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Equities recover on trade optimism and cautious Fed

Jan 8 2019, 02:32 AM (CST) | Forextime.com

 

 

After a terrible end to 2018 which saw global equities plummet, markets are finally seeing the color green returning to their screens. U.S. stocks built on Friday’s massive rally supported by optimism that Beijing and Washington may be moving in the right direction towards a trade deal. The volatility index dropped to 21 from a high of 36.20 in late December. Calm has also returned to Asian equities with Japanese stocks outperforming the rest of Asia.

 

The recent mad volatility in equity markets seems to have forced Fed Chair Jerome Powell to change his tone, sounding more dovish by indicating that the Fed may pause its balance sheet shrinkage if it’s necessary. Atlanta Fed President Raphael Bostic backed his boss yesterday stating that the Fed may only need to raise rates once this year. Such a combination of a dovish Fed and relatively stable economic data should be supportive to risk. However, many unknowns remain especially if more Tech firms follow Apple’s footsteps by lowering their earnings guidance for 2019. While earnings may have continued to grow in double digits in Q4 2018, the projection for 2019 is what matters.

 

The U.S. non-farm payrolls which easily topped all economists forecast coming at 312,000 in December, supported views that the U.S. economy remained robust in 2018. However, when looking at leading indicators such as ISM Manufacturing & Service data we get different interpretations. Such conflicting economic reports make it difficult for macro investors to make decisions, and that’s likely to keep many investors on the sideline until a clear trend in data is formed.

 

The U.S. and China are unlikely to come up with a full solution on trade today, neither in the near future. Small baby steps towards a resolution are all what’s needed to support investors’ confidence, and that’s what markets are hoping for.

 

In currency markets, the Dollar recovered slightly after touching its lowest levels since October on Fed comments. If investors become increasingly convinced that the Fed will pause its tightening cycle, expect today’s recovery to be short-lived as the repricing of interest rate hikes will lead to further losses in the Greenback.

Forextime.com

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