Week Ahead – Dollar and stocks at the mercy of trade talks

The US dollar will see if it continues to benefit on risk aversion flows as a critical week for trade talks will see if the US is able to get any concessions on core issues and not just further commitments from China purchasing more US goods.  Deputies from both sides will speak on Monday, with the apex falling on high-level talks on Thursday and Friday.  Chinese officials, including Vice Premier Liu He will meet both the US Trade Representative Lighthizer and Treasury Secretary Mnuchin, with the bar currently set at delivering an extension of the trade truce.  President Trump has been clear a deal will not be reached until he meets with President Xi, which is now expected to be at sometime in mid-March.

The short-term spending bill last month that ended the longest federal government shutdown on record saw talks fall apart over the weekend, potentially signaling talks will go down to the wire and that the possibility remains that we could see another shutdown or the President may finally use his emergency powers.

EUR – Germany dances with a potential technical recession

GBP – May seeks more time for Brexit negotiations

STOCKS – Mixed Earnings and political risks weigh on risk appetite

GOLD – Rally could continue if US leaders disappoint

OIL – Investors shed bullish bets as oversupply concerns return

EUR – Germany dances with a potential technical recession

The 20-year old currency could see selling pressure if the largest-member, Germany falls into a technical recession.  On Thursday, Germany’s preliminary fourth quarter GDP quarterly reading is expected to just miss triggering a recession with a 0.1% reading, an improvement from the third quarter -0.2% print.  Recent industrial production data showed worst than expected weakness that could signal a worse reading for GDP.

While Germany is critical for the euro zone, a German recession does not necessarily mean one for the euro area.  The euro zone has one negative quarterly GDP reading between 1995 and 2008, while Germany had 13 contractions.

Recent German weakness stemmed from new emission rules that hurt the car industry and trade concerns.  Germany could see further pressure from a February 17^th report from the US Commerce Department on potential tariffs on European autos.  Trade uncertainty will keep Germany vulnerable, but is not expected to complete derail their economy.

GBP – May seeks more time for Brexit negotiations

Prime Minister May’s game of winding the clock down in order to get concessions from the EU continues as she is expected to be unable in securing a new deal on Wednesday, February 13^th, which will lead to an expected vote on February 14^th to confirm Parliament’s desire to remove the Irish backstop clause.  If after that, she is unsuccessful in securing a new deal, she is also expected to offer another vote on February 27^th to give Parliament control on handling talks.  The EU has not shown any signs in conceding on the backstop, mainly because their laws don’t allow it, but they will need to decide if they want to throw PM May a bone and offer some language that could give her enough support to get a deal done.  If not, it will be a huge mess in dealing with Parliament.

Separately, PM May reportedly has agreed to talk to Labour leader Corbyn on a soft Brexit.  Time is running out and an extension of Article 50 will eventually become the key focus.

A wrath of UK data will be released this week, with fourth quarter GDP and January CPI both expected to decline.  December readings for manufacturing and industrial production are expected to show monthly improvements.

STOCKS – Mixed Earnings and political risks weigh on risk appetite

Stocks had a soft start to the week as China returned from holiday and markets focused on trade uncertainty.  Another peak week for earnings will show if the narrative remains to be slower revenue growth, strength only in the US, and downbeat forecasts expected as a result of the trade war.  With most of the major central banks globally likely to refrain from tightening for most of this year, any significant selloffs may be met with buyers.  Key earnings reports will come from Nvidia and Coca-Cola.

Nvidia shares have been battered after delivering poor guidance in November and the earnings warning in January.  The chip-maker will report on Thursday and the sector has already delivered a clear message that the trade war will weigh on the outlook and that the first half of the year is likely to disappoint.  Nvidia is hoping to have the same reaction that Apple had after issuing a warning and delivering in-line results.

Coca-Cola reports on Thursday and investors want to know if they will have their seventh straight earnings beat.  Coca-Cola will see price pressures start to weigh on results and we could see the trade war and strong currency hurt results this time.

GOLD – Rally could continue if US leaders disappoint

Gold prices appear to remain in a holding pattern until we clarity on the trade front and government shutdown risks.  The precious metal has been supported by the Fed’s dovish pivot and the next move higher will likely need to see some disappointment with US leaders delivering results in showing meaningful trade progress and an agreement on border security so talks can then move onto negotiating an infrastructure deal.

OIL – Investors shed bullish bets as oversupply concerns return

Crude prices have lost momentum to the upside as investors and money managers abandon bullish as concerns of oversupply and as global economic prospects remain muted.  The Commitment of Traders report showed that institutional investors increased bearish bets on Brent oil by 27.9% in the week ending February 5^th.  West Texas Intermediate crude positioning will not be current until next month since the government shutdown delayed the CFTC’s reporting.  This week, market players will also watch the monthly reports from both OPEC and IEA to see if we continue to see compliance with the OPEC-led production cuts and how much higher US oil production will increase.

The stronger dollar continues to weigh on oil prices and if the trade talks between the U.S. and China only deliver a vague agreement or if trade truce deadline is extended with no significant progress on core issues, such as opening markets, forced technology transfers and intellectual property theft, we could see risk off take West Texas Intermediate crude below the $50 level.

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