Risk appetite increases on trade war breakthrough hope

April 1-6, 2019

Equities are rallying and sovereign bond prices have been falling in week one of Q2. Investor optimism has been supported by stronger China PMI data and on the news that China and the U.S maybe on the cusp of a trade deal. It’s believed that most issues have been resolved between the world’s two largest economies. President Trump is expected to meet the trade delegations Thursday. Will he be able to announce a summit soon?

Earnings season begins next Friday (April 12) with JP Morgan kicking things off. The market has already priced in a poor first quarter, with earnings on S&P 500 stocks seen declining by low-single digits.

Central banks

The Reserve Bank of Australia (RBA) left the cash rate target unchanged at +1.50% this week as expected. Policy makers omitted its prior comment noting “central scenario was still for the Australian economy to grow by around +3.0% in 2019.” But instead, inserted “to set policy to support sustainable growth and achieve the inflation target over time.”

The Reserve Bank of India (RBI) cut its key policy rate by -25 bps to +6%. The central bank said since its last meeting in February, “global economic activity has been losing pace,” both in the U.S. and developed markets and emerging markets. The “domestic economy is facing headwinds, especially on the global front. The need is to strengthen domestic growth impulses by spurring private investment which has remained sluggish,” the bank said in a statement. Hence the necessity to cut key rates to aid the sluggish economy ahead of the upcoming elections.

In Europe, the ECB policymakers debated the risk that ultra-low interest rates pose to banks. The effects of persistently low rates could depress banks’ interest margins and profitability, with negative effects on banks intermediation and financial stability in the longer run.

Brexit and more Brexit

U.K PM Theresa May announced a cross-party approach to break the impasse in parliament over Brexit. The PM has indicated she would look for Labour support for a new Brexit deal. However, there is no guarantee that Labour and the PM would agree terms on the Brexit path, nevertheless, the fact that she is willing to cross the floor is a clear shift in her party’s stance towards a ‘softer’ Brexit.

PM May still insists that her withdrawal agreement – which was voted down last week – would remain part of the deal. The U.K requires an extension and PM May has said she wanted the extension to be “as short as possible” – before 22 May so the UK does not have to take part in European elections.

The UK has until 12 April to propose a plan – which must be accepted by the EU – or it will leave without a deal. However, if the UK can approve the withdrawal agreement with a viable majority before next week’s summit, the EU will agree to a short extension up to May 22. On Wednesday, U.K lawmakers passed a vote by a majority of one to block a potentially destructive no-deal Brexit. This means that if a stalemate on exiting the E.U persists until the April 12 deadline; the PM will be forced to ask the EU for a long extension to the process.

Data this week showed that Brexit worries has caused the dominant services sector to contract for the first time in nearly three-years, in fact, since the Brexit referendum.

On the Economic Calendar, no releases are scheduled for this weekend.

**DST – clocks go forward in Australia and New Zealand on the weekend

Market concerns:

  • U.K/Brexit fallout
  • US-China trade deal – details may emerge
  • Trans-Atlantic trade tensions to intensify
  • OPEC, Saudis, Venezuela & Trump
  • Venezuela/Russia/U.S tension
  • Geo-political concerns in Russia, Ukraine & France
  • India/Pakistan – tension remains high amongst two nuclear nations
  • U.S ramps up trade talks with India and Turkey
  • Spanish snap elections expected to be full of surprises April 28
  • Next week: GBP GDP & manufacturing product, ECB monetary policy statement, USD CPI & FOMC meeting minutes (Apr 10).

    Central Banks Monetary Policy decisions for April 2019

    2-Apr AUD Australia Reserve Bank of Australia
    3-Apr PLN Poland National Bank of Poland
    4-Apr INR India Reserve Bank of India
    10-Apr EUR Euro area European Central Bank
    24-Apr CAD Canada Bank of Canada
    25-Apr JPY Japan Bank of Japan
    25-Apr SEK Sweden Sveriges Riksbank
    25-Apr TRY Turkey Central Bank of Republic of Turkey
    30-Apr HUF Hungary Central Bank of Hungary

    Monetary policy snapshot 2019:

    Fed: changes tune to patience and flexible – Jan. 2019
    ECB: Growth and inflation doubts raise questions about first-rate hike
    BoE: Waiting for Brexit
    PBoC: Expect further RRR cuts to save private firms
    BoJ: Only speculation
    SNB: No hikes expected before 2020
    Norges: Higher rates ahead, but upside may be capped
    Riksbank: Still very ‘dovish’
    BoC: Hawkish stance opens door to two or more hikes in 2019, will take cue from Fed
    RBA: Still relaxed
    RBNZ: Upside surprise
    BoM: Hawkish stance opens door to two more hikes in 2019, but data dependent.

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    Dean Popplewell

    Dean Popplewell

    Vice-President of Market Analysis at MarketPulse
    Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
    Dean Popplewell