Risk appetite very much improved

Investors cheer positive US developments

We’ve seen a clear shift in risk appetite over the last 24 hours, with the US being the source of most of this as the government looks to avoid a shutdown and the truce deadline with China may be extended.

The shutdown soap opera may be over for now – assuming Trump doesn’t throw one final spanner in the works – after Democrats and Republicans agreed on a deal to keep government funded, at the expense of most of the funds the President demanded for his border wall. This is unlikely to deter Trump though who will be seeking alternative arrangements to secure this but will be keen to avoid another shutdown after the finger of blame last month was pointed in his direction.

One of the primary risk factors for the markets is unquestionably the US/China trade war and so a lot depends on those talks – now taking place in Beijing – progress. The rhetoric has been changing week by week but comments from Trump on Tuesday gave investors plenty of cause for optimism, with the President suggesting he very much wants a deal and could let the deadline slide. This means the tariff on $200 billion worth of Chinese imports may not yet increase from 10% to 25% and further tariffs won’t be proposed, which is clearly coming as a relief to investors.

Kiwi surges on less-dovish RBNZ

Brexit can kicked down the road

The can has been kicked down the road as far as Brexit is concerned, with Theresa May confirming on Tuesday that an agreement has not yet been reached with Brussels and that MPs will have a chance to vote on any new deal by 27 February, a little over a month before Brexit day. If a new deal isn’t forthcoming, then MPs will instead have the opportunity to vote on amendments to a motion put forward by the Prime Minister, which means another chance to postpone Brexit or block no deal. For now, the saga continues and the prospects of an eleventh hour deal become ever higher. Still, sterling traders remain relatively chilled about the whole situation with apparent increased no deal risks not fazing them, for now.

Gold gains as USD ends eight day winning streak

The risk rally has brought an end to the eight day winning streak in the dollar, with improved prospects on sino-US talks primarily behind that. This has provided some relief for gold just as the downward pressure was building. We hadn’t yet seen the crucial $1,300 support come under any significant pressure but it may have only been a matter of time if the dollar had continued to make gains at the same rate.

Gold Daily Chart

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Gold bulls have shown a strong resilience in the face of an impressive rally in the greenback but how long could they have kept it up? Obviously, global central banks becoming notably more dovish does help.

Oil buoyed by numerous factors on Tuesday

A combination of factors seemed to contribute to a lift in oil prices on Tuesday, a rally that has continued into this morning. The improved risk appetite is of course one of these, as it the better prospects for trade talks but the most important factor is probably the efforts of oil producers to reduce output and counter the oversupply in the markets.

Saudi Arabia clearly stands out here as it vowed to reduce output by 500,000 barrels more than it previously committed to by March.

Change in OPEC Output

Source – Bloomberg

This is a welcome development at a time when Russia’s compliance is being called into question. The API report showing inventories had fallen by almost a million barrels a day – against expectations of a 2.7 million barrel build – didn’t do the rally any harm either.

Economic Calendar

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Former Craig

Former Craig

Former Senior Market Analyst, UK & EMEA at OANDA
Based in London, Craig Erlam joined OANDA in 2015 as a market analyst. With many years of experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while producing macroeconomic commentary. His views have been published in the Financial Times, Reuters, The Telegraph and the International Business Times, and he also appears as a regular guest commentator on the BBC, Bloomberg TV, FOX Business and SKY News. Craig holds a full membership to the Society of Technical Analysts and is recognised as a Certified Financial Technician by the International Federation of Technical Analysts.