Amplify Weekly Strategy: 7th - 11th January 2019

Entroxy Ltd
Apr 19, 2019
3 min read

Calendar highlights

Monday: GE Factory Orders, Retail Sales, EU Sentix Investor Confidence, Retail Sales, US ISM Non-Manufacturing PMI, CA Ivey PMI, Trade delegation from US travel to China

Tuesday: AU Trade Balance, JN Consumer Confidence, 10-yr govt bond auction, GE Industrial Production, FR Trade Balance, UK HPI, 10-yr govt bond auction, US NFIB Small Business Index, Trade Balance, JOLTs Job Openings, Consumer Credit, Weekly API Inventories, CA Trade Balance, Trade delegation from US travel to China

Wednesday: AU Building Approvals, GE Trade Balance, SZ CPI, IT/EU Monthly Unemployment Rate, GE 10-yr govt bond auction, UK NIESR GDP Estimate, US DoE Oil Inventories, 10-yr govt bond auction, FOMC Minutes, CA Rate Decision + Press Conference, Fed's Rosengren, Evans, Bostic, BoE's Carney speak, UK PM May Brexit deal discussed in Parliament

Thursday: UK BRC Retail Sales Monitor, CN CPI/PPI, New Loans, M2 Money Supply (tentative), JN Leading Indicators, 30-yr govt bond auction, FR Industrial Production, IT Retail Sales, FR 10-yr govt bond auction, ECB Monetary Policy Minutes, US Weekly Jobless Claims, 30-yr govt bond auction, CA Building Permits, Fed's Powell, Bullard, Evans, Barkin, Clarida to speak

Friday: JN Current Account, Economy Watchers Sentiment, AU Retail Sales, IT Industrial Production, UK GDP, Manufacturing/Industrial Production, Goods Trade Balance, Construction Output, US CPI, Federal Budget

Jay Powell to the rescue...

A tightening of financial market conditions in the context of persistent Fed rate hikes was at the heart of the sell-off at the end of last year. As such, the comments from the Fed chair last Friday came as welcome relief to battered market sentiment as Powell hinted that the central bank will be flexible on policy and it is in no hurry to raise interest rates.

This change of tone in combination with a stellar jobs report was enough to see all three major US indices gain more than 3% on Friday.

At present, FFR rate futures are pricing in the Fed on hold throughout the year despite their projections of a further two interest rate hikes. Following Powell's comments analysts at Goldman Sachs issued a report on Saturday stating that the USD is poised to decline citing an increased chance of a Fed pause combined with net softer US data for December.

Looking forward, a trade delegation from the US is due to arrive in China on Monday as part of a two-day trip. Recent press reports have indicated some willingness on both sides to negotiate and nothing sharpens the mind more than the risk of an impending economic collapse. Therefore, anything positive on this issue will likely have a meaningful impact on risk assets given the markets bearish pricing.

It's also worth noting that following China's PMI slip back into contraction for the first time since May 2017, both the government and central bank have responded in order to lift the economy out of the doldrums and to signal to participants their willingness to act to shore up the economy.

China Manufacturing PMI

The latest measures have included a cut to required reserves for banks by the PBOC and government approval for an $125bln rail project in an attempt to support demand through the uncertainty of the on-going trade war.

Given the recent change in tact from the Fed, in addition to continued intervention from Chinese authorities, a further recovery in US equities would not be surprising. However, from a technical point of view there are significant barriers to the upside in the form of the March 2018 lows and 38% fib retracement of the all-time high to December low. If broken this is then repeated again around the 2600 handle.

Brexit means Brexit...

The Brexit debate resumes in Parliament from Wednesday with government sources confirming that the vote on Theresa May's deal will take place on Tuesday the 15th.

The complexity surrounding the possible outcomes is high and it should always be remembered that with politics the situation can quickly change at the drop of a hat. As such, I would recommend an awareness of the various possibilities with planning for how UK assets would react under each scenario. With that in mind here's a great infographic from the team at ING economics.

The bounce in oil continues...

WTI crude has seen a firm bounce since the lows in December as the OPEC+ decision to cut production takes hold. As mentioned above, the outcome of trade talks between the US and China remains pivotal for the demand side and if the combination of a more dovish Fed and supportive Chinese authorities can stabilise market sentiment then a further recover cannot be discounted.