New Year, Same Old Trading Habits

08 / 02
06 : 40

New Year, Same Old Trading Habits New Year, Same Old Trading Habits

恒生中国企业指数 Market trends

Investors enter 2019 remaining increasingly uncertain about where sovereign bond markets are heading given the confused interplay between , , and that intensified in Q4, 2018. The effect from U.S interest rates will have a material impact on the ‘mighty’ and equity markets. Thus, it’s a necessity that the markets are focused firmly on the Fed. Despite Fed officials continuing to express confidence in the U.S economy, the market remains so worried that even though the Fed has scaled back its rate-raising plans for 2019. Still, higher interest rates continue to pose a risk for expansion.

Last month, the Fed penciled in two hikes for 2019, rather than the three hikes that officials predicted in September. However, the market sees things differently, fixed income dealers have priced out any additional hikes this year with Fed fund futures implying no change and a -25 bps cut in 2020. It’s not just the Fed actions that will have an impact on , but it’s what they will say in 2019. Investors need to keep an eye on the Fed’s own messaging. will have the opportunity to once again lay out the Fed’s direction for 2019 as he joins former and for a joint discussion this Friday (January 5 10:15 am EDT).

Officials signaled that they intend to rely more on recent economic data in setting interest rates and coupled with Fed Chair Powell’s intention to hold news conferences after every will only add to the volatility. 2019 has started on the back foot with global equities under pressure after disappointing Chinese data overnight has ruined investors hopes for an upbeat start to the New Year – safe havens including gold, Euro bonds and the have benefited in early trading.

On tap: The highlight of the week will be the two North American employment reports (Friday, January 5 – and ). Also Friday, the market will also be looking for some clarity from Fed Powell’s panel discussion titled “Federal Reserve chairs: Joint Interview.

5 Major Markets Topics Now

1. Global Equities Suffer A Hangover

Disappointing data from the world’s second-largest economy overnight is causing global equity markets to begin 2019 on the back foot. A private sector survey showed China manufacturing activity contracted for the first time in 19-months. The for December fell to 49.7, from 50.2 m/m.

In Japan, equities were lower after the close this morning, as Pharma, Retail and Power sectors losses took the lead lower. At the close, the fell -0.31%.

Down-under, Aussie stocks kicked off the New Year in the red, pressured by disappointing Chinese data – China is Australia’s largest trading partner and the AUD trades as a proxy for China economic growth. The closed -1.6% lower – the benchmark ended -0.1% lower on Monday.

In China and Hong Kong, stocks slumped in their first trading session as investors digested the disappointing data, adding to concerns over trade and an economic slowdown. In China the fell -1.4%, while the ended down -1.1%. In Hong Kong, at the close of trade, the was down -2.77%, while the fell -2.87%.

In Europe, regional bourses trade sharply lower across the board starting the year on a negative tone as weaker PMI data in Europe and China added to the negative sentiment.

U.S stocks are set to open in the red (-1.5%).

Indices: -0.44% at 334.20, -1.08% at 6,655.50, -0.48% at 10,508.03, -1.90% at 4,640.96, -1.55% at 8,407.85, -1.57% at 18,035.50, closed, -1.49%

2. Oil Kicks Off The New Year With Losses On Signs Of Economic Slowdown

markets start the New Year on the back foot, pulled down by surging U.S output and concerns about an economic slowdown in 2019 as factory activity in China, the world’s biggest oil importer, contracted.

futures are at +$53.19 per barrel, down -61c, or -1.1%, from their final close of 2018. West Texas Intermediate (WTI) futures are at +$44.95 per barrel, down -47c, or -1%.

Oil prices registered their first yearly decline in three-years in 2018 – Brent tumbled -20%, while WTI slumped -25%.

A number of factors are expected to provide heightened volatility in the commodity space in Q1, 2019. There is the market uncertainty on Sino-U.S trade; there is Brexit, as well as political instability and conflict in the Middle East. There are U.S shale output numbers and OPEC’s and Russia’s supply discipline. All factors that are expected to have a meaningful impact on energy price in H1.

prices scaled new heights earlier this morning, printing a six-month high, as the fell along with equities after disappointing data from China overnight flagged fears of a slowdown in global economic growth.

was up +0.28% at +$1,285.71 an ounce, after hitting its highest since June 15, 2018 at +$1,287.31 earlier in the session. U.S have rallied +0.5% to +$1,287.80 per ounce.

3. Sovereign Yields Buckle

A disappointing Chinese PMI print overnight is keeping the demand for safety going, especially for German bonds.

Overnight, German government bond yields dropped to its lowest in 20-months as investors piled into one of the safest assets in the world on the back of widening stock market weakness and a gloomy global growth outlook.

The yield on Germany’s 10-year debt briefly dropped to +0.17%, it’s lowest since April 2017, before edging up to +0.183%, down -6 bps as we head towards the North American open. The German 2/10’s spread are at their tightest in over two-years at +79.90 bps.

On the horizon, supply will be an important factor for eurozone bond markets this month as countries start their annual funding programs.

January is usually being the busiest month of the year.

Elsewhere, the yield on U.S 10’s has rallied less than +1 bps to +2.69%, the largest advance in a week. In the U.K, the 10-year Gilt yield fell -3 bps to +1.25%, the lowest in almost three weeks, while the spread of Italy’s 10-year bonds over Germany’s rallied +4 bps to +2.53% to the biggest premium in a week.

4. Dollar Under Pressure From Lower Yields

The ‘mighty’ dollar has been dragged down by a steep fall in U.S Treasury yields over the last month as the market prices in the U.S Fed would not raise rates again in 2019, even though the Fed last month is still projecting at least two more hikes for this year.

Ahead of the U.S open, the dollar is somewhat mixed, edging up a tad on the EUR to €1.1445 and steady on a basket of currencies at 96.189 – DXY.

The safe-haven has extended its broad rally as the U.S dollar dropped to ¥109.37 in the overnight session, its lowest since June last year.

Elsewhere, the , often used as a proxy for China sentiment, lost as much as -0.7% overnight, to print its lowest since February 2016 at A$0.7001.

5. U.K Factories Build Up Stockpiles Before Brexit

Data this morning showed that U.K factories last month ramped up their stockpiling as they prepared for possible border delays when Britain leaves the E.U in less than three months’ time.

The IHS Markit/CIPS Manufacturing Purchasing Managers’ Index () rose to 54.2 from an upwardly revised 53.6 in November, the highest reading in six-months and stronger than all forecasts.

Markit said, “the improvement did not herald a big change in the outlook for Britain’s stuttering economy and was caused in large part by manufacturers stockpiling inputs and finished goods, both of which were near record highs.”

In December, the Bank of England (BoE) cut its forecasts for quarterly growth to just +0.2% in Q4 of 2018 and Q1 of 2019. It has warned that a worst-case Brexit could push Britain into a deep recession.

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