News & Analysis

Weekly Summary – IMF Warnings and Conflicting Trade News

January 25, 2019

By Deepta Bolaky

Amid a busy calendar, the IMF growth warnings have been the primary driver of risk sentiment during the course of the week. Towards the second half of the week, investors seem to be driven and supported by the earnings season and a deluge of conflicting trade news which were more on the positive side on Friday.

 IMF warnings

The World Economic Outlook has further shifted to the downside. The recent downward revisions were the result of the weakening momentum in key industrialised economies. The most significant revisions came from Europe mainly in Germany and Italy. The Eurozone area is facing a lot of headwinds:

  • Weakness in economic data
  • Domestic political challenges
  • A rise in populism

The growth momentum for the United States is still strong but will soften and slightly more than initially expected. Washington is in gridlock, and the fiscal sugar rush died down. Countries like Japan, the United Kingdom, India and Brazil were among the few that received an upgrade.

All in all, the main message from the IMF seem to be the “Call for Policies” and “Multilateral Cooperation”.

In the financial markets, we saw risk sentiment sliding under the influence of the growth warnings signals. The FX markets were relatively risk-off at the beginning of the week as well allowing safe-havens like the Japanese Yen, the US dollar and the yellow metal managed to find some bullish ground. However, the momentum was short-lived and lack of convictions.

Earnings Season

In a week where we saw conflicting trade talks and growth warnings, the earnings season have intermittently been the positive factor driving the thrive for riskier assets. There are unexpectedly more reassurances from big companies.

Earnings for the fourth quarter of 2018 came strong and the estimates for the first quarter of 2019 are coming down but numbers are indicating a slow down not a recession nor are they dropping down to zero. Given the challenging macro environment, there are still expectations of marginal profits from the stock markets.

World Economic Forum

The buzzword of the forum appears to be “Populism”. The leaders of global society talked about a growing risk of populism which is one of the main threat to the global economy. The headlines emerging from different sources are heavily dominated by those concerns:

  • “Brazil’s Bolsonaro is the Face of Populism at the Davos Forum”
  • “Merkel encourages multilateralism in the face of populism…”
  • “Chrystia Freelans decries the rise of populism…”
  • “Is Davos listening? The populist wind blows over…”
  • “Business leaders concerned about the rise of US nationalism, populism…”

This year three western leaders are not present at the forum, and the reasons behind it are somewhat tilted towards the populist issue.

Populist political parties often boost short-term economic growth through their fiscal spending policy, but usually comes with protectionism and anti-immigration policy which is a hindrance for long-term economic growth.

Central Banks

The Bank of Japan (BOJ) and European Central Bank (ECB) held their first meeting for the year 2019. The markets expected dovish comments from both central banks, but attention was on the downgrades of the inflation and growth forecasts.

As widely anticipated, BOJ lowered its inflation forecasts again and combined with a disappointing trade deficit which came higher than estimates at JPY 55bn and a fall in industry activities; the Yen trimmed its haven gains.

The dovish comments from the ECB on Thursday were widely expected, but the language was not too aggressive as there were some upbeat underlying tones on inflation. The EURUSD made a brief dip below the 1.29 level but stabilised above 1.30 mark as of writing. Even though the ECB comments brought some volatility in the pair, its price action was mainly driven by the US dollar. We expect the pair to remain underpinned by the current headwinds and be gradually challenged to the downside following a lack of supportive catalysts.

EURUSD (Hourly Chart)

Source: GO MT4

Brexit Updates

Theresa May’s Plan B looks much like the Plan A, and the EU is not only reluctant for further concessions on the backstop that she intends to ask, but they believe that even if they do agree to the concessions, the deal may still not pass through Parliament.

In the meantime, pressure mounts on the Prime Minister to take the no-deal Brexit off from the table.  The Pound has gained upside momentum on the back of higher chances of a soft Brexit.

GBPUSD, GBPAUD and EURGBP (Hourly Chart)

Source: GO MT4

US-Sino Trade News

There was conflicting news on trade talks this week. We saw news emerging that the US has rejected preparatory talks which were later denied by the White House. Risk sentiment was also dented by trade news at the start of the week, but trade optimism returned on Friday with the news of China getting ready to its imports of US goods. Yet, the trade truce is looming, and it is unlikely that a trade deal will be reached in the near term.

US Government Shutdown

The US government shutdown drags on, and there is no sign of ending this week as of writing. Investors are deprived of key economic data releases due to the shutdown. At this stage, economists are predicting a 0.5% drop in GDP if the shutdown goes through January. The effects of the shutdown on the markets have been contained so far, but we may see it affecting the sentiment in the stock market in the coming weeks given its economic impact.

Commodities Markets

After the recent gains, oil prices have been under pressure dragged by trade news, growth concerns and chaos in Venezuela. The diplomatic relationship between the US and Venezuela is getting worst. Being one of the US most important oil customer, we expect to see some repercussions on oil prices. Adding to the current uncertainty was a surprise rise in crude oil inventories.

However, some trade optimism towards the end of the week helped oil prices to pare the recent losses.

USOUSD and UKOUSD (Weekly Chart)

Source: GO MT4

Monday, 28 Jan 2019
Indicative Index Dividends
Dividends are in Points
ASX200 WS30 US500 US2000 NDX100 CAC40 STOXX50
0 0 0 0.009 0 0 0
ESP35 ITA40 FTSE100 DAX30 HK50 JP225 INDIA50
0 0 0 0 0 0 0