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Market Commentary 05/04/2019

April 5, 2019 / Ali Rajani

Market snapshot: US and Chinese stocks rallied buoyed by progress towards a US-China trade deal and expectations of positive U.S. employment data release; similarly, the US bond market and dollar prices surged. Brent Crude and WTI touched 5-month highs due to supply-side factors, while spot gold slipped following a strengthening dollar.

Stocks: The new consensus between President Trump and Vice Premier Liu He was a catalyst for the equities market; the Dow closed more than 150 points higher and S&P 500 continued its six-day long streak. As the trade deal takes shape over the next four weeks and U.S. job data is released, the momentum of the U.S. equities market will be clearer. Amid US-China talks and a potential economic slowdown in Europe, the pan-European Stoxx 60 remained stable. The bearish German factory data release and reduction in Italy’s 2019 GDP forecast (lower than the December forecast) are expected to be detrimental for the European markets. Markets in Asia, however, edged up due to the news of a potential US-China trade deal, increased household spending in Japan and higher demand from China: Nikkei 225 and Topix index surged by 0.38% and 0.35%. Stock markets in China and Hong Kong remain close on Friday due to a holiday.

Currency: Progress on the US-China trade talks and positive expectations with regards to the non-farm payroll release helped the dollar rise to its three-week high against yen (US$/¥: 111.8). The Euro remained stable as earlier gains were mitigated due to a drop in German industrial orders data. The EU offered Theresa May an extension for Britain’s exit from the bloc which resulted in a 0.2% increase in sterling against the dollar.

Commodities: Brent crude crossed the $70/barrel mark for the first time in 2019. The supply-side factors include supply cuts by OPEC nations along with the sanctions on Iran. US-China trade talks are expected to pave way for higher oil demand. Moreover, the high PMI (Purchasing Managers’ Index) numbers from China and US indicated continued growth in oil demand by the manufacturing sector. Spot gold slipped by 0.2% as the dollar rose against the yen on signs of US-China progress. Moreover, gold trading witnessed a slowdown as the largest gold consumer, China, is closed for a public holiday on Friday.

Bonds: US Government Bond prices surged as investors awaited the US-China trade talks. Consequently, the yields on the 10-year Treasury note and 30-year Treasury bond reduced to 2.508 and 2.916 percent. The outcome of the meeting between Donald Trump and Liu He along with the speeches by U.S. central bank policymakers on the state of the U.S. economy (and employment rates) will greatly shape the way forward for the US Investment Grade Bond Market over the next few days.

The decline in U.S. 10-year/2-year spread (Chart 1) and the inversion of the yield curve seem to be indicative of a future economic slowdown and market volatility. However, the stock market (represented by the rise in S&P 500 and DJIA) rally and higher real earnings suggest future economic growth.

Chart 1