Markets climb as Volume picks up

Daily Analysis - 20/02/2018

Holidays in the US and Asia


After the Holiday in the US and Asia, trading volume is expected to pick up. The US Dollar found support while investors turn towards risky assets. The stock market made a huge comeback while WTI jumped above $60 per barrel.

US Dollar rebounds

The DXY, greenback’s index against six major currencies was 0.3% higher at 89.346, continuing its Monday’s rebound from a three-year low of 88.251 set on Friday. On the other hand, Dollar’s outlook is clouded by concerns that the ballooning U.S. fiscal deficit could disrupt the economy.

The Dollar added 0.15% against the JPY to 106.760 and 0.15% against the Euro to $1.2387. With little in the way of significant economic data on the schedule, traders expect the $151 billion sales of short-term U.S. Treasury sales will provide the clearest gauge yet of how steeply bond yields may rise in the world’s largest economy.

Traders will also be analyzing the minutes from the January’s 30-31 Federal Reserve’s meeting, Janet Yellen’s last as chair, where the rate was kept unchanged. The Fed minutes could pave the way for the future steps and thoughts of the policymakers where they will be released on Wednesday at 19:00 GMT.

The U.S. currency has been weighed down by a barrage of factors, including worries about widening U.S. trade and budget deficits and speculation Washington might pursue a weak dollar strategy. There is also talk that foreign central banks may be reallocating their reserves out of the dollar.

Economists say U.S. President Donald Trump’s tax cuts and spending plans could backfire by overheating an already strong economy and causing an unwelcome pick-up in inflation.


Equities: Recovery Mode

Investors are looking for any signs of inflation in the economy, the threat which sparked the recent volatility in the stock markets, where the Dow and the S&P 500 were pushed into correction territory, defined as a drop of at least 10% from all-time highs.

Trading remained light yesterday as U.S. financial markets were closed Monday due to the Presidents Day Holiday and the Asian market resumes activity after the Lunar New Year celebrations. The focus will be on whether Wall Street can maintain its recovery once trading resumes.

Last week, equities gained back more than half of the lost territory during a sharp sell-off earlier in the month The Dow gained 4.5%, its biggest weekly percentage gains since November 2016. The S&P 500 also gained 4.3% in its best week since January 2013, while the NASDAQ finished 5.3% higher in its best weekly percentage rise since December 2011.

The VIX index - Wall Street’s “fear gauge” indication of market volatility - has slipped below 20, less than half the 50-point peak touched earlier in February.

Today, Britain’s FTSE was seen rising 0.1%, Germany’s DAX dropping 0.1% and France’s CAC dipping 0.07%. MSCI’s broadest index of Asia-Pacific shares outside Japan shed 0.25%. Australian stocks were little changed and Hong Kong’s Hang Seng dropped 0.4%.


Oil on the highs

The U.S. crude oil prices pushed up by reduced flows from Canada while international Brent prices eased.

The higher WTI prices was believed to be due to reduced flows from Canada’s Keystone pipeline, which has been operating below capacity since late last year due to a leak, cutting Canadian supplies into the United States.

Outside North America, the dip in Asian stocks together with a stronger dollar eased Brent crude which potentially curbs demand as it makes fuel more expensive for countries using other currencies domestically.

The opposing price direction of the two main crude benchmarks has sharply reduced WTI’s discount to Brent, to around $3.22 per barrel on Tuesday, down from over $7 in late 2017.

Looking at the bigger picture, oil markets remain well supported due to OPEC and Russia oil-cut deal due to expire at the end of this year. Meanwhile, Russia has shown signs it may at some stage gradually start to increase output again.

OPEC Secretary-General Mohammad Barkindo said on Monday that the global oil demand for 2018 is estimated to grow 1.6 million barrels per day due to an “encouraging environment.”

The United States late last year became the world’s second biggest oil producer, behind Russia and ahead of top exporter Saudi Arabia. Mounting U.S. production is threatening to disturb OPEC’s efforts.

Last week, the amount of U.S. oil rigs drilling for new production indicated that U.S. crude output, already at a record 10.27 million bpd, may rise further.


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