Market Sentiment Turns ‘Risk Off’, US GDP in Focus

9 min readFeb 28, 2019

Risk assets lost traction yesterday, perhaps due to a blend of reasons. One of them could be the escalating tensions between India and Pakistan, while another may be comments by US Trade Rep. Robert Lighthizer that the unresolved issues between China and the US are “too serious”. The slide in China’s January PMIs did not help either. The pound continued sitting on the front seat, keep gaining on hopes that a no-deal Brexit can be averted. As for today, the spotlight is likely to fall on the US GDP data for Q4, which was delayed due to the partial government shutdown.

Equities Slide in ‘Risk Off’ Trade, CAD up as Oil Rebounds

The dollar traded lower against most of the other G10 currencies on Wednesday. It traded higher against AUD, NZD and JPY, while it traded virtually unchanged against EUR. The greenback underperformed against GBP, SEK, NOK, CHF and CAD in that order.

The FX performance pattern does not paint a clear picture with regards to the broader market sentiment, as the risk-linked currencies Aussie and Kiwi as well as the safe-haven yen were found lower this morning. However, the performance of the equity market suggests a risk-averse market environment. Most major EU indices closed their session in the negative zone, with the exception being Italy’s FTSE MIB, which was +0.19% up. In the US, the Dow Jones slid 0.28%, while the S&P 500 and Nasdaq closed within a ±0.10% distance from their opening levels. The negative investor morale rolled over into Asia as well, with Japan’s Nikkei and China’s Shanghai Composite ending their sessions 0.91% and 0.44% down respectively.

Risk assets may have lost traction yesterday due to a blend of reasons. One of them could be the escalating tensions between India and Pakistan after both shot down each other’s army aircrafts. Another one could be comments by US Trade Representative Robert Lighthizer. When testifying before House members, Lighthizer said that it is too early to predict the outcome of US-China negotiations and that the outstanding issues are “too serious” to be resolved with China’s promises to buy more US goods. The remarks may have poured some cold water to trade-truce hopes, prompting investors who cheered the last week’s progress and the deadline extension to reduce their risk exposures. The slide in China’s January PMIs did not help either. The manufacturing index slid from 49.5 to 49.2, the third consecutive print within the contractionary territory, and the lowest since February 2016. The non-manufacturing index, although it stayed above 50, slid as well, to 54.3 from 54.7.

Now back to the currencies, the Canadian dollar managed to end slightly higher against its neighboring greenback, despite the slide in both Canada’s headline and core CPIs. Given that Canada is on the world’s largest oil exporting nations, the Loonie may have stayed supported due to the rebound in oil prices, which came under buying interest after the EIA (Energy Information Administration) weekly report showed an unexpected slide in US crude inventories, the first after five consecutive builds. Another driver behind the recovery in the “black gold” may have been commends by Saudi Energy Minister, who said that OPEC and its allies are already “taking it easy”, in response to Trump’s recent warnings, and that the group may extend the agreed cuts until the end of the year.

DJIA — Technical Outlook

The Dow Jones Industrial Average was the worst performer among the top 3 US indices. Since December 27th, DJIA was trading above an upside support line, taken from the low of that day, but yesterday the index broke below it and remained there up until the close of the US trading session. From Monday, the Dow Jones is forming lower highs, which is not a very good sign for the bulls. That said, before we can look further south, first, we must see some key support areas getting broken and only then we may target slightly lower levels. For now, we will remain cautiously-bearish, with regards to the short term.

A drop below yesterday’s support at 25870 could mean that not all is good in the bull-bloc and the index would confirm a forthcoming lower low, which could open the door to some lower areas. This is when we may target the 25600 hurdle, marked by the high of February 14th, a break of which could invite even more sellers into the game and lead DJIA towards the next possible support zone near the 25300 obstacle. This is where the price got held from moving lower on February 15th.

Alternatively, if DJIA pushes back above the aforementioned upside support line and also climbs above the 26150 barrier, marked by the high of February 26th, this might force the sellers to start worrying. But for a better confirmation of seeing a further move higher, a jump above this week’s high, at 26250, is needed. This could give full control to the bulls, in which case the price may travel to the 26540 barrier, marked by the high of October 9th.

GBP Stays on the Front Seat, US GDP on the Agenda

The pound continued sitting on G10’s front seat, gaining the most for the third day in a row. Although the currency did not react much to the UK Parliament’s voting on proposed amendments, GBP-traders continued adding to their long positions, on increasing hopes that a chaotic Brexit on March 29thcan be avoided. Just for the record, MPs backed an amendment which puts down PM Theresa May’s promised timetable, and rejected a proposal by the Labour Party for a permanent customs union with the EU. They also voted down the Scottish National Party’s call for the no-deal case to be ruled out under any circumstances.

As for our view, it remains the same as yesterday. Although the chances of a disorderly withdrawal have declined notably in recent days, they have not totally vanished. On Tuesday, PM May noted that an extension will be a one-off and as short as possible. So, if MPs continue to reject any deal offered by the Prime Minister, the remaining alternatives may be a no-deal Brexit, a second referendum, or revoking Article 50. With May dismissing the latter two, it’s hard to rule out the worst yet.

Back to the US dollar, the main event for its traders is likely to be the 1stestimate of the US GDP for Q4, which was delayed due to the effects of the partial government shutdown. The forecast suggests a slowdown to +2.6% qoq SAAR from +3.4% in Q3. That said, the surprisingly weak retail sales for December led to downside revisions in GDP estimates for the last three months of 2018, with the Atlanta Fed GDPNow model suggesting a +1.8% qoq SAAR growth rate. The New York Nowcast points to a higher rate (+2.35%), but still below the market consensus. Thus, we see the risks surrounding the +2.6% forecast as tilted to the downside.

Although according to its December forecasts the Fed itself anticipates growth to slow throughout its forecast horizon, it still expects it to average at around 2.3% in 2019. Thus, a slowdown closer to the Atlanta Fed estimate rather than the New York one could raise more concerns with regards to the health of the world’s largest economy and may add to expectations of no Fed hikes this year. It could even prompt some participant to add to their rate-cut bets. According to the Fed funds futures, investors are 82% confident that the Fed will hold off from acting this year, while they see a 14% chance for a rate cut. There is also a 1% probability for two rate cuts by year end. The probability for a hike stands at a mere 3%.

GBP/USD — Technical Outlook

Since the reversal to the upside on February 14th, GBP/USD kept pushing higher, gaining almost 600 pips. Yesterday, the pair found good resistance near 1.3350 barrier, from which it reversed back down. Given that GBP/USD seems to be quite overextended to the upside already, as our oscillators on the 4-hour chart suggest, we may see a bit of correction to the downside. But the downside might be limited due to the short-term upside support line, which is running from the low of February 15th.

A drop below the 1.3290 hurdle, marked by the intraday swing low of yesterday and the high of Tuesday, could temporarily place the bears behind the steering wheel. They might then drive GBP/USD lower, initially, towards the 1.3230 obstacle, which is yesterday’s low, or even a bit further down, where the rate could hit the 1.3215 level. This level is near the highest point of January, which also coincides with the 23.6% of the Fibonacci retracement. Also, around there runs the previously-mentioned short-term upside support line, which could hold the rate from traveling further down. If that line continues to hold, then we may see another leg of buying.

On the other hand, if that upside support line gets broken, this would place the rate below January’s high, at 1.3215, and push the pair lower, to test the 1.3160 hurdle, marked by the high of January 31st. GBP/USD could rebound from there, but if it fails to get back above January’s high, then we may see another leg of selling. This could drag the rate to the 1.3110 obstacle, which is the high of February 20th.

As for the rest of Today’s Events

During the European morning, we have Germany’s preliminary CPIs for February. Both the CPI and HICP rates are forecast to have ticked up to +1.5% yoy and +1.8% yoy, from +1.4% yoy and +1.7% respectively, which could raise speculation that Eurozone’s headline inflation rate, due out on Friday, may rebound slightly as well. Sweden’s GDP for Q4 is also coming out and expectations are for a rebound to +0.6% qoq from -0.2% qoq.

From the US, apart from the GDP data, we get the initial jobless claims for the week ended on February 22nd. Expectations are for a rise to 221k from 216k, but this will drive the 4-wk moving average down to 227.75k from 235.75k. The Chicago PMI for February is also released.

As for tonight, during the Asian morning Friday, we get Japan’s employment data for January. Expectations are both the unemployment rate and the jobs/applications ratio to have remained unchanged at +2.4% and 1.63 respectively. We also have the Tokyo CPIs for February. The headline rate is expected to have remained unchanged at +0.4% yoy, while the core one is expected to have ticked down to +1.0% yoy from +1.1%. China’s Caixin manufacturing PMI for February is also due out and is expected to have risen to 48.7 from 48.3. That said, bearing in mind the slide in the official manufacturing index for the month, we see the risks surrounding the Caixin forecast as tilted to the downside.

As for the speakers, four FOMC officials step up to the rostrum today: Vice Chair Richard Clarida, Atlanta President Raphael Bostic, Philadelphia President Patrick Harker, and Dallas President Robert Kaplan.

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