MORNING CALL: US Futures Catching A Break


Investors are ready to build on the gains from last week, what can derail this momentum? 



US futures are ticking higher to kick-start the week on a positive note. Investors are feeling positive about the markets and this is on the back of the stellar rally which we experienced last week. To put things in perspective, the S&P500 index is up 12.59 percent year-to-date (YTD), the Nasdaq index 15.74 percent and Dow Jones 10.81 percent YTD. These are some strong gains, and this confirms a robust demand for risk assets even though we have seen some serious turbulence such as the trade war and the ongoing Brexit chaos. The picture becomes clearer when we look at the performance of the VIX and VSTOXX indices, both of which are down nearly 48.39 and 45.84 percent YTD.  
 
Nonetheless, things can change rapidly, and it could take no time to lose these solid gains. The question is what could trigger that?
 
There are several events during this week that have the potential to move the needle of the risk appetite. Starting from tomorrow, investors will be focused on the next action of the British prime minister, Theresa May, who scored her first victory in relation to Brexit last week. Chancellor of the Exchequer, Philip Hammond, tried to put more pressure on rebel MPs over the weekend. He said the absence of their support for the current deal may trigger a longer delay in Brexit. Since last week, a growing number of Tories have started to support the government version of Brexit. However, May has said that she will be only putting the same deal (rejected by the parliament twice) in front of the lawmakers if she is confident of strong support from her party and the DUP.  
 
In terms of Sterling-Dollar price movement, the key levels to watch are support at 1.30 and resistance at 1.35. The Bank of England is going to announce its interest rate decision on Thursday, but no one is expecting fireworks. The focus is going to be more on the bank’s stance towards the economic health of the country because of the Brexit storm.  So far, the upward trend is strong, and it is likely that the British Pound may continue its uptrend. The RSI indicator is backing the momentum. Looking at the CFTC data, it appears that speculators are still favouring a downside move, and that means more uncertainty.
 
The below chart shows an increase in net short positions. However, if we look at the overall trend since January this year, the uptrend is still in place and this confirms a reduction in short positions.


Sterling-net-position.PNG

The Yellow Vest violence erupted once again in the second most powerful country in the Eurozone, France. Previously. investors reacted negatively when it occurred because it suppresses the GDP growth in the country and creates more uncertainty for the future of the Eurozone as one nation. Emmanuel Macron, the French president, will have to take harsher measures this time to destroy the root cause of this because any prolonged period of violence is going to threaten his position of power.
 
This geopolitical unrest is keeping the gold price above the 1300 mark against the dollar. Further contamination of this situation is likely to push investors into a safe haven mode. The CAC index in up a whopping 14 percent YTD but a failed attempt may trigger an intense sell off for the index.
 
Finally, we have the FOMC minutes due on Wednesday. The Fed has a lot to digest in terms of economic figures over the past two months.  The data for this month has created more of a Goldilocks scenario for investors. We are expecting the Fed to hold interest rates steady and announce the end of asset roll-off from its balance sheet. But what matters the most for traders is the downward revision of the number of interest rates hikes in 2019. We do not expect more than one or max two interest rate hikes for this year. This would keep the dollar bulls on a tight leash, but it may not be enough to stop the dollar index from continuing to grind higher from its price of 96.41.
 

 



Back