Global trade, earnings downgrades, Brexit, and Fed policy cast a long shadow, but at the same time, there are signs that point to opportunities. US-Chinese trade talks ended and optimism about the outcome sent the Chinese yuan high and the US dollar lower yesterday afternoon. Dovish Fed speakers were followed by dovish FOMC Minutes that don't sit comfortably with the comments Chair Powell made at the press conference after December's meeting, but the dovish tone does support the risk bounce and the dollar's softness. The combination of Fed dovishness and trade harmony is risk-friendly and dollar-negative, even if Asian equities are threatening to run out of steam. While the U.S. dollar looks as though it has peaked, equity valuations still look promising, despite the inevitable volatility ahead and the risk of a U.S. recession is not on the horizon so far. There are opportunities for the prudent investor to take advantage of an environment that overall remains relatively supportive. Looming risks faded slightly over last week providing an opportunity for asset to recover. It’s fitting that two primary themes for 2019, US-China trade relations and Fed monetary policy path, would dominate the news flow at the start of the new year. Economics Unexpected Bullish Turn US & Chinese trade talks has ended and broad optimism sent the CNY higher and USD lower. While no hard agreements were released, it was likely these low-level discussions were setting up a positive outcome for their bosses. Significantly, in the near term, higher-level discussion are planned between Liu He and Lighthizer & Mnuchin possibly on 30-31 January. From the buzz, there is growing expectations that the US will suspend traffic implemented in 2018 in order to give China time to announced significant reforms. There is meaningful risk that a temporary settlement will send global sentiment higher driving foreign currency inflows (especial portfolio investments). The PBoC is not looking for a sharp appreciation indicated official inventions before the yuan becomes too strong. However, the significant undervaluation’s in the Shanghai composite would provide an opportunity for investors. Elsewhere, Federal Reserve Chairman Jerome Powell predicted no recession in 2019 and stated the FOMC will be patient in additional interest rate tightening. The Fed speaker’s dovish tone supported the risk bounce and broad USD weakness. Highlighting the markets true focus, traders shrugged off the conflict between Trump and Democrats over the government’s shutdown. S&P 500 index nears 2600, bullish break would signal reversal of correction phased while failure would emboldened bears.
By Peter Rosenstreich
