Key market themes to watch this week

14 May, 2018

Trade resolution

A month after the U.S. Commerce Department banned one of China's biggest tech companies, ZTE, from exporting U.S. products, President Trump announced his willingness to help the company get back in business. This unusual intervention by the U.S. President comes amid tense talks with China on trade deal renegotiations. With Chinese Vice Premier, Liu He, expected to visit Washington this week to resume talks it seems Trump’s move is a good starting point, and likely to be welcomed by markets. Many policymakers will criticize such a reversal, but from an investor’s perspective, it’s a sign of easing relations between the world’s two largest economies and should support risk-taking.

U.S. Dollar Strength

The surge in U.S. yields and USD strength has proved to be problematic for emerging markets over the past several weeks. The higher U.S. yields go, the more outflows are expected to be seen from emerging markets. As of Monday morning, the dollar index DXY appears to be showing signs of weakness, declining from 92.55 to 92.38. Currency traders should also keep an eye on the U.S. 10-year treasury yields, as failing to break above 3% may suggest a short-term top. A significant break above the 3% benchmark requires faster tightening expectations from the Federal Reserve; for this to happen, the economy must show signs of over-heating. However, we are not there yet; U.S. April retail sales figures, scheduled for release on Tuesday, is the key economic data release to watch this week. Markets expect a 0.4% increase in April, from 0.6% in the previous month.

Did oil find a top?

Brent crude hit a new three-and-a-half year high on Thursday, reaching $78 after the U. S’s withdrawal. from the Iranian nuclear deal. The 26% surge from February lows was far from expected, but the record demand from Asia, fears of supply disruption, and more importantly, the risk of war between Iran and Israel, led traders to buy call options at $100. Given that risk of a direct confrontation between Iran and Israel has abated, markets will turn their focus to fundamentals and a $100 target will likely be unrealistic. While demand has been strong enough and OPEC and Russia are exceeding expectations on supply cuts, prices are likely to remain elevated. Meanwhile, the soaring U.S. shale output will continue to put a cap on prices. However, the most significant downside risk is President Trump intervening in oil markets by pressuring OPEC members to increase output.

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