Optimism creates illusion of stability

4 January, 2019

The first trading week of 2019 has been explosively volatile and highly unpredictable due to persistent concerns over slowing global economic growth. Sharp swings witnessed across global equities and a flash crash in the currency space simply highlighted how financial markets remain extremely sensitive to growth fears. With rising geopolitical tensions fuelling risk aversion and accelerating the flight to safety, investors are likely steer clear of riskier assets.

There was an illusion of stability across markets this morning amid renewed optimism about US-China trade talks. Although a breakthrough deal between both sides is unlikely, any encouraging signs of co-operating or interest for further negotiations will help ease tensions. However, if talks descend into disagreements, global sentiment is poised to take a hit. While renewed trade hopes could offer market players a short-term distraction, the underlying factors weighing on risk sentiment remain present.

Across the Atlantic, the Dollar depreciating against a basket of major currencies after disappointing economic data fuelled fears over the US experiencing an economic slowdown. US manufacturing activity slowed sharply to a two year low in December as the impacts of trade tensions were felt at home. Although the Dollar remains shaky, sentiment could brighten if the pending US jobs report dishes out and upside surprise. A blockbuster NFP coupled with signs of accelerating wage growth in the United States could rekindled expectations of higher interest rates, especially when factoring in how the Fed is data dependent.

In the commodity markets, Gold slightly weakened due to the renewed trade optimism. However, downside losses are likely to be limited with rising geopolitical risks and global growth fears. The technical outlook remains firmly bullish as there have been consistently higher highs and higher lows. A soft US jobs report has the ability to inject Gold bulls with enough inspiration to attack the psychological $1300 level.

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