European markets rally on trade talk optimism

European markets opened higher, taking their cue from a strong closure on Wall Street where stocks were boosted by optimism over the trade talks between US and China and signals that the Federal Reserve may hold back on planned interest rate hikes.

Though the last set of Sino-US talks that finished this week seem to have yielded very little in terms of concrete progress, the fact that the communication channels remain open and that the Chinese Vice Premier Liu He is expected to visit the US later in January is giving rise to hopes that the two sides will find some middle ground soon. Both countries need to keep the pace of progress up to be able to negotiate key issues by 1 March when the current 90-day trade truce expires.

Dollar slides as Fed chairman warns of government shutdown implications

The greenback is weakening almost across the board except against sterling, in part on the Fed’s more dovish comments but also as the US government is heading for its longest shutdown in history (it is currently the second longest on record). The standoff between President Trump and Congress is showing no signs of abating and if anything, Trump is becoming more combative saying that he might consider declaring a state of emergency to obtain the funding for his Mexican wall.

Although stock markets have mostly dismissed the shutdown as having little relevance for trading, Fed chairman Jerome Powell has warned that a prolonged US government shutdown could start taking a toll on the country’s economic growth. It would also make it more difficult for the Fed to assess the real condition of the US economy as a number of agencies that gather key economic indicators have been affected by the closures.

Oil prices rally almost 9% on the week

Crude oil prices are going through a period of irrational exuberance as investors pin their hopes that the production cuts agreed by OPEC in December will start creating a tightness in the market in the first half of this year. Also, the perceived progress in the Sino-US talks is boosting optimism that China’s economy will stop slowing down and that demand from the world’s largest buyer of commodities will remain strong. But given that Brent crude started the week at $57.26 and is now trading almost 9% higher, crude oil should be approached with due caution.