Wednesday focus: If this is 'risk-on' why is gold rallying?

It's too early to stand down the dollar watch.

Dollar watch continues
It's too early to stand down the dollar watch. The greenback keeps finding new ways to plumb multi-month lows. Economic readings and robust corporate earnings from major exporting nations, plus resurgent commodity prices are joining fray to keep the dollar on the back foot. New developments in the U.S. Special Prosecutor’s investigation of possible Trump Campaign collusion with Russia aren’t helping the dollar.

Furthermore, expectations are building of another ramp in global growth this year. Note Reuters' survey out overnight showing economists see growth expanding by 3.7% this year, the best pace since a 4.3% rise in 2010. The Fed's rate path is dollar-supportive, but already well etched into market participants’ minds. We suspect priced-in Fed policy makes more recent global economic factors more potent. If we're correct, this is a recipe for volatility because early assessments are usually revised.

U.S. futures up but gold higher

S&P, Dow Jones and Nasdaq futures were slightly firmer at last look. U.S. shares have yet to be perceptibly roiled by dollar travails. Since White House tumult has cooled, the influence of Capitol Hill on markets has also softened. That leaves the focus squarely on earnings. These have been mixed—see P&G and Verizon— further reason for major indices to lose their footing. Other reasons are valuation concerns and ‘overbought-ness’. Still S&P 500 earnings are forecast to grow some 12% on the year in Q4, so investors still err on the side of the uptrend continuing. The outlier on Wednesday is gold. It was up 0.7% and within $8 of 2017’s high whilst looking set for a seventh week of gains. That’s not a risk-on signal.


With the larger Asian markets mostly matching the pace of the Dow and S&P 500’s 6% advance in January, pauses are becoming more frequent there too. MSCI APAC fell 0.2% and Nikkei was 0.8% off a 26-year high. That was despite Japanese exports growing for a 13th straight month and manufacturing expanding at the fastest pace in almost four years.


FTSE buyers have had a lot to be frustrated about, including the pound, Tuesday’s copper rout (now over) and dicey oil prices. FTSE needs to hold Thursday’s 7683 low or else may extend its recent range to the downside. Copper, silver and oil were firm though. The FTSE could erase its 0.5% loss if the pound eases.


Europe’s de facto benchmark was slipping after the one of the first major profit warnings of Europe's earnings season, from French conglomerate/utility Suez. That stemmed modestly positive stock sentiment from earlier in the session. France’s CAC-40, Spain's IBEX and Italy's FTSEMIB were all last down 0.1%-0.3%. The balance of corporate results will almost inevitably be positive during the earnings season though. Switzerland’s Novartis’s was an example on Wednesday, raising profit guidance after beating consensus.


Dollar three-year lows mean three-year highs vs. majors, including the euro. It touched a $1.2345 3-year peak earlier. Forward focus points include Thursday’s ECB statement and commentary. The market anticipates a signal of an end-2018 finale for QE and a switch of attention to rates. $1.2356 was the low of the week ending 28th November 2014. Wednesday PMI readings slightly missed forecasts, perhaps adding weight to the single currency. Price at last check: $1.2337, up 37 pips.


Cable has barely needed a shot in the arm of late, as it resists the pull off post-Brexit highs. But it got one on Wednesday from inarguably robust jobs data. Cable’s surge could be its last gasp. Its recent advance has left it overstretched on momentum oscillators for several sessions already. It was down around 40 pips at time of writing from a leap to $1.4118.  To be sure, UK unemployment readings erased a rise in unemployment from last time. However, record high vacancies and unemployment were mere increments above recent highs. The pound may need more substantial triggers to push even higher.


Still to come: Just U.S. existing homesales on Wednesday. We suspect Washington and earnings will be of more interest to markets. Even on the latter front, highlights are a day away, including Caterpillar’s Q4 results on 25th. That day also brings Japanese inflation releases and Germany’s Ifo Business Climate survey, ahead of early assessments of GDP from the UK and the U.S. on Friday.

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