Clear sky for a ‘risk-on’ rally | CMC Markets Daily Commentary

CMC Markets

Market sentiment swung to the positive side as the White House ruled out the possibility of another Fed government shutdown. President Trump signalled flexibility on the 1st March tariffs deadline in an attempt to strike a meaningful deal with China. Political uncertainties surrounding this week’s agenda was largely alleviated and three US indices rebounded sharply overnight. Positive sentiment is likely to spread over to Asian markets this morning, fuelling a board rebound in equities, commodities and emerging market currencies.

The US dollar index pulled back to 96.5 area, ending an eight-day gain. Weaker dollar led to rebound in crude oil prices, EUR, CAD and AUD. As political uncertainties are largely removed for this week, there is fading demand for safe-haven currency like the dollar. Fundamentally, a clear dovish Fed stance is likely to contain the upside of USD in the weeks to come. 

Brent crude oil advanced 2% to US$62.5 area, backed by weaker USD and report showing OPEC+ had cut production aggressively in January. The impact was partially offset by EIA statement pointing out higher US crude production in 2020, when ‘US production is on pace to average 13 million barrels per day’. Traders are eyeing tonight’s US DoE Crude oil inventory data to paint a clearer outlook of supply-demand relationship. Consensus shows 2.77 million barrels added to the stockpile.

Technically, Brent is challenging strong resistance zone at US$63.0-63.5 area and momentum indicator MACD is diminishing these days. Failure to break out above this resistance will probably result in a pullback to around US$60.0 area.

China markets registered strong gain for the past two days, led by small-cap companies listed in the tech-hub Shenzhen. Prior of this rally, dozens of companies issued huge profit warning on goodwill impairment, blamed slower economic growth and deteriorating external demand. Bad news, however, were interpreted as good news by market participants as a ‘one-time’ profit plunge will help to pave way for future earnings reversion.

The ratio of ChiNext Index over large cap Shanghai 50 Index, has come down from 1.1 to 0.5 over the past three years, suggesting the small-cap technology shares were severely oversold against the blue chips. Strong rebound in ChiNext index following month-long rally in the large-cap index shows a silver lining of China’s economy, as fiscal and monetary stimulus will gradually feed positively into the stock markets.

US SPX 500 – Cash

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(By CMC Markets)

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