MACRO 4 minutes to read

Risk in retreat

Summary:  Sentiment is running for cover into the early hours of today's New York session, with rare earth rumours and rising yields sparking enough discontent to break key support levels in the S&P 500.


Risk-aversion is rising as US Treasury yields, equity indices and oil prices fall. FX markets are nervous thanks to Brexit and UK political woes, uncertainty around the new European Parliament, Italian budget questions and the ongoing US/China trade war.

It all has a bit of a “Chicken Little” feel about it. But is the sky really falling? Is another 2008-style crisis just around the corner?

Probably not. The story that China may use exports of rare earth elements to the US as a weapon in trade negotiations has traders on edge and contributed to the drop in equity prices and gains in the Japanese yen and Swiss franc. A week ago, an RBC analyst pointed out that China tried to use its rare-earth clout against Japan in 2010.

It didn’t work out very well for them as they lost market share to other countries and as many corporations can attest, once market share erodes, it’s hard to get back.

The market reaction seems to be exaggerated due to the lack of top-tier economic data availability this week and a cone of silence around Federal Open Market Committee officials. That changes starting Thursday with the release of US March GDP followed by German inflation and US PCE data on Friday.

Wall Street indices took it on the chin at the opening bell. The Dow Jones Industrial Average, S&P 500 and Nasdaq shed around 0.80% in early trading on continued trade war jitters and recession fears sparked by the inverted yield curve.

The US dollar is marginally higher across the board in New York trading, underpinned by risk-off and gaining additional support from the weak equity market profile. The US dollar index (USDX) is almost fully recovered from Wednesday’s plunge. The uptrend is intact while prices are above 97.20.

The Bank of Canada did as universally expected and left interest rates unchanged. The accompanying statement was somewhat positive until the discussion on the global economy. The BoC said “the recent escalation of trade conflicts is heightening uncertainty about economic prospects".

In addition, trade restrictions introduced by China are having direct effects on Canadian exports. USDCAD soared an smashed through resistance at 1.3520, opening the door to further gains to 1.3580 and then 1.3670. However, failure to extend the rally would be considered a false break and the trading would revert back to the 1.3370-1.3520 band.
US dollar index (four-hour, source: Saxo Bank)
Disclaimer

Saxo Capital Markets (Australia) Pty Ltd prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Combined Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)