Rally losing momentum despite trade hopes & dovish Fed

Investors have kicked off 2019 in a positive mindset. The S&P 500 rallied during five out of the past six trading days booking 3.1% gains so far, and the index is up more than 10% from its December lows. The MSCI World Index saw a similar performance rallying 3.6%, and credit spreads have narrowed significantly especially on high-yield bonds supporting the risk-on environment. Oil prices entered a bull market yesterday after gaining around 5% on hopes that Beijing and Washington are moving in the right direction to end their trade dispute. Meanwhile, the Chinese Yuan leapt to a 5-month high.

The impressive comeback in risk appetite indicates that investors were a little too pessimistic in December and that growth outlook isn’t as gloomy as some might think. However, it’s still early to judge.

The three-day talks between U.S. and Chinese officials played a significant role in calming the markets. There were clear signs of progress in terms of moving towards higher levels of negotiations that could lead to some sort of agreement before March 2, ahead of the 90-day truce window. Despite this positive environment, nothing should be taken for granted. Trump’s demands are difficult to meet and talks may break down at any moment.

Probably, that’s why the rally in equity markets seems to have taken a pause on Thursday with Asian markets struggling to find direction and U.S. equity futures pointing towards a lower open.

The FOMC minutes released on Wednesday showed that some policymakers were reluctant to hike rates in December, given the volatility in financial markets and week inflationary pressures. The minutes revealed that the consensus was more dovish than Fed Chair Powell’s assessment during the press conference. Fed members saw the risks of the outlook to be “roughly balanced”, but some noted that “downside risks may have increased of late”.

The Dollar fell further after the minutes were released on expectations that interest rates may be raised only once or not at all in 2019. This should continue to add pressure on the Greenback, unless economic data begins to surprise to the upside.

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