Financial market research and analysis

Risk-on trading returns as trade war fears ease Wall Street finally snapped a four-day losing streak on Monday, although the exact reason behind the return of risk appetite was difficult to pinpoint. The Dow closed over 330 points higher, whilst the S&P 500 and the Nasdaq closed 1.1% and 1% higher respectively. Risk on also saw Asia trade higher overnight and is helping Europe look towards a stronger start on Tuesday.

Fears over a trade war eased in the overnight session, possibly thanks to relatively little interest by China in retaliating against the US, at least for the time being. Or possibly because the US Republican’s may try to block Trump’s trade tariffs, for fear of what implementing them could do to the US economy. A third reason that market concerns dropped down a gear, could be thanks to President Trump showing potential for flexibility surrounding the steel and aluminium tariffs by linking them to NAFTA agreement negotiations. However, opening the way to exceptions for the likes of Mexico and Canada, could in itself open a whole can of worms with the WTO. Finally market participants are starting to question whether this could have just been a NAFTA negotiating tactic from the start. Either way, whatever the precise reason for the market’s reassessment of trade war fears, traders were content to jump back in to riskier assets, picking up bargains after losses of 4.5% on the Dow over the past 4 losing sessions.

USD/JPY rebounds as risk sentiment improves The improvement in risk sentiment has seen USD/JPY put in a solid recovery in the Tokyo session. USD/JPY had fallen to 3 ½ month lows on Friday as investors moved into safe havens, following the announcement by President Trump of the 25% tariff on steel import and 10% tariff on aluminium imports. However, the improved risk environment has seen the pair rally, breaking through several resistance levels to post a high of 106.39.

Looking out across the week, Fed speak and the US labour department’s jobs data on Friday will ensure the focus remains on the dollar. Meanwhile Q4 Japanese GDP plus the BoJ rate decision on Friday will mean the Japanese yen is also under the spotlight.

Continued risk-on sentiment could see buying interest push USD/JPY to resistance at 106.60 before targeting 107.00. Meanwhile, should risk appetite drop once again and the USD/JPY sell off, strong support can be seen at 105.50.

A quick word on the pound

The pound received a boost in the previous session after Prime Minister Theresa May said that Britain was nearing a transition deal with the EU. This came as a relative surprise given all the negativity EU Chief negotiator Michel Barnier has shown towards a deal being achieved in the time frame just last week.

Moving into Tuesday, the British Retailers Consortium (BRC) released like-for-like sales numbers that beat expectations. Stronger than forecast BRC  sales growth at 0.6%, compared to 0.5% expected, adds to mounting evidence that the UK economy is holding up well at the start of 2018 despite Brexit uncertainties. The BRC figures come hot on the heels of expectation beating service sector activity which was at its highest level since October 2017.

GBP/USD barely flinched following the BRC release and is seen heading into Tuesday at 1.3850

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