Today’s Key Market Drivers: 28th February 2019

Pakistan and India launch airstrikes against one another.

Pakistan and India are two nuclear states and this week launched airstrikes against one another which has traders nervous that a war could break out between the two countries. Pakistan retaliated on Wednesday shooting down two Indian fighter planes following India attacking what it says was a militant camp in the Pakistan controlled area of Cashmere.

Whilst these sorts of geopolitical events usually don’t impact financial markets for very long, they can change the markets general sentiment in the short term. US stock markets have been rallying strongly for 8 weeks, the price has come to a significant area of potential price resistance on the S&P 500 and as I said in my report yesterday for stock markets to fall and safe haven currencies to rise there will need to be a fundamental catalyst. It may have just found it.

The current tensions between Pakistan and India are not likely going to change the course of global growth or inflation, nor is it likely going to impact any Central Banks interest rate decisions but it is a source of genuine concern. Both countries are emerging market economies that are nuclear armed and the world’s leaders are asking both countries to exercise restraint. Financial markets appear to be taking a concerned but mindful approach but if both countries continue to fire missiles at one another in coming days we would likely see a steeper decline on stock markets and a rally in safe-haven currencies and gold.

US stocks retreat on US China trade comments.

Tensions in the subcontinent were not the only reason why US stock markets retreated on Wednesday. A top US trade official said that a trade deal with China was not done yet and China would need to step up to the plate and do more than just buy more US products. What he meant was China would need to agree to stop pinching US intellectual property which the US Government has been accusing China of doing for years.

US Fed Chair Jerome Powell was again speaking on Capital Hill on Wednesday and repeated the US Fed’s intention to remain patient and added the Central Bank committee saw the US economic outlook as “generally favourable”.

Trump tells North Korean leader his country could become an economic powerhouse.

As he sat next to the North Korean leader in Vietnam on day one of their talks the US President told Kim his country could become an economic powerhouse in the future just like Vietnam. He said he’d like to help and Vietnam was a great example of what is possible after Vietnam normalised relations with the US more than 20 years ago and now has one of the most enviable growth rates in Asia.

The financial markets are unlikely to be bothered by the two leaders meeting this week as the likely friendly and constructive outcome has already been priced into markets. What traders are more concerned with is the trade deal between the US and China which doesn’t appear to be going as smoothly as many thought it was just a few days ago.

Aussie and Kiwi Dollars pull back.

There are some good fundamental price action lessons to be learned from what has happened in the past 24 hours. The AUD and NZD have fallen sharply on the back of two areas of “concern” and goes to show just how sensitive both currencies are to any “risk-off” trading activity. The following two events have conspired to send both currencies back lower.

  • Geopolitical tensions between India and Pakistan.
  • A US trade official confirming a trade deal with China is still some way off.

Today sees the release of important Capital Expenditure data for Australia which will give the market an indication if big business, in particular, big miners, are spending up big on new equipment. A weaker than expected number would send the AUD lower as it would be a signal that big business is concerned about its future growth prospects and is pulling in the reigns. The data is set for release at 11.30am AEDT.

Midday will see the release of China’s latest manufacturing figures which recently have been declining along with GDP. The market is expecting the number to be under 50 at 49.5 which indicates contraction so anything weaker than this, the market will jump all over the AUD and sell it off lower. The opposite is true if the number is better than expected.

US 4th Quarter GDP numbers will be a focus today.

Traders are keen to know if the US economy was still powering ahead in the last quarter of 2018 or was there a genuine slow down that could signal a sign of things to come. The US Fed says the economy remains strong and certainly recent jobs numbers indicate the US economy is virtually fully employed with an unemployment rate around 3%. Growth in the 4th the quarter annualised is expected to show the US economy grew at 2.5% and following is my take on how the US Dollar will likely react post the data release.

  • If GDP is higher than expected the US Dollar will likely rise as traders will see this as a sign the US Fed will lift the official interest rate sooner. Stocks would likely fall as higher interest rates correlate to traders selling stocks. Simply put money is not as cheap to borrow and leverage into financial markets.
  • If the GDP number is weaker than expected the US Dollar will fall as traders will immediately price in their expectation the US Fed doesn’t have a mandate to continue to raise rates in 2019. Stocks would likely rally as the cost of leveraging money would not be going higher.

The data is set for release at 12.30am AEDT Friday morning.

You should have zero desire to be average. AB

 

About the Author: Andrew Barnett

Andrew is a professional trader and successful investor who has a strong focus on education. He is a regular Sky News Money Channel Guest and one of Australia’s most awarded and respected financial experts and is regularly contacted by the Australian Media for the latest on what is happening with the Australian Dollar. Director at LTG GoldRock, Andrew Barnett, guides thousands of traders around the world in the live market on a daily basis, advising them on buy and sell directions, as well as trading his own personal account. Andrew, a regular keynote speaker at trading and wealth-creation events throughout the Asia Pacific region, is an authorized representative registered with the Australian Securities and Investment Commission (ASIC).

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