Risk Appetite Fades on Trade Jitters: China back in Focus

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A wave of risk aversion swept across Asian markets this morning as renewed jitters over the progress of trade talks and disappointing economic data from China knocked investor confidence.

Stocks in Asia closed broadly lower amid the risk-off vibe with the negative mood infecting European markets as of writing. The sharp change of attitude towards global equities clearly highlights how global trade developments are heavily influencing market sentiment and risk appetite. With investors seen maintaining a cautious stance for the rest of the trading day, Wall Street may end up opening in the red this afternoon.

Weak China data sends shivers across markets

China was back in the spotlight this morning for all the wrong reasons after disappointing data from two key sectors fueled fears of a deepening economic slowdown.

The world’s second largest economy reported that industrial production in November grew 5.4% YoY compared to the 5.9% projection while retail sales rose 8.1% last month – its weakest pace since 2003. Appetite for the Chinese Yuan is likely to fade as markets attribute today’s weaker than expected economic figures to ongoing trade tensions. The Chinese Yuan is seen depreciating further if risk aversion punishes emerging market currencies and empowers the safe-haven Dollar.

Euro falls as ECB ends Quantitative Easing

The Euro was more concerned with the European Central Bank (ECB) trimming its growth forecasts rather than the fact that quantitative easing (QE) was coming to an official end this month.

As widely expected, the ECB left interest rates unchanged in December but the announcement of the official end of QE coupled with trimmed growth forecasts added a special twist. With Draghi stating that the balance of risk to the euro area economy was moving to the downside, markets interpreted the meeting as dovish.

Domestic risk in the form of Italy’s budget feud, political risk in France and signs of slowing growth in Germany has left the ECB extremely cautious. Concerns revolving around slowing global growth, trade tensions and Brexit uncertainty are external risks that may create headaches for ECB policymakers. With the European Central Bank clearly in no rush to remove the zero-interest rate policy (ZIRP), interest rate differentials will certainly not be in favour of the Euro anytime soon.

In regards to the technical picture, the EURUSD remains in a very wide range on the daily charts with resistance around 1.1450 and support found at 1.1290. An intraday breakdown below 1.1330 may inspire a decline towards 1.1290.

Dollar buoyed by risk-off mood

Renewed jitters over the direction of trade talks have sent investors marching towards the Dollar today.

Although the Dollar remains king in times of uncertainty, the question remains for how long? With soft economic data from the United States and dovish comments from Fed officials forcing investors to re-evaluate the Fed’s hiking path next year, Dollar bulls may be living on borrowed time. Investors will direct their attention towards the pending US retail sales figures this afternoon which should provide fresh insight into the health of the largest economy in the world. A disappointing report is seen fueling market speculation over the Fed taking a pause on rate hikes next year, an outcome that will be Dollar negative.

Commodity spotlight – Gold

Gold’s depreciation on Friday continues to highlight how the yellow metal’s near-term outlook remains heavily influenced by the Dollar’s performance.

With appetite for the Dollar receiving a solid boost today on trade jitters and soft China economic data, this will certainly punish Gold. Although the risk-off mood may attract some investors towards the precious metal, an appreciating Dollar is likely to sabotage any attempt for a rebound.  Focusing on the technical picture, bulls lost control on the daily charts after prices broke below the $1,240 support level. Sustained weakness under this level could inspire bears to target $1,234.

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