“Risk-off” Sentiment Intensifies on Fears of US Government Shutdown

Hopes of a possible Santa Clause rally were thoroughly crushed mid-week thanks to the Fed’s less dovish than expected policy statement. With growing fears of a possible US government shutdown paralyzing risk appetite, U.S stocks plunged on Thursday with the Nasdaq Composite Index on the brink of entering a bear market. Stock markets are clearly facing a perfect storm of headwinds such as global growth fears, US rate jitters and ongoing trade tensions among many other geopolitical risk factors.

In the currency markets, the Chinese Yuan stood out from the pack by appreciating despite the growing risk aversion. The Yuan’s appreciation is likely based on Dollar weakness rather than a change of sentiment towards EM currencies. While the local currency is seen extending gains in the near term, the medium to longer term trajectory remains heavily influenced by ongoing trade developments. Any signs of easing trade tensions will be a welcome development for the Chinese Yuan. Technical traders will continue to closely monitor how the USDCNY behaves around the 6.880 handle. A breakdown below this level is seen opening a path back towards 6.872.

Across the Atlantic, the Dollar’s status as a safe-haven currency was under threat amid fears over slowing growth in the United States. The flattening US treasury yield curve stimulated recession fears – ultimately reducing appetite for the Dollar. With the Fed’s 2019 rate hike outlook data-dependent, there will be a special focus on the pending U.S. GDP data. A solid GDP print is seen boosting the Dollar and fuelling speculation over the Fed raising interest rates sooner than expected. However, a disappointing print will be Dollar negative as fears mount over the United States experiencing an economic deceleration.

In the commodity markets, Gold is clearly benefitting from Dollar weakness, volatile equity markets, and expectations of fewer rate hikes in 2019. Geopolitical risks in the form of Brexit-related uncertainty, heightened political risk in Europe and concerns over plateauing global economic growth have also boosted appetite for the safe-haven metal. With the Dollar likely to weaken ahead of the US GDP print, Gold has the potential to extend upside gains. In regards to the technical perspective, prices have already secured a daily close above $1260. The next key level of interest can be found around $1272.