A large shift in the currency market is predicted by Morgan Stanley analysts in the global forecast for 2019, published last week. The investment bank’s strategists team led by Hans Redeker suggested a sharp decline for the U.S. dollar next year due to several fundamental imbalances created lately. The first problem for the greenback would be the widening surplus of the budget deficit after Trump’s administration provided fiscal stimulus, cutting taxes. That deficit must be funded somehow and it becomes a more tough task for Treasury due to the growing interest rates with the Federal Reserve tightening its monetary policy in the United States. Another negative factor for the world’s leading economy would become a slowdown of macroeconomic data with the latest reports showing some decline in the pace of growth. Those factors would also weigh on the U.S. equities market, lowering the attractiveness of corporate sector. Such imbalances would add selling pressure on the greenback and other countries which are capital importers, increasing the cost of external borrowings. In contrast, such regions as the European Union and Japan, which used to export the capital, would face local currencies strength due to the growing demand in the fixed-income market and capital repatriation flows. The weakest currencies, according to Morgan Stanley economists, would be commodity currencies like Australian, New Zealand and Canadian dollars. The investment bank suggests selling those currencies versus Japanese Yen and Euro. At the same time, an attractive level of current prices for emerging markets assets would lift the demand for such high-yield securities. The assumption is to buy a basket of those assets (South African Rand, Indian Rupee and Chinese Yuan) versus the greenback. Some troubles are predicted for Mexican Peso amid growing risks of political uncertainty and budget imbalances.
Italian stock exchange had picked up the bullish momentum after the compromise found between Rome and Brussels. The key Italian index surged 20% in Milan. These positive shifts were seen in price action despite the latest bear market conditions, leading the gains throughout the whole European exchanges. The difference between Italian and German securities dropped to 280 points, the lowest rate since the ‘budget crisis’ compared to 330 points in its peak. Analysts consider the positive changes related to Rome and Brusells cessation (probably temporary though) in the budget tensions, as the Italian government and Euro commission sopped threatening each other and moved into the negotiations process. As it’s been reported earlier, the Italian government increased the budget deficit from 2% to 2.4% of the Gross Domestic Product for 2019, in order to accomplish its pre-election promises. Such steps were promised as cancelling the VAT hike, cancelling the retirement age increase, providing the minimum income level for citizens. The EU officials strongly opposed that, as Italy should tighten spendings in the conditions of high external debt level (130% of the GDP), according to EU. Increasing budget spendings and lowering the retirement age would be a wrong step in such an environment for Italy. On the other side, the Italian government considers that the tight economic conditions did not prove its effectiveness, and a new and more adequate economic policy is required for the country. They refused to change the budget in accordance with EU requirements. Euro commission had officially warned Italy of launching the sanctions procedure.
Leaders of two world’s largest economies - Trump and Xi - managed to agree on a compromise deal for the trade war cease-fire. A period of at least 90 days was announced for import tariffs freezing while countries will keep working on ‘the largest trade deal ever made’, according to Trump’s comments after the dinner with the Chinese leader Xi Jingpin in Buenos Aires, Argentina. That news was the huge factor influencing the bullish run in U.S. equities and global stock indices. High-risk assets and commodity currencies had also soared on the announcement, as the trade war tensions were weighing on investors’ sentiment throughout the whole year. After the series of mutual threats, more than 40% of the overall volume of Chinese goods imported to the United States, was under the tariffs sanctions. That’s equal to almost 2.5% of the global trade volume, and investor confidence would not be stable in such an environment. The topic was also one of the main drivers having the negative impact in equities market crash in October 2018, the largest meltdown since technical retracement in February. Stock indices gained more than 2% on Monday after the White House published some of the agreement details. The United States promised to cancel the intention of hiking import tariffs for Chinese goods from the current level of 10% to 25% starting from January 1, postponing that decision for 90 days. On the other side, China will avoid mirror measures, sharply increasing the volume of importing U.S. goods in the agricultural, automotive and industrial sectors. “That’s an incredible deal” - Trump twitted after coming back home from G20 summit.
OPEC members gathered in Vienna last Thursday. The key topic discussed by oil producers was the oil price which fell more than 30% since October’s peak on lower-than-expected global demand forecast and oversupply issues. OPEC countries were deciding whether should they cut oil output to lift the black gold prices or leave things as they currently are. The question was also about the volume of such restrictive measures. Some analysts told that the range of a possible cut was considered at the level of 0.5 - 1.5 barrels per day. A consensus of 1 million barrel per day was exactly the number which has been required by Saudi Arabia - one of the three largest non-OPEC oil producers. Saudi Energy Minister Khalid Al-Falih expressed a modest optimism of such a decision, stating that “We hope to conclude something by the end of the week. We have to get non-OPEC countries on board”. Meantime, another giant oil exporter - Russia - was not decisive in precise figures. Russian Energy Minister Alexander Novak left the OPEC meeting for an additional consulting with President Vladimir Putin in St.Petersburg. Meantime, Trump kept pressuring on OPEC members, underlying the need for a fair oil price, based on supply-demand issues. U.S. President opposed restrictive measures directed for energy prices manipulations and interventions. WTI Crude futures were trading slightly lower than $55 per barrel in a volatile momentum last week.