Economic data released today did not influence trading as investors stay focused on the incoming FOMC meeting. Moreover, disappointment in sentiment indicators, including Conference Board Index, may partially reflect the US government shutdown, being a one-time event. Volatility in global markets should be low ahead of Powell statement scheduled for Wednesday, however other events also are noteworthy.

First of all, market optimism seems to have increased due to speculations that trade war between the USA and China may calm. On Wednesday and Thursday the Chinese Vice Premier Liu He is to meet with the US Secretary Mnuchin and hints from this meeting will be closely eyed. Earlier, on Wednesday, the U.K. Parliament will vote on amendments to the Brexit deal with the EU.

Interesting situation is observable in the gold market, where the price breached the USD 1300 resistance and approached USD 1310. In our view the recent growth is hard to explain as inflation expectations are falling and risk appetite is strong. That is why, we keep our bid at lower levels, looking for short-term corrective moves.

The XAU/USD broke above the 61.8% Fibo of 2018 fall. It remains above short-term moving averages that are strongly positively aligned. Our trade idea is to buy gold at 1280.00.

Meanwhile the US S&P 500 stays within horizontal trend and in short term should stay between 2610 and 2680 pts, while the German DAX should trade between 11000 and 11400 pts. Stabilization is expected also in Asia, with Hang Seng is trading between 27000 and 27900 pts. Later this week sentiment will depend of FOMC meeting and political developments. Particularly positive for stocks would be the combination of dovish FOMC and improvement in trade relations between the USA and China.

Looking into financial markets in mid-January it seems that investors are not worried by the government shutdown in the USA. The key question to be answered is if the US yield curve can really invert indicating high risk of recession. At the moment the spread between the 10, and 2-year treasury yields is close to 15 bp., but many analysts are worried that tensions related to trade war and waning impact of tax cut will be reflected in falling corporate outlays, making the money flowing from real economy into long term bonds. Clearly, recession risk is high and many investors want to stay away from risky assets.

On the other hand, business may shift costs that increased due to trade war on their customers so that negative adjustment in real economy would eventually be limited. It is also possible that mergers and acquisitions will intensify. In both cases recession would probably not take place and the US yield curve would steepen from the current, close to zero, levels.

The latter scenario may be very tempting for risk loving investors as the market sentiment in late 2018 was close to extreme. Perhaps that is why the first weeks of new year brought strong jump of the S&P 500. Earlier, the index might have started to discount recession while now the baseline scenario is just a slowdown.

With no data that could spoil sentiment in calendar, markets may move according to technical signals. In case of stock indices there is still some space for bulls as the nearest resistance on the S&P 500 is the 100 DMA at 2730 pts., which is 2.3% above the Friday close. This level may be tested in a couple of days but seem unlikely to be breached. In case of DAX, there nearest resistance is the level of 11472 pts., around 3.5% above the current level. German market obtained support on Tuesday as the expected economic sentiment, given by ZEW index, surprised on the upside amounting to -15 pts. The preliminary PMI reading for January, scheduled for Thursday, is expected slightly above its value in December so positive sentiment may continue, at least in short term.

The recent improvement in stock markets has not been however reflected in gold market. It is interesting that the gold/silver ratio has been growing for the most of January after it fell sharply in the end of December. Still, in short term, gold price has limited room to increase. In fact, the baseline scenario is the downward correction towards USD 1250.

Market participants seem not afraid of US tightening, despite FOMC sounded slightly more hawkish than it was expected. In fact, it is really not important if the upper bound for Libor goes up by another 25 or 50 bp, given the possible slowdown in the US economy. Indeed, the threat of a slowdown seems the most important factor supporting gold. Its importance is particularly visible looking on its relative outperformance over silver, which lost much more than gold since the beginning of 2018, especially in the second part of the year.

Deteriorating economic sentiment was confirmed in the latest Philadelphia Fed index, that fell to the lowest value since 2016. This is not favorable situation for the US stock market, especially as the S&P 500 index has not got support from the FOMC. Technical situation suggests the nearest target for S&P as low as at 2400 pts. Still, the index is currently oversold, so the baseline scenario for the nearest days is a horizontal trend with 2600 pts being the short term resistance. 

Bear market is a baseline scenario also for the German DAX index. It is however increasingly interesting how long the relative underperformance of DAX can be continued. While the economic situation in euro zone may deteriorate as well as in the US, slowdown may not stop ECB from hiking rates, perhaps already in the end of 2019. Looking in longer term horizon, European stocks may offer additional return from euro appreciation so traders may gradually shift their capital from US towards euro zone. For now, this tendency is however lacking macroeconomic trigger. In 2019 it may be the solution to Brexit problem or recovery in Germany, the economy of which was in 2018 hit by new car industry regulations. is an independent macroeconomic consultancy with thousands of subscribers all over the world. We provide fundamental research to help our clients make better investing decisions. Our subscribers should expect to get access to:

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