Appetite for risk returns as US Government shutdown ends

January 23, 2018 09:02 AM

The rally in Asian equities resumed on Tuesday taking the lead from Wall Street, after the U.S. government shutdown came to an end on Monday. Although reaching a deal to fund the government for another 17 days is positive news, it isn’t necessarily the key driver of investors’ decisions. After all, government shutdowns have little or no impact on corporate earnings, and during the previous three, stocks still moved to the upside.

However, a longer-term solution is required as we get closer to the debt ceiling. Failing to raise the borrowing limit would lead to a technical default, send yields on Treasuries higher, and potentially lead to a downgrade of U.S. credit rating. 

Meanwhile, investors are likely to ignore the overstretched valuations and continue moving with the flow. Many factors are likely to keep fueling the rally including, positive earnings, Merger and Acquisition deals, and the upsurge in global growth. The IMF joined the party yesterday, raising its outlook for economic growth in 2018 and 2019 to 3.9%. That represents an upgrade of 0.2% for each year.

BoJ: No Change in policy

The Bank of Japan decided not to surprise markets by keeping monetary policy unchanged. Traders who were speculating on early withdrawal of stimulus received no signs that one would materialize. The fact that price projections remained unchanged, indicates that the exit of unconventional monetary policy isn’t likely to occur anytime soon. This is despite the BoJ announcing earlier this month that it was marginally reducing the purchase of long-dated JGBs. The lack of surprise kept the U.S. dollar/Japanese yen (USDJ/PY) currency pair trading within a range of 50 pips during the Asian session.

Sterling pops above $1.4

The British Pound attracted most of the traders’ attention after breaking above $1.4 earlier today. The 1.4 is not only a psychological level, but it has also been considered a key support level during the past three decades prior to the Brexit vote. Although a lot of the currency’s strength is attributed to dollar’s weakness, the Pound is the best performing major currency this year, and it’s up 1.35% against the euro YTD which is a better proxy for Brexit negotiations. With only tier-2 economic data due for release today, I don’t expect to see big moves, however, I still believe there’s more upside potential if Brexit talks continue to move forward when they resume in March.


About the Author

Hussein Sayed is chief market strategist at FXTM.