More signs of a US-China deal boosted risk appetite initially on Monday but yesterday's pullback in indices (biggest in 4 weeks) underscores our belief that a deal is priced in. Gold is down 2% so far this month (it's only the 3rd trading day of the month), and it's the worst monthly performance since July (more on gold's notable notable monthly seasonals below). Data watchers keep an eye on the US Feb services ISM at 10 am NY (3 pm GMT/London) expected at 57.4 from January's 56.7, which was the lowest in 6 months. Also watch speeches from 3 Fed officials today.
Reports of progress on a US-China trade deal and a Trump-Xi meeting at the end of the month initially boosted Chinese stocks and risk assets but the effect faded in North American trade and US stocks finished lower after initially climbing. Part of the reason is Huawei's (SZ:002502)'s announcement to file a lawsuit against the US govt over a law that bans US govt agencies from buying Huawei products.
Looking ahead, there are few positive catalysts in the pipeline if a trade deal is fully priced in. Moreover, closing a deal may lead to a pivot towards the dispute in Europe and an escalation on that front. For now, the Fed is a neutral factor and Chinese stimulus is also already priced in. Also watch speeches from 3 Fed officials today (Rosengeren, Kashkari and Barkin).
Seasonally, March is a usually solid month for risk trades (but April has been the most positive over the last 15 years for US indices) but that's a minor factor compared to some of the gathering headwinds. On Monday, the S&P 500 peaked at the late-September highs then quickly reversed. Don't forget that March has been the worst month for gold over the last 15 years. We're only 3 trading days into the month and it's alrady the worst monthly performance since summer.
Looking ahead, the market is raising fresh questions about the US economy with Q1 growth looking like it could be below 1% and Q4 likely to be downgraded. One of the finest forward-looking indicators is the ISM non-manufacturing survey and it's due up Tuesday at 1500 GMT. The consensus is for an improvement to 57.4 from 56.7. It remains well-within expansionary territory but a soft number could spark jitters in a market that may be overextended. Also watch the sub-indices such as employment, new orders and priced paid. Earlier today, UK services ISM improved to 51.3 from 50.1