China Soothes Frazzled Nerves

Soothing comments on trade by the Chinese Commerce Ministry late yesterday in Asia saw Wall Street stocks carve out impressive gains overnight.

In addition to refraining from retaliating against the latest tariff hikes from President Trump, the spokesman emphasised the need to create a conducive atmosphere for further negotiations to continue.

The remarks overshadowed U.S. GDP which came in at 2.0% as expected but had last months reading revised down by 0.1%. It doesn’t sound like a lot, but given the fragility of sentiment from earlier in the week, without the Chinese comments, investors would probably have continued streaming for the exit door. All-in-all it emphasises once again, that the U.S.-China trade dispute and or its resolution remains the only game in town for investors globally, with data a secondary player.

Equities and energy markets gladly accepted the sugar rush, marching higher. The dollar also gained on trade hopes while U.S. treasury yields rose slightly, not helped by the weight of new issuance by the Treasury this week. The dreaded 2-10 year yield curve inversion, however, remained.

Elsewhere Argentina asked creditors to reschedule payments on over $100 billion of debt overnight. That includes the IMF whose latest package was a $44 billion loan to Argentina. With an election due in less than 60 days with a likely change of government, creditors are unlikely to be very sympathetic after yet again being led to water, only to find it contaminated. An impending default, yet again, is a genuine possibility. Given the fragility of global economic sentiment, could weigh on emerging markets.

This morning’s data has already seen NZ building permits disappoint, but South Korean and Japan industrial production both come in higher than expected. Japanese retail sales, however, fell a disappointing 2.0% unlining that consumer-driven inflation is as elusive in Japan as fiscal discipline in Argentina.

South Korea is expected to remain unchanged at 1.50% at 0900 SGT, but it will be a close-run decision following the announcement of a government fiscal stimulus package this week. The U.S. personal income and personal income expenditure index (PCE), will be monitored closely, as we close out the week, for signs of weakness from the American consumer. Consumer spending has so far insulated the U.S. from the slowdown creeping across the globe.

As ever though, sentiment remains cautious at best with global markets vulnerable to headline bombs emanating from either Beijing or Washington D.C.

Equities

China’s soothing remarks on trade passed almost unnoticed by late Asia yesterday but were seized upon by the uber-bulls of Wall Street. The S&P 500 rallied 1.30%, the Nasdaq 1.50% and the Dow Jones by 1.25%. The price action perhaps gives us a glimpse of what to expect in equity markets, if the U.S. and China manage to come together and agree to share the toys.

The Japan Nikkei and Australian ASX are both higher by just under 1.0% this morning, and we would expect the rest of Asia’s markets to follow suit as they open today. Since last weekends ructions though, Asia has been more cautious and somewhat less inclined to buy into Wall Street’s recovery. While Asia may end in the green today, we do not expect an ebullient session to the same degree.

FX

The U.S. dollar was stronger overnight reflecting China’s trade comments and potential the potential renewal of trade discussions between Beijing and Washington D.C. Rising U.S. bond yields we also supportive and the dollar index rose 0.36% to 97.46.

Somewhat surprisingly, the British pound (GBP) has managed to hold at 1.2200 in overnight trading, as the controversy over the suspension of Parliament threatens to become a full constitutional crisis. A possible no-confidence vote next week potentially toppling the government. It yet again implies that the street is now very short of GBP and that the next big move could be higher.

Asian currencies are likely to remain on the back foot against a resurgent dollar but not to a high degree. Increased trade hopes to a region inextricably linked to China will limit losses on local currencies.

Oil

Falling crude inventories this week, potential disruptions to production by Hurricane Dorian, and the favourable trade comments from China, all combined to pump oil prices higher overnight. Brent crude rallied 0.80% to $61.00 a barrel while WTI rose 1.40% to 56.60 a barrel, ignoring higher U.S. yields and a stronger dollar.

The frothy price action emphasises the store that energy markets place on trade progress to support further gains in prices going forward. What is given, can be taken away though, and the rally looks more like its running on vapours than petrol.

Given that the rally overnight could be evaporated by one Presidential tweet, Asia will approach today’s session cautiously. Profit-taking should limit gains in Asia as the region awaits more clarity on a possible reduction in trade tensions.

Gold

Gold, unsurprisingly, gave up some of its recent gains overnight on the possible reduction in trade tensions between the U.S. and China. Gold will have a very high beta to any reduction in trade tensions given that they have driven so much of its rally.

Gold fell 0.80% to $1527.50 an ounce as the U.S. dollar, and Treasury yields rose. Gold has initial support at $1519.50, the overnight low before %1500.00 and then $1480.00. Resistance remains at $1550.00 and $1555.00.

Asia should find support towards the overnight lows at investors put risk hedging positions into the weekend.

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