Traders are buying stocks as tension between China-US ease, buy USD/JPY?
Friday’s US jobs report may provide more evidence about the state of the American economy than the handshake at G-20
The two largest economies declared a truce in their trade war over the weekend that was heavy on hoopla but light on details. While the positive noises out of the G-20 summit in Osaka will underpin risk appetite, uncertainties over still-unresolved trade disputes and the economic outlook could return to cloud investor sentiment.
This weekend’s events only served as a reminder that tensions remain, not just on the trade front, but also around issues such as North Korea, the Middle East and Europe.
Safe-haven currencies such as the Japanese yen fell in Asia-Pacific trading on Monday, while the Chinese yuan and commodity-related peers gained ground. Other markets from stocks to commodities may also benefit from the more buoyant demand for risk. But with investors still smarting from the rapid re-escalation of US-China tensions in May, bond traders may be reluctant to substantially trim the amount of US central-bank easing they have priced in.
Heading into the weekend, futures traders had expected Fed to lower rates by about a percentage point in the coming year. The market had priced in a 100% probability of a quarter-point cut in July, with some observers even predicting a half-point reduction. This concern prompted Fed, ECB and other central banks to raise the possibility of interest-rate cuts or other stimulus to offset the dampening effects of tit-for-tat tariffs between the world’s two largest economies.
After meeting with Xi, Trump said he would hold off imposing an additional $300 billion worth of tariffs on Chinese imports, a concession Beijing demanded to restart negotiations. Trump also said he would delay restrictions against Huawei, allowing US companies to resume sales to China’s largest telecommunications equipment maker.
Given the overhang of the existing duties, traders will likely be reluctant to pare Fed easing wagers unless inflation expectations stabilise.
EUR/USD – Slightly bearish
This pair will drop towards 1.14 ahead of NFP this Friday.
USD/JPY – Slightly bullish
Risk-on environment may push this pair towards 109 this week.
XAU/USD (Gold) – Slightly bearish.
We expect price to drop towards 1360 this week.
U30USD (Dow) – Slightly bearish.
Index may further lower towards 25467 this week.
Fullerton Markets Research Team
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