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Data is rather light, with the US Federal Reserve’s meeting on Thursday morning (AEST) the centrepiece of an economic calendar otherwise filled with a handful of central-bank-head speeches and a meeting of the RBNZ. Hence, traders will find themselves sucked into a vacuum that can only be filled by noise surround the global economy’s biggest contemporary international-political hot-points. The break-down in talks between the US and China was once again the most significant of these, but a shift in sentiment will also be underlined by increasingly frosty negotiations between the UK and Europe, along with tensions between the US and oil producing countries. The core matter for will be how these clear risk-off factors conspire with the US Federal Reserve’s meeting to impact traders, on the back of a week that was defined by a tangible relief-rally.
The Chinese formally cancelled trade talks with the US on Saturday afternoon. It was what markets had feared this time last week, and true to their word, China kept to its line that it would not negotiate with the US while under duress. Frankly, how markets react to this news will be curious today, given that global markets shrugged off-last week’s developments to jump into riskier-assets, pushing US indices to all-time highs. Will this escalation in the trade-war be taken in stride by markets, or does this amount to the flashpoint that traders have been long fearing? The truth – as always – will probably sit somewhere between these two poles, but what looks assured now is that this trade-war is a battle of attrition: China will not compromise the long-term vision for their country disrupted; while US President Trump will not stop until he can achieve what he considers victory.
Global geopolitical problems weren’t contained to just Asian over the weekend. In a noteworthy reversal of fortunes, Brexit negotiations deteriorated further, after UK Prime Minister Therese May delivered a hostile public address rebuking the EU’s treatment of her and her country at the latest summit in Salzburg. Markets didn’t like the UK Prime Minister’s approach, hitting the sell button on the Pound, sending that currency from a multi-week high around 1.33 before the news, back within the 1.30 handle (at time of writing). The greater hostility between the UK and EUR raised once more the spectre of a Brexit no-deal, which looks increasingly likely as the October/November deadline looms. Watch for activity in the EUR/USD this week, particularly considering the scheduled speech of ECB Mario Draghi tonight, for hints that a no-deal outcome is being priced into markets, as that pair shrugs off the news to challenge three-month highs at about 1.18.
The politics of oil rounded off the weekend’s tripartite of geopolitical troubles. In response to a US President Trump Twitter-tirade last week regarding a spike in oil prices, OPEC+ defied the US President calls to boost oil production to lower oil prices, stating that the organisation was currently doing enough to meet demand. The commentary opens-up a possible push higher in oil prices above $US80 per barrel (in Brent Crude terms) – a mark that has been consistently threatened in the past month. That price point still appears the comfortable level for Brent Crude despite US President Trump’s protestations, amounting to the mid-point between its multi-year high and low price. However, some degree of overshooting looks possible in the short term, with $US83.75 jumping out as the next significant technical level.
SPI futures are indicating a 23-point drop at the open for the ASX 200 against this backdrop, following on from a week where Australian equities showed tentative signs of strength, but appeared capped to the upside in the short-term. The pattern of higher lows continued to end last week’s trade, with resistance around 6190/6200 for the ASX200 holding firm to create an ever-tightening wedge pattern for the index. Though a sign of reluctance from traders to push the market higher, the trade dynamic does suggest a pent-up bullishness that may provide a pop to the upside provided the right circumstances. It will be a matter today -- and for the rest of the week – of whether such activity can occur in an environment of heightened geopolitical risks. Intuition says no, but too often have we seen the counter-intuitive play out in this market.
The benefit for Australian traders is that we may not have to look any further than our own currency to get a gauge on this. The AUD/USD spiked higher last week, spurred by the greater risk appetite brought about by (at least the illusion) of greater certainty in financial markets. The local unit launched off support around ~0.7150, to trade towards the very top of its well-defined trend channel (at the time) at around 0.7300. It would take something remarkable to push the AUD above this trend channel this week, particularly considering the economic fundamentals underpinning the market. A certain amount of profit taking should be expected at these levels too, especially given the conspicuousness of the AUD/USD’s trend. The interest will be consequently in how well the currency holds itself at these levels: it will be the best measure of trader perceptions regarding the latest escalation in the trade war.
The fortunes of Wall Street indices will be worth assessing in the next 24 hours as a result of the heightened trade war tensions. The industrial heavy Dow Jones traded in line with the strong activity in the DAX and Nikkei on Friday, to close trade at new all-time highs at 26,743.50, while a sell-off in tech shares contributed to a fall in the NASDAQ and S&P 500 of 0.51% per cent and 0.04% respectively. The extent of China’s hostility, at least according to the perception of traders, will be revealed by activity in the major tech stocks, which have come under pressure in recent weeks due to fears that China may target tech-companies supply chains. Furthermore, it may be in this sentiment that dictates whether US stocks can hit new all-time highs this week: growth in US tech stocks have been the core factor behind Wall Street’s record highs, so flatness in the sector could see the benchmark S&P500 recede back within its firmly established trend channel.