Stay the defensive course

Temporary relief sets in for markets after the turbulent start to the week with reassurances from both US and Chinese authorities. That said, the bearish bias remains the case amid the potential for further fallouts.

Brief calm before another storm?

Comforting words from both the US administration and PBOC governor Yi Gang had been items re-installing a sense of calm for markets on Tuesday. Not to forget, we had likewise witnessed the slightly stronger than expected fixing for the yuan against the US dollar that had been viewed as relatively less menacing a stance from China. Following Monday’s surprise, expect the fixing to remain a point of scrutiny as we assess China's stance in what looks to be another round of protracted trade escalation.

As highlighted in our note yesterday the lack of a middle ground, provocative actions and the emboldening of the authorities with expected policy support sets the stage for further confrontations down the road. Following the unfolding of events since President Donald Trump’s tariffs threat, the likelihood of a deal in the next six months appear to have significantly diminished. Alongside the decline in economic performance, seeing the US ISM services PMI notably falling to a three-year low in July, the pitfalls for equity prices to further decline is in abundance.

Once again, the trades would be with the likes of haven assets amid the heightened sense of uncertainty in the current market climate. Looking at the IG client sentiment indicator, retail contrarian continues to support bearishness for the USD/JPY pair. This is with the elevated net-long position as seen in the chart. Even as prices fall to the lowest level since early 2018, look to further downsides from here.

Source: DailyFX, IG

Central banks watch

Asia markets have tailed Wall Street to relish in a slight breather this Wednesday, keeping the gains mild at present amid the cautiousness that prevails. Central banks across New Zealand to India will be convening in the day with rate cuts expected from both RBNZ and RBI. More importantly, it will be the guidance to watch with the moves having been priced in. Following the lack of dovishness seen on Tuesday from both the RBA and Fed Bullard, there likewise remains risks that a repeat may be seen here from the likes of the RBNZ.

Yesterday: S&P 500 +1.30%; DJIA +1.21%; DAX -0.78%; FTSE -0.72%

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