While concerns remain, traders are working to remain optimistic ahead of the Boao in Asia, dubbed Davos without snow where CN President Xi Jinping is expected to announce further economic reforms that are aimed to open up China’s economy to the world stage. In addition to geopolitical developments, the markets are focusing on US CPI, and Q1 earnings to see if sales growth can keep the market momentum going.
S&P/ASX bucks US stocks’ weakness on Friday, closes higher: Despite a turbulent end to last week on Wall Street, Australian shares were able to end the day higher on Monday. The S&P/ASX finished up by +0.35% to 5808.70 despite intensifying trade concerns between China and the United States, after US President Trump suggested $100 billion in tariffs on imported Chinese goods. Healthcare led the index higher, closing up by +1.21%, while Consumer Staples ended Monday up by +0.91%. Ten of the eleven sectors of the S&P/ASX finished positive overall, with Energy posting the only down day, off by -0.43%.
China is said to be eyeing a Yuan Devaluation. With the strengthening of the Chinese Renminbi (CNY) over the last year against the US Dollar, a report surfaced that China is studying the potential for weakening the RMB to provide breathing room on trade negotiations with the US. While many market participants remember the shock devaluation of 2015 that threw markets into a short-term tailspin, the shift from producer to consumer economy in China appears to make such a move less attractive. Currently, USD/CNH is trading in the gap created by the August 2015 devaluation that took USD/CNY as high as 6.964 with spot currently at 6.307.
Wall Street closes in the black despite overarching trade concerns: US stocks posted a solid rebound on Monday despite a sharp selloff to end last week as China-US trade tensions ratcheted higher. Both the Dow Jones Industrial Average and the S&P 500 headed for closes up by +1.4% each while the tech-heavy NASDAQ eyed a close up by +1.6%. Volatility has become the norm for US equities, with 5% ranges carved out by the Dow and the S&P 500 and a 6.6% range carved out by the NASDAQ over the past two weeks of trading.
AUD/USD follows risk assets higher: The Australian Dollar had a positive day versus its American counterpart on Monday, but results were mixed elsewhere. AUD/USD eyed a close up by +0.35%, setting up a bullish outside engulfing bar, a technical signal that suggests more gains in the near-term. But AUD/JPY posted an inverted hammer, while EUR/AUD was working on a doji candle. If anything, the near-term outlook for the broader AUD-complex remains neutral, while the US Dollar remains front-and-centre with trade tensions looming. Given the price action we saw across the USD spectrum between Friday and Monday, more weakness may be coming for the greenback as traders await the March US CPI report on Wednesday.
ECB Annual Report gives confidence to EUR bulls as ECB President Draghi kept to the three Ps of ‘patient, persistent, and prudent’ monetary policy. While the EUR has been on the back foot lately, Draghi said that the ECB continues to see strong EUR area-growth ahead, which was enough to see EUR/USD rise as much as 0.5% from early morning lows. Insight from the options market shows unusual complacency as 1-month implied volatility hit a three-month low on Friday.
Boao forum has heightened importance given trade spat started by Trump. The positive risk tone on Monday is expected to be nurtured by Chinese President Xi Jinping who will make a speech later today at the Boao Forum for Asia. Recently, markets heard that negotiations have stalled, but expectations for President Xi to directly address US President Trump’s threats are low.
Boao is known as China’s Davos, and the speech by Xi is expected to make good on Liu He’s statement at Davos this year that China’s reform plans are set to exceed global expectations such as opening up China’s financial sector to the global economy.
An updated US sanctions list of Russian oligarchs, some who run Russian commodity firms helped spur a rally in aluminium. Of course, trade tensions remain a dark cloud over the commodity sector, but in the short-term, the rise in aluminium on the anticipated reduction in global metal supply is the key focus.
In energy markets, opposing forces have Crude traders on both sides of the pit excited with bulls currently winning the battle. A potential re-introduction of economic sanctions on Iran, currently the third largest OPEC producer could reduce a large amount of global oil supply. The speculation of new sanctions caused Brent to rise to $68.72 or 2.37% on Tuesday morning.
SPI futures moved 19.93 or 0.34% to 5808.67.
AUD/USD moved 0.0027 or 0.35% to 0.7711.
On Wall Street: Dow Jones 1.39%, S&P 500 1.41%, Nasdaq 1.6%.
In New York: BHP 0.5%, Rio 1.64%.
In Europe: Stoxx 50 0.2%, FTSE 100 0.15%, CAC 40 0.1%, DAX 30 0.17%.
Spot Gold moved 0.22% to US$1336 an ounce.
Brent Crude moved 2.06% to US$68.49 a barrel.
US Crude Oil moved 2.09% to US$63.36 a barrel.
Iron Ore moved 3.08% to CNY452.5 a tonne.
LME Aluminum moved 1.64% to US$2042 a tonne.
LME Copper moved -0.69% to US$6769 a tonne.
10-Year Bond Yield: US 2.8%, Germany 0.5%, Australia 2.67%.
Written by: Christopher Vecchio, CFA and Tyler Yell, CMT, DailyFX