Trade optimism meets US earnings
Politics plays a significant role this week seeing US-China trade and Brexit being key items on the table and driving market movements.
That said, we will also be gradually shifting our focus towards earnings, with the US bank earnings set to commence this Tuesday.
Recapping on the progress seen from last week, a breakthrough was seen for US-China trade with the latest meeting between the two sides yielding a partial deal. The US was seen agreeing to postpone the hike in tariffs to 30% from 25% for approximately USD250 billion of Chinese imports, while China had agreed to increase purchases of agricultural goods to an annual value of between USD40bn to USD50bn, benefiting the stakeholders that appeared to be the most affected on each side. The fact that we had a ‘Phase One’ deal coming through, albeit a partial one, spells the intention from both the US and China to try and work towards resolution.
That said, the abovementioned items are no doubt the lower hanging fruits in attempting a deal between the two sides. Few are likely ruling out the possibility that there could be more twists and turns in this matter of US-China trade conflict. As it is, news flow suggest that China is seeking another round of talks prior to the signing of the ‘Phase One’ deal that is widely expected into November. Bloomberg had also reported that China had sought to scrap the planned tariff hike set for December, which will be important but may be a difficult one to extract from the US and even if materialized could easily be reversed. This had not stopped the cyclicals from holding on to their gains as the defensives lagged, a short-term trend that could sustain given the latest positive momentum build in US-China trade talks.
Notably, the fresh week will also find approximately 10% of the companies on the comprehensive S&P 500 Index in the US reporting their Q3 earnings. Many of the ones to note falls into the financial sector, particularly the banks that are now bracing lower interest rates and thus depressed net interest margins amid the Fed’s insurance cuts. Look to the performance of the sector, watching the sector ETF (XLF ETF) for reactions towards guidance from these big American lenders.
On Brexit, GBP fluctuations had sustained into Monday. It will not be an easy week for the British pound with a series of items to watch. The currency pair was seen edging to a 3.5-month high last Friday on the back of a Brexit deal optimism. This had been built on the back of meetings between UK and Irish leaders citing visibility of a pathway to a deal, though the lack of details had been apparent.
The fresh week had so far seen comments from PM Johnson highlighting ‘significant’ work to be done, inviting the paring back of gains that sustained into Tuesday morning here in Asia. The uncertainty that lies ahead of the issues may see to further GBP/USD downsides here. Caution may also set ahead into Friday with the parliament seen as the key hurdle to acceptance of any Brexit deal even if we should find a way forward during the EU summit.
With the abovementioned backdrop of scepticism setting in on US-China trade, Asia markets may find more lacklustre movements going into Tuesday. While the Japanese Nikkei 225 had returned to catch up to the gains, trading higher by 1.3%, the ASX 200 had been a poignant example of this lack of direction seen flat as a pancake.
A packed day lies ahead for Asia markets with something for everyone to watch. Asia markets and currencies will continue the scrutiny on Chinese data with China’s September inflation numbers expected to continue showing softness in the economy. RBA minutes to be released, while US markets returns on Tuesday with a whole slew of bank earnings, one to watch for risk sentiment.
Friday: S&P 500 -0.14% DJIA -0.11%; DAX -0.20%; FTSE -0.46%
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