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A cease-fire in the US-Sino trade war has allowed markets to breathe and buy: Investors likely want more details to verify the exuberance

Source: Bloomberg

The key line from news released over the weekend came from US Treasury Secretary Steven Mnuchin, who said the US decided that “putting the trade war on hold” was the best move to ensure a supportive framework. That bolstered sentiment, with major equity gauges and emerging markets trading higher as anti-risk assets including gold and the Japanese Yen fell.

Wall Street moves higher, led by industrials: A temporary olive branch may have been extended as US-Sino tariffs were shelved to allow time for a better deal, and industrial equity investors are breathing a sigh of relief.  China marks a major destination for US industrial goods, and the news of relaxing trade tensions may have helped the sector index rise by more than 2%. With a major factor of uncertainty in the global market “on hold,” risk assets are rising, and it is hard to argue against the view that China has the upper hand in this negotiation given the demand of their growing economy. Talks have focused on China’s purchases of energy, which the US is supplying more than ever, and industrial goods.

Trade war truce gives a further boost to energy while metals lag: A collective cheer likely rose when withdrawn US tariffs led to China agreeing to meaningfully increase purchases of US agriculture and energy imports. WTI and Brent crude continue to rise and push the YTD gain to nearly 20% in USD terms. In AUD terms, the gains are 23.4% and 22%, respectively. NYMEX gasoline contracts are higher by about 30% YTD. Not to be outdone, CBOT agriculture futures like corn and wheat are up 18.7% and 22.9% in AUD terms. Much of the focus will now move to industrial and base metals to see if either room to run after the recent pullback as the capacity for the surplus to be drawn down is opened amid trade tensions relief.

ASX 200 will seek its former glory after flat weekly open: A drag from material stocks caused the S&P/ASX 200 to fall for the third day and pushed it to the lowest level since May 7, though the fall was a minuscule 0.05%. Meanwhile, other Asia Pacific equity benchmarks like the regional MSCI AC APAC index, Japan’s Nikkei 225 and Hong Kong’s Hang Seng all rose. Implied data has a flat open for the prompt futures contract while ADRs anticipate a 1% gain.

AUD/USD breaks near-term chart resistance, takes aim above 0.76 figure: The Australian Dollar shot higher as the US and China opted to de-escalate tensions before the outbreak of an outright trade war. The move bodes well for Australia’s raw materials producers, for whom China is the largest market and a crucial stop along a global supply chain feeding demand for the country’s exports. Indeed, the similarly commodities-linked Canadian and New Zealand Dollars also soared. A break above chart resistance at 0.7525 on AUD/USD has opened the door for a retest of former support marked by the March 29 low at 0.7643. Alternatively, a turn back below the 0.75 figure targets the May 9 bottom at 0.7413.

Euro bounce may struggle as Italian political risk swells: Commodity currencies’ sharp rise against the US Dollar echoed as an overall weakness for the US Dollar, dragging EUR/USD up off its intraday low. Gains were decidedly muted however as worries about Italian politics remained a headwind. Markets are worried that a populist coalition government comprised of the right-wing League and anti-establishment Five Star movement will challenge Eurozone budget rules and may even threaten Italy’s membership in the single currency. Indeed, the spread between 10-year Italian government bond yields and German equivalents – a measure of the extra risk perceived in lending to Rome versus Berlin – shot upward to the highest in 11 months. That suggests the nascent advance may struggle for follow-through, with the single currency finding itself back on the defensive in short order. 

Pound may fall further on dovish Carney testimony: Bank of England Governor Carney will lead a group of central bank officials in testimony on the latest quarterly Inflation Report – the document outlining the near-term policy path – before Parliament’s Treasury Committee. The report marked a distinct dovish turn in forward guidance, sending the British Pound downward. More of the same may be in store if Mr Carney and company use the occasion to beat back rate hike speculation further. As it stands, market pricing suggests an increase is expected no sooner than November. 

Market Data:

SPI futures moved -2.87 or -0.05% to 6084.49.

AUD/USD moved 0.006 or 0.8% to 0.7571.

On Wall Street: Dow Jones 1.29%, S&P 500 0.78%, Nasdaq 0.6%.

In New York: BHP 1.48%, Rio 1.19%.

In Europe: Stoxx 50 -0.03%, FTSE 100 1.03%, CAC 40 0.41%, DAX 30 -0.28%.

Spot Gold moved -0.15% to US$1291.16 an ounce.

Brent Crude moved 0.69% to US$79.05 a barrel.

US Crude Oil moved 1.21% to US$72.14 a barrel.

Iron Ore moved -0.32% to CNY466.5 a tonne.

LME Aluminum moved -1% to US$2270 a tonne.

LME Copper moved -0.35% to US$6855 a tonne.

10-Year Bond Yield: US 3.07%, Germany 0.52%, Australia 2.89%.


Written by: Ilya Spivak, Currency Strategist and Tyler Yell, CMT, Currency Strategist with DailyFX

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