Short-term relief for markets

Risk-on mood can be seen spreading to various parts of financial markets with the biggest sentiment driver being the issue of US-China trade relations receiving a positive boost from the latest updates.

The sustainability of these short-term reliefs nevertheless comes into question.

No immediate retaliation from China

China’s deferment of any immediate retaliation against the latest US tariffs increase coupled with President Donald Trump’s remarks that talks are scheduled had altogether provided relief for a market plagued by trade jitters of late. Meanwhile, the second reading of US’ Q2 GDP arrived in line with expectations at 2.0%. Although a downward revision from the 2.1% initial reading was seen, it continued to show the strong consumer sector resilience. In turn, Wall Street rose, yields picked up slightly while the FX market continued to see dollar strength shining through. USD/JPY likewise was seen departing further from the $106 level to a 1-week high, though finding some sellers into the US close reflecting some restraint here.

Zooming into the fact of the matter, while there is no immediate retaliation expected from China, this does not suggest an improvement in situation either. China’s response, while a temporary relief for markets, continues to fall in line with the view that they may delay a deal until the 2020 US elections while at the same time through talks avoid further escalations that could be damaging to the health of the economy. Altogether this could still make for prolonged trade uncertainty.

Source: IG Charts

Asia open

As such, look to the short-term relief for the markets going into the Friday Asia session, but keep the bias towards a defensive strategy. Early movers in the region, the likes of the ASX 200, Nikkei 225 had both reflected strong gains of over 1.0%, but until any notable breakthroughs in US-China trade relations is seen, there may be a lid on prices for Asia Pacific indices. Bank of Korea had announced a no change in rates in the morning, in line with expectations but is expected to allude to a cut in the next meeting as we await the news conference.

A slew of data is expected in the day ahead including CPI numbers out of the eurozone. China’s official PMI numbers will notably also be seen over the weekend with the market expecting the August manufacturing PMI to remain unchanged at 49.7.

Yesterday: S&P 500 +1.27%; DJIA +1.25%; DAX +1.18%; FTSE +0.98%

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