Asia Morning: Trade war news flows continue to toggle risk sentiment

Market Analysis /
23 Sep 2019

In the wake of the Federal Open Market Committee’s (FOMC) 25 basis point rate cut last week, the focus will be on the data that are at the forefront of the Fed's concerns. Given that worries about global growth and the slowdown in manufacturing sit atop their "wall of worry “, the European PMIs today will likely be a key focus ahead of US regional surveys later in the week. The data will provide an excellent soundboard for investors to gauge the depths of the global manufacturing demise while deciding if the central banks made the correct policy decision.

US-China trade relations took a turn for the worse on Friday when low-level Chinese delegates cancelled a US farm tour. The market reacted quite negatively as the Chinese trade representatives were thought to have been given their marching orders from Beijing an hour after President Donald Trump said he wasn't interested in "a partial deal". Such are the trials and tribulations of a testy trade war discussion. Indeed, it was all about symbolic perception as investors continue to wear trade war emotions in their sleeves.


Monday Open

The yuan opened higher along with U.S. equity futures as an investor put a finger to the air to gauge how trade war winds are blowing Monday morning. So far so well as investor sentiment appears to be somewhat placated after China’s Ministry of Commerce said trade delegates from the two nations held “constructive” talks while Vice Agriculture Minister Han Jun Friday’s recall of Chinese trade representative had nothing to do with trade talks.

After last weeks deluge of central bank meetings, it's unlikely the markets have gained any more policy clarity coming out of these sessions than what they did going in. Moreover, at the heart of the issue is the FOMC policy dispersion which further confuses an already befuddled situation. A divided Fed, the most powerful central bank on the planet, is never particularly useful for risk and is possibly holding investor sentiment back.

The central banks have met the market's minimum wants, and that is tentatively buttressing sentiment. However, what should be worrisome for investors is that volatility in US equities has fallen dramatically over the last two weeks to its lowest levels in a year, and far from the extremely elevated levels at the beginning of the month? It is unusual for volatility to stay at these levels suggesting we may see a pickup in the coming weeks, especially if the trade conflict escalates with the S&P 500 near new highs.


Oil Markets

The number of active oil and gas rigs in the U.S. fell again this week as despite higher oil prices the industry slowdown continues to weigh in U.S. oil production.

The combination of lower U.S. rig counts, some " fairer" early morning trade war winds and the omnipresent middle east geopolitical risk premiums are buttressing prices to start the week.

Still, those lingering demand worries could start to compete for attention, especially if Saudi Arabia makes good on their promise to restore production quickly.

What is interesting about this latest oil shocker is that for the most part, the broader markets continue to sidestep oil risks. Sure, Oil stocks jumped on Monday in response to the attacks on Saudi Arabia's production but followed oil prices lower as the week progressed and closed lower for the week. Which suggests the oil price move is being factored in as a short-term phenomenon by much of the market.

None the less, Oil could continue to be highly reactionary in the near term as evidence emerges of progress (or not) towards Saudi Aramco’s repair timeline hence the return of regular global oil supplies.


Gold Markets

Gold rallied into the weekend trade and geopolitical concerns as equity investors symbolic perceptions were jaded when the Chinese delegations planned visit to farmland USA was abruptly cancelled. However, with trade war winds blowing fairer this morning after China’s Ministry of Commerce suggested the low-level trade discussions were constructive, the report has tempered the markets topside ambitions this morning. Still, if trade news flows should continue to deteriorate, Friday price action does suggest that less than cheery news flows could have the power to drive Gold prices higher.

Gold investors were likely of mixed emotions after last week central bank policy deluge, which hardly embraced investors dovish perception. While the FOMC, SNB, ECB and BOJ reiterated their easing bias, but they failed to surprise “dovishsly” so. However, gold investors could find some support from the “lower for longer “interest rate narrative, but without fresh stimulus, prices may struggle to make rapid gains.

While ETF flows continue to surge higher. elevated gold prices may continue to crimp demand in Gold in traditional markets, China, the Middle East, and India. In addition, given the rise of Gold on a cross-currency basis, especially in terms of the Australian Dollar and the Sought African Rand terms, two of the worlds large producing regions. Non-USD producer of the Yellow metal may be inclined to hedge some forward production at these loft levels which could pressure gold lower in the absence of negative trade war news flows.


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