Wednesday, May 29, 2019

China threatens to up the ante in its dispute with the US, safe havens gain and equities suffer

Tags
  • Dollar
  • Gold
  • Yen
  • Euro
  • Pound
  • Stocks
  • Oil

MORNING BRIEFING

Risk sentiment dampens across the board once again on the back of bearish news coming from the US-China trade war. A recent hint from the Chinese state media suggested that the Asian country is considering whether to use rare-earth exports as a weapon in its dispute with the US, which would disrupt electronics and defense goods production in the States. Safe havens gained on this news, the Dollar extended its advance versus the higher beta currencies but remained unchanged versus the Yen, equities and Gold fell with Oil treading water around $59.

Starting our overview with the Dollar, the US currency climbed further during yesterday's session on increased investor demand for safe havens. This comes despite the fact that the yield on the 10-year Treasuries continues to decline, hitting 2.23% overnight. Furthermore, the inversion of the 3-month/10-year yield curve continues to send recessionary signals in regards to the US economy, with the spread between the two maturities reaching 12 basis points during the Asian session, a gap not seen since 2007.

So what does this mean for the Dollar? Should we assume that the decline in the Treasury yields will start pushing the US currency lower? The answer still remains no, at least not yet. Investors currently regard the greenback as the go-to instrument in a time when global growth is threatening to turn lower on the back of a trade dispute and political fragmentation abroad. Adding to that, the consumer confidence report from the States came in stronger than expected yesterday, indicating that the US economy is still over-performing its peers, in spite of the slowdown seen in several sectors.

As such, the direction for the Dollar should remain upwards, especially versus the European and antipodean currencies. Dollar/Yen is a different story as the pair is mainly driven by the prevailing risk on/risk off narrative. So even though the Dollar is expected to stay well bid, investors' demand for safe havens could benefit the Japanese currency in the near term, potentially driving prices towards the 109 lows. Keep in mind though that this is a strong support level and in case of positive US data this week - with GDP and inflation figures pending for release - the decline might find a bottom and look to travel north again.

Meanwhile, the Euro continues on its bearish trajectory. The shared currency will take its cue from the Dollar's price action, even though the German employment data will be released this morning. Market participants are mainly focused on the political developments in Europe; Italy is coming under scrutiny for not meeting its budget deficit goals while the European leaders debate who will take over the leadership roles in the European Commission and the ECB. The bearish bias should remain in place and the Euro looks poised to travel towards the 1.1120 area.

Gold spiked lower yesterday succumbing to the Dollar's strength. This is quite an interesting phenomenon, as one would expect the yellow metal to benefit from the increased trade tensions, worries over global growth and signs of slowdown in the US economy. Nevertheless, Gold broke below $1,280 yesterday but is now gaining back lost ground; the level to watch is the $1,287 mark where a break higher will clear the path towards the $1,295 area. Oil lost some of its momentum and retreated below $59 again so we need to remain patient before we can decide on a direction for the black gold.

Stock markets ended the day in the red as investors see no light at the end of the tunnel in the trade spat between China and the US. China's threat to include rare-earth exports on its list of weapons to fight back on Trump's actions is a quite substantial move and, should it happen, it would take the dispute to another level. As such, equity futures are pointing sharply lower this morning and with most global indices trading close to their recent lows, a move below these would invite more selling pressure.

MARKET EVENTS TO WATCH

  • German Unemployment - 11.55am
  • ECB Financial Stability Review - 12pm
  • Bank of Canada Rate Decision - 6pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research