Friday, June 28, 2019

Market participants opt for a cautious approach ahead of the G-20 meeting

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

MORNING BRIEFING

Investors are taking a defensive approach at the end of the week and ahead of the G-20 meeting between the US and China. The Dollar is mixed against its peers while the Japanese Yen has gained overnight with the Asian stock markets turning negative. The Euro spent the day consolidating yesterday just above the 1.1350 mark with traders now turning their attention on the Eurozone inflation data pending for release this morning. Gold edged higher during the Asian session while equities were rather mixed around the globe.

The key event of the week is without doubt the sit-down between the US and Chinese Presidents during the G-20 meeting in Japan. The two leaders will discuss the progress - or lack thereof - in the trade negotiations and try to find some common ground. Market participants are taking a cautious approach ahead of this high-level meeting as hopes for a material breakthrough are low. The price action on the Dollar/Yen currency pair reflects this skepticism as the bullish momentum that drove prices above 108 earlier in the week has now diminished.

Looking ahead, the direction for the Dollar and the global equities depends on whether the two leaders will send a positive message in regards to the trade dispute between their countries. According to some political analysts, the most likely scenario is that Trump and Xi will agree to postpone any additional tariffs on each other’s exports in an effort to encourage further negotiations. However, recent leaks over the past couple of days indicate that the Chinese side has specific demands, including a lift of the ban against Huawei, which may make it hard for the US to agree on. As such, we should remain cautious as lack of any progress will send Dollar/Yen towards 107 again and force equity traders to bank any profits and hedge against the downside.

At the same time, the Euro will attract investors’ attention during the European trading hours in light of the release of the Eurozone inflation figures. Yesterday, the Spanish and German inflation data came in mixed but economists are predicting a slightly better reading from the Euro area today. In any case, the Euro has been trading sideways over the past 2 days with prices hovering above the 1.1350 level and despite the release of the inflation report today, we believe that traders will likely remain on the sidelines in anticipation of any news from Japan. Should Trump and Xi arrive to some sort of an agreement, a risk-on bias will send prices towards and above 1.14 again, otherwise elevated safe haven demand should push the shared currency towards 1.13 next week.

Gold edged higher overnight after spending two days just above the $1,400 mark. The fact that the Chinese sides arrived in Osaka with specific demands sends a message that words will not be enough this time as Trump’s temperamental approach to these talks has damaged his credibility. As a result, Gold is seeing some increased demand ahead of the meeting and if the two sides don’t come out with some concrete progress prices could again rally towards the $1,440 area.

Finally, equities ended the day in a mixed manner yesterday with Europe marginally below water and the US managing to score a small advance in the S&P and NASDAQ indices. This morning though, futures on either side of the pond are trading flat which highlights the uncertainty among equity investors and the significance of the G-20 sit-down between Trump and Xi. This is a stellar opportunity for the two leaders to find some common ground and unless they do so, equities will likely push lower as a prolonged period of tariffs on each other’s exports will take a heavier toll on both economies and global growth.

MARKET EVENTS TO WATCH

  • Euro-Zone Consumer Price Index - 1pm
  • US PCE Core - 4.30pm
  • University of Michigan Sentiment - 6pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research