Thursday, June 27, 2019

Trade optimism drives safe havens lower, equity futures point to the upside

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

MORNING BRIEFING

Risk appetite improves pushing safe havens lower on reports that the US and China have called for a temporary trade truce ahead of the G-20 meeting over the weekend. The Yen weakened against the Dollar and Treasury yields moved above the 2.05% mark as investors are hoping for some kind of progress in the trade dispute between the world’s two largest economies. Equity futures are in the green and Gold is hovering just above the $1,400 mark this morning.

It didn’t take much to get market participants excited about a potential breakthrough in the trade spat between the US and China. An interview with US Treasury Secretary Steven Mnuchin lit the fuse initially when he was misquoted saying that “a deal is 90% there”, a statement that was later corrected to say that he was referring to the progress having been made before the recent breakdown in talks a few weeks back. In any case though, the sentiment in the markets is turning bullish as investors are hoping from some sort of meaningful development over the weekend.

Truth be told though, the odds for material progress in such a short span of time are quite low given the hesitant tone coming from the Chinese side. China has seen how temperamental President Trump is when it comes to high-stakes negotiations and they are approaching this meeting with skepticism. Actually, according to some political analysts any serious hopes for a positive takeaway are based on Trump’s need for something concrete to bring back home in an attempt to bolster his pre-election campaign. The real question is whether the Chinese side will play along or opt to prolong this dispute and deal with a Democratic President in 2020.

Dollar/Yen climbed to 108 on the back of the bullish tilt in sentiment and depending on the action in Osaka we may see more gains ahead. From a technical perspective, the currency pair has been trading within a descending channel since early May with the top side of this channel found around the 108.30 mark. With the short-term momentum pointing higher, it is likely that this area will be tested soon, with a further extension leading towards the 108.70 monthly highs. However, we need to note here that this is clearly a short-term focused analysis and if nothing positive comes out of the Trump-Xi meeting, then prices may turn lower on Monday.

In the interim, the focus today will be on Europe with the German and Spanish inflation figures pending for release. This data will act as an appetizer for tomorrow’s Eurozone CPI report, which will likely solidify ECB’s outlook for additional easing needed in the future. Prices for the Euro have come off their 1.14 levels and further weakness could clear the path for a deeper correction towards 1.13. Meanwhile, Sterling dropped below 1.27 yesterday and with the Dollar enjoying a positive bias at the moment, further losses would drive the currency to the 1.26 area.

Elsewhere, Gold consolidated just above the $1,400 mark yesterday as risk aversion eased ahead of the G-20 meeting. Having run an impressive rally during the current month, the yellow metal is now seeing decreased momentum and it appears likely that we will see more consolidation going into the weekend as investors will be waiting to see what kind of progress will take place in Japan. The next support for Gold lies around the $1,380-85 area and with equities pointing higher and UST yields on the rise, a test of this level could come soon.

Finally, equities has a flat day yesterday with most indices in Europe and the US closing marginally in the red. This morning though, the reports calling for a temporary truce between the US and China are spreading optimism among equity traders and futures on either side of the Atlantic are trading in the green. As mentioned above, sentiment is turning bullish but we’d rather be a bit more cautious ahead of the G-20 meeting as the odds for a material breakthrough are quite low.

MARKET EVENTS TO WATCH

  • Spanish Consumer Price Index - 11am
  • German Consumer Price Index - 4pm
  • US Gross Domestic Product - 4.30pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research