Thursday, May 9, 2019

Trump accuses China of “breaking the deal”, Dollar in potential risk from PPI report

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

MORNING BRIEFING

President Trump took another step to raise the stakes in the trade talks with China by declaring that the Asian side “broke the deal” being negotiated. The risk off bias persists as the clock is winding down towards Friday's deadline when the US is threatening to impose harsher tariffs on Chinese imports. Money markets around the globe continue to trade with a bearish bias, with high beta currencies coming under pressure and the Yen gaining further. Equities point towards another bearish opening bell, while Gold attempted to break its downtrend but stalled.

The Dollar is gaining against the higher beta currencies on the back of Trump's continued attacks on China. Investors are growing increasingly worried that a deal will not be reached in time and additional levies will be imposed from both sides. This doesn't necessarily mean that negotiations will break down completely but, if the two sides increase the tariffs on each other's imports, growth on a global scale will take a hit. In contrast to how the greenback is trading against the European majors, Dollar/Yen is hovering around the 110 level against the Yen and in our note yesterday we mentioned how crucial this support area is. A potential break below it, triggered by another day of losses in the global equity markets, will invite more selling pressures and prices may travel all the way to the 109 and 108 levels if the situation takes a turn for the worse.

At the same time, the US currency will also take its cue from the inflation figures pending for release today and tomorrow. The Producer Price Index report will precede the Consumer Price Index figures and both sets of data will be closely monitored by investors looking to assess what the Fed's next move will be. Recently, Fed Chairman Powell called the current low inflation environment “transitory” but the softer wage growth seen in the NFPs last Friday drove the Dollar lower. As such, a potentially softer inflation reading today or tomorrow may again increase the odds of the Fed cutting rates soon, and in turn dampen demand for the Dollar.

Meanwhile, the EU leaders will gather in Sibiu, Romania today in an informal meeting ahead of the upcoming European elections. This will be the first meeting since the European Council approved the Brexit extension request so the progress in finding a solution - or lack thereof - will be part of the discussion. Moreover, the developing situation with Iran will also be part of the agenda with the Middle Eastern nation threatening to start uranium enrichment again. With the US-China dispute making headlines, a strong response to Iran's threats from the European side will further raise geopolitical risks, with the safe haven instruments due to benefit.

Across the commodities' universe, Gold made an attempt to break its downtrend yesterday when it threatened to overtake the $1,290 level but lacked the necessary follow-through. Nevertheless, continued geopolitical risks and a potentially bearish US inflation reading still allow for optimism among the yellow metal's bulls. Obviously, the level to watch is yesterday's highs and a move above those will bring the $1,300 area into focus. Oil was unchanged during the past 24 hours trading sideways between $61 and $62; tensions between the US and China threaten global growth and hence demand for Oil but a potential escalation between Iran and the US side could also prompt prices to the upside. However, a break above $63 is needed before we can see $65.

Equities were able to claw back some of their losses yesterday, especially over in Europe where the EuroStoxx 50 closed around 0.5% higher. The US markets were mixed, with the Dow Jones closing with marginal gains while the S&P was down 0.16%. This morning, futures on both sides of the Atlantic are pointing lower while the Asian markets are trading with a strong negative bias. Clearly, with time running out before Trump imposes fresh tariffs on China investors prefer to stay defensive so we should be in for a bearish day of trading.

MARKET EVENTS TO WATCH

  • US Producer Price Index - 4.30pm
  • US Initial Jobless Claims - 4.30pm
  • Fed's Powell Delivers Opening Remarks at a Fed Conference - 4.30pm

All times are GMT +4.