Risk appetite gets a boost at the start of the new week after a well-received development in the US trade war against, well, almost everyone. US President Donald Trump decided to suspend his plans for tariffs versus Mexico over the weekend after reaching an agreement with its southern neighbor in regards to border security. Equities rejoice at the fresh news and the Dollar back is in the ascendancy tracking Treasury yields higher this morning. Safe havens seem to be pulling back as investors are looking somewhat optimistic over this development, with the Yen giving up ground and Gold moving below $1,330.
The key question in our mind however this morning remains: is this news good enough to change the negative status quo in regards to global trade tensions? And how will the major currencies and other asset classes react to the recent developments in trade and global macroeconomics? So, even though we do believe that the suspension of the levies versus Mexico is helping improve the mood regarding trade conditions, two significant macro themes remain front and center and will continue to affect how currencies, equities, commodities and bonds trade: a) the standoff between the US and China will take a toll on global growth and b) the US economy is flashing more and more signals of entering its late cycle phase, which will be reflected on the US Dollar.
The US currency took another hit at the end of last week when the Non-Farm Payrolls report missed its mark by a wide margin. The number of jobs added during the past month came in at 75k, compared to expectations for a 175k increase, while wage growth also printed softer. This is another hint that the US economy is slowing down, as we've been indicating over the past months, and market participants are now pricing in at least a couple of rate cuts by the Fed until the end of the year. And, should the US central bank start cutting rates, the Dollar will be feeling the heat in the medium term.
In the short term though, the greenback is ticking higher this morning with gains seen versus the higher beta European and antipodean currencies and the safe haven Yen and Swiss Franc. Meanwhile, more key US figures are scheduled for release this week, with the inflation and retail sales reports expected to provide the direction in the interim. Inflation is a sore spot for the US economy but consumer demand will likely come in positive so the Dollar should be able to take a breather over the next couple of sessions. Dollar/Yen is attempting to break above 108.50 and a potential extension towards 109 looks possible.
Further Dollar strength will also allow traders to take some profits off the table on the Euro and the Pound, which would force a pullback in these instruments in the short term. The shared currency is just above the 1.13 mark this morning but a further advance from the Dollar's side will bring the 1.1260 level back in focus. At the same time, Sterling had rallied to 1.2750 but with the Dollar moving higher again prices are now about to test the 1.27 round figure which, if breached, clears the path towards 1.26.
Elsewhere, Gold is easing off its last week's highs. Prices had almost reached the $1,350 area when Trump issued his threat to impose tariffs on Mexico and with the Sino-US talks going nowhere, investors were flocking to the safety of the yellow metal. However, following the news that an agreement has been reached between the US and Mexico, prices are now declining below $1,330. This may be an opportunity for traders to take some profits on their longs so we would expect the $1,325 lows to be tested soon.
Finally, equities are rejoicing on the risk-on environment triggered by the developments over the weekend and futures are pointing higher this morning in Europe and the US. Meanwhile, with market participants pricing in two or more rate cuts by the Fed until the end of the year, stocks are receiving a welcome boost. However, for this euphoria to last in the medium term a host of catalysts need to fall in line: the Fed has to deliver easing quickly and hint on more action to come, the US economy needs to pick up pace again and there needs to be some progress in the US-China standoff. And, even though the first seems quite likely, the other two might not take place soon, if ever. As such, we remain bullish on the short term but keep our guard up in terms of the possibility of an extended rally in equities during the weeks to come.
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Written by Konstantinos Anthis, Head of Research