Monday, November 25, 2019

China announces tighter intellectual property rules; will Tuesday’s speeches from key RBA officials be dovish?

  • China
  • Dollar
  • Gold
  • Euro
  • Stocks
  • Dow Jones

Market recap: Global equities look set for gains today on renewed US-China trade optimism  

US stocks broke its four-week gaining streak, as conflicting news on the US-China partial trade deal weighed on investors sentiment throughout the week, despite US President Donald Trump’s boost to the stock market on Friday after saying that there was a “very good chance” of a trade deal with China. The DJIA, S&P500 and the Nasdaq made a weekly loss of 0.46%, 0.33% and 0.25%. But US equities futures gained on Monday morning on renewed optimism for a US-China Trade deal. China announced on Sunday that it is looking to get stricter on intellectual property rights, signalling to investors that the country is willing to compromise on key issues surrounding the US-China trade war. Dow e-mini futures were 0.28% higher as of 10.35am (GMT +4)

Safe haven assets fell for the third straight day on Friday, after Trump’s positive comments on the US-China trade pact. Gold fell 0.17% and the yen weakened against the dollar by 0.03%. But the Dollar Index gained 0.28%, as better-than-expected Purchasing Managers' Index (PMI) data and an upward revision to consumer sentiment for November surprised investors on Friday.

The Nikkei and Straits Times Index fell for the second straight week, losing 0.82% and 0.41% over the last week. The Hang Seng Index made a weekly gain of 1.02% as protests in Hong Kong were calmer compared to the week before. On Monday morning, stocks in Asia gained on China's announcement on tightening intellectual property rules. The Nikkei, Hang Seng Index and Straits Times Index started Monday's trading session 0.78%, 1.05% and 0.50% higher.

The week ahead looks to be macro heavy, with GDP (second estimate for Q3), inflation, durable goods orders, personal income and personal spending for October for the US releasing this week. Speeches from key officials  from the Reserve Bank of Australia (RBA) on Tuesday will likely also be closely watched. Finally, inflation from both Germany and the EU will be released this week as well.

Today’s Analysis: Aussie traders looks set for a busy Tuesday 

The Aussie looks set for gains today, which will end a three-day losing streak against the dollar. The AUD/USD currency pair reached as high as 0.6803 (a gain of 0.25%) as of Monday 8.30am (GMT +4), after investors grew more optimistic for a US-China trade deal over the weekend after China’s announcement to tighten intellectual property laws on Sunday.

But speeches from RBA Governor Philip Lowe and Deputy Governor Guy Debelle may put downward pressure on the Australian dollar as investors look for hints regarding the next RBA monetary policy decision on December 3rd. Debelle will be speaking ahead of Lowe at the 2019 Australian Council of Social Service (ACOSS) National Conference on Tuesday, at 3.50am (GMT +4) on employment and wages. Since unemployment in Australia has risen to 5.3% for October from 5.2% in September(increasingly further from RBA’s target rate of 4.5% and wage growth in Australia for Q3 reached the lowest since Q2 in 2018, Debelle's speech looks likely to sound dovish which would imply higher downside risk for the Australian dollar.

Then later on Tuesday, investors will be watching Lowe's speech on unconventional monetary policy at 1.05pm (GMT +4) for any signs of dovishness and the possibility of introducing quantitative easing or negative interest rates in the near future. While the RBA has been struggling to stimulate the economy with interest rate cuts, it is unlikely that the central bank will introduce unconventional monetary policy tools. Lowe has expressed that while the possibility remains, he hopes to avoid using it. He also said that these unconventional monetary policy measures are most effective when used together with a broader set of policies, citing fiscal policy as an example.

We expect little change in tone from Lowe in regards to unconventional monetary policy tools, as there is no compelling reason for the central bank to lean to them to stimulate the economy. Inflation rate in Australia has remained mostly consistent, reaching 1.7% year-on-year for Q3 although still missing the central bank’s target range of 2%-3%. The pickup in housing prices in Australia and employment growth is also likely to reduce the likelihood that the RBA will introduce new monetary easing tools to stimulate the economy. 

In the worse-case scenario that Debelle expresses a dovish tone and Lowe signals a possibility for quantitative easing, the Australian dollar is likely to weaken against the greenback, falling past 0.6770 to range between 0.6770 and 0.6754. But if only either central banker sounds dovish, then AUD/USD will likely only inch slightly lower towards 0.6777. In the best case scenario where both central bankers fail to send dovish signals to the market, expect the Aussie to rise, possibly towards 0.6821.