Friday, October 11, 2019

Markets soar on renewed US-China trade deal optimism; will today’s trade talks end with a partial deal?

  • China
  • Dollar
  • Gold
  • Pound
  • Stocks

Market recap: Safe haven assets tumble as global risks reduce

China and the US started their trade negotiations on Thursday and will meet again later today for the second day of talks. After Thursday’s negotiations, officials from both sides signalled that they were optimistic of a potential partial trade deal between the two superpowers. The partial trade deal may pave the way for a temporary trade truce. Global equities rallied, with the US leading the pack. The DJIA rose 0.57%, S&P500 advanced 0.64% and the Nasdaq increased 0.60%.

Sterling surged on Thursday, with Cable spiking 1.94%. The currency strengthened as Irish Taoiseach Leo Varadkar spoke positively of his meeting with British Prime Minister Boris Johnson, sparking hopes that a Brexit deal may still be possible between the UK and the EU before the October 31st deadline.

Safe havens fell as optimism on a partial trade deal was renewed. Gold tumbled 0.77%, the yen weakened against the dollar by 0.47% and the Dollar Index retreated 0.42% on Thursday. US Treasury yields rose as well, with two-year, 10-year and 30-year yields advancing 8bps each, to 1.54%, 1.67% and 2.16% respectively.

Asia markets opened higher on Friday morning, tracking US gains. The Nikkei, Hang Seng Index and Straits Times Index each opened higher on Friday morning, gaining 0.91%, 1.08% and 0.45% respectively.

Investors will likely be focusing on the second day of trade negotiations between the US and China. Also, the results from the University of Michigan Consumer Sentiment Index for October will be released later today, October 11th at 6pm (GMT +4).

Today’s Analysis: A partial trade deal looks to be more likely

US and China officials are set to continue trade negotiations later today. It seems that the concessions that the US has proposed has been enough to keep China officials at the table. We may potentially see a partial trade agreement between the two superpowers, which would likely involve China making more purchases on US agricultural goods, while the US agrees to temporarily halt tariffs and possibly even roll back some of the tariffs made earlier this year. An agreement may also include a currency pact between the two countries, to prevent the Chinese yuan from devaluing or for the US dollar to weaken against the yuan.

But, if there is no agreement between the officials, tariffs on US$250bn worth of Chinese imports will increase from 25% to 30% on October 15th and new levies of 15% will be applied to all remaining Chinese imports. The US has also been considering restricting capital flows to China and Chinese firms, which we will most definitely see come into play in the event of a no-deal. China will likely retaliate as it has done in the past.

The fundamentals of the trade war have not changed, the key issues that the US wants resolved (protection of US intellectual property and equal opportunities for US companies in China) still remain and is unlikely to have much progress in the discussions. As recent economic data has indicated a slowdown in the US economy (the Institute of Supply Management (ISM) Manufacturing Purchasing Managers’ Index (PMI) contracted in September and Automatic Data Processing (ADP) Employment data showed a lower than expected growth in the private labour market for September), it is likely that the US will be more willing to compromise to drive sectors that have been heavily affected by the trade war (for example the agricultural and manufacturing sector). In addition, the US has reason to weaken the dollar to reduce trade imbalances.

Therefore, a partial trade deal between the US and China would be in both parties’ interests. A partial trade deal between the two superpowers is likely to already be priced into the markets by a certain extent. We expect however that the dollar has more room to fall in the event of such a deal. It is likely that the dollar will break the initial support level of 98.67, to drop to 98.33’s level. If the University of Michigan’s Consumer Sentiment Index released today falls short of expectations, we could potentially see the dollar drop to range between 98.19 and 98.33 levels.

*Source: ADSS

*Source: ADSS, TradingView

Investors are waiting for the outcome of the ongoing trade negotiations as the bears continue its downward pressure of the dollar, pulling it below the 50-day and 100-day moving averages. The bears will likely try to retest the support level of 98.65 while the bulls try to keep the dollar afloat. In the event of a partial trade agreement, we will likely see the dollar form a bearish trend, breaking the support level of 98.65 and contract towards 98.33.