Donald Trump stole the spotlight again yesterday when he identified himself as the main culprit responsible for the delay in the US-China trade talks. The US President said that he’s holding back the process because the Chinese side backtracked from their initial commitments during the earlier stages of the negotiations. Risk sentiment turned dovish again this morning as investors seem to take this statement as a sign that Trump will accept nothing other than the deal he wants, putting any progress until the G-20 meeting in doubt. Safe havens are bid while equities are seen opening in the red.
Starting our overview with currencies, the Dollar ended the day marginally negative on average as Treasury yields started pulling lower again but we have to take a closer look at the greenback’s performance to assess the current state of play. The US currency mostly lost ground against the Euro and the Pound, after the UK employment figures surprised to the upside. Contrary to that, the rest of the higher beta instruments suffered with the Australian, Canadian and New Zealand dollars weakening and the safe haven Yen and Swiss Franc are pointing higher this morning.
As such, even though the marginal decline in the Dollar would normally suggest a risk-on appetite, the overall performance of the other assets indicates that market participants are back on the sidelines. The prospect of an unending trade dispute between the world’s two largest economies is a nightmare scenario and, despite their respective government officials’ comments, both the US and China are seeing a steady deceleration in their domestic growth. This may go unnoticed by the mainstream commentators and news networks but the reality is that both countries are flashing warning slowdown - but not recessionary yet - signals.
Hence, it becomes apparent why investors are taking to safer havens every time a fresh piece of news comes up suggesting an extension to the war with China or another front opening up - see Mexico. As mentioned yesterday, we expect the Dollar to broadly gain from this ongoing uncertainty in the medium but its short-term action this week hinges on fresh US data. Today, the release of the inflation figures from the States is too close to call but the risk for the greenback is to the upside: the odds may be in favor of a weak reading that will just confirm what we already know - that inflation is stubbornly low - but a bullish set of figures may push back expectations for a Fed rate cut in July and propel the Dollar higher.
Meanwhile, Gold is again on the rise following the Dollar’s lackluster performance over the past 24 hours. We have explained in our note yesterday that, despite the potential of further Dollar weakness this week, we don’t expect the yellow metal to extend its recent rally. This thesis is now being put to the test but with market participants already aware of the low inflationary environment in the States and expectations set for a robust retail sales reading on Friday, the odds are currently in favor of a double top around $1,350 at the most. Just for clarity though, if there’s a material breakdown in US-China talks or, even worse, the US consumer demand figures miss badly at the end of the week then Gold will explode towards $1,360.
Finally, equities are responding badly to Trump’s admission that he’s holding back on the US-China trade talks. He said that “unless they [China] go back to that [preliminary] deal I have no interest” which suggests that the road towards the G-20 meeting might not be filled with progress. Futures in Europe and the US are pointing lower but we don’t have any reason to believe that the broader uptrend is in jeopardy, at least not yet. Of course, a lot of that bullish sentiment is based on the premise that the Fed will initiate their easing cycle very soon so we should always keep an eye on any changes or fresh comments on that front.
MARKET EVENTS TO WATCH
- US Consumer Price Index - 4.30pm
- US Crude Oil Inventories - 6.30pm
All times are GMT +4.
Written by Konstantinos Anthis, Head of Research