Thursday, November 28, 2019

US stock futures fall as US-China tensions rise; will Japan’s economic data surprise the market?

  • China
  • Dollar
  • Gold
  • Yen
  • Pound
  • Stocks

Market recap: US major indices extend gains after unexpected growth in durable goods orders

Better-than-expected data from the US pushed major US indices to their fourth straight gain on Wednesday. The second estimate for Q3's GDP in the US was higher than the initial estimate of 1.9%, rising to 2.1% quarter-on-quarter. Durable goods orders for October surprised investors after they beat economists' forecasts by a wide margin, growing 0.6% month-on-month instead of an expected 0.9% contraction.

What’s more, Initial Jobless claims for November 23rd only fell 213,000 instead of the predicted 221,000. But personal income and core Personal Consumption Expenditure (PCE) slightly disappointed – the former failed to show any growth while the latter fell slightly to 1.6% instead of the expected 1.7%. The DJIA gained 0.15%, the S&P 500 rose 0.42% and the Nasdaq advanced 0.66%. The Dollar Index gained 0.12% as a result of the better-than-expected economic data.

US President Donald Trump signed legislation bills S.1838 (which requires annual reviews of Hong Kong's special trade status under US law, along with officials that are deemed responsible for human rights' abuses and undermining the city's autonomy) and S.2710 (which bans the export of crowd-control items such as tear gas and rubber bullets to Hong Kong's police force) on Thursday morning. US equity futures fell after the announcement, as investors viewed the signing as a possible trigger for trade war tensions to escalate. Dow e-mini futures slipped by 0.31% as of Thursday 5.30am (GMT +4).
Safe haven assets retreated on Wednesday, with gold falling 0.48% and the yen weakening 0.45% against the greenback. US Treasury yields gained across the board, with two-year yields gaining 4bps to 1.63%.

In Asia, equities opened Thursday's trading session lower as investors grow cautious of a possible escalation in the US-China tussle. The Hang Seng Index and the Straits Times Index started the day 0.71% and 0.18% lower, while the Nikkei was 0.09% higher. But the Nikkei later fell by 0.14% as of 5.30am (GMT +4).

Today’s analysis: Typhoon Hagibis’ effect on Japan’s Industrial Production in October is uncertain

The Dollar Yen reached a six-month high of 109.54 on Wednesday, after the greenback was boosted by positive economic data in the US. Tomorrow's inflation rate for Tokyo will be released and traders will likely be focused on the Consumer Price Index (CPI), excluding the fresh foods dataset. Economists expect Tokyo's inflation to inch higher in November, at 0.6% year-on-year over a previous of 0.5% in October. Other economic indicators released tomorrow are Jobless Rates and Industrial Production for October. 

Economists’ forecast Tokyo’s inflation rate to slightly strengthen in November

October's Industrial Production is likely to slow due to Typhoon Hagibis, which hit Japan early that month. The typhoon and its after-effects devastated several cities in Japan, especially in the Kanto region and is likely to have negatively impacted businesses and production. But the extent of its damage is uncertain, and could be better or worse than the consensus of a 2% month-on-month contraction. Jobless rates and Tokyo's inflation rate are unlikely to surprise the market.

The Dollar Yen is also affected by investors' risk appetite, as it is considered a safe haven asset. The Japanese currency has been greatly affected by conflicting news on the US-China trade war that has been released since the announcement that the two superpowers are working on a partial trade agreement.

The yen should continue to experience fluctuations before an actual partial trade deal is reached as the possibility of an agreement still remains highly volatile. But while a phase one partial deal is highly probable in the near future (as both the US and China need it to stimulate their respective economies), the key issues of the US-China trade war (regarding intellectual property rights in China and fair business opportunities for US companies in China) is unlikely to be solved soon.

The most progress this year on the key issues surrounding the trade war was earlier this week when China announced that it is looking to get stricter on intellectual property rights. While the UK's ongoing general election contributes to global risk, it is likely to have little impact on the yen. Therefore, as the US and China get closer to a phase one deal, expect the yen to weaken against the dollar as investors shift to riskier assets. 

As a result, the yen may experience higher volatility after the release of tomorrow's data. But USD/JPY is likely to continue to range within 108.785 and 109.575 in the short term. In the medium term, the yen is likely to continue to weaken against the dollar.