Tuesday, October 22, 2019

Commons Speaker rejects Brexit vote; will gold take a tumble?

  • China
  • Dollar
  • Gold
  • Euro
  • Stocks

Market recap: Markets cheer as a US and China trade pact looks increasingly likely

US markets edged upwards on Monday as US-China relations continued to improve. US President Donald Trump said yesterday that talks with China over the first phase of a trade deal were progressing well, raising market expectations that a pact between the two superpowers could be signed by the Asia-Pacific Economic Cooperation (APEC) meeting in Chile next month on November 16th and 17th. The DJIA gained 0.21%, the S&P 500 rose 0.69% and the Nasdaq advanced 0.91%.
Sterling continued to weaken against the greenback on Monday, with Cable falling 0.51% after House of Commons Speaker John Bercow rejected British Prime Minister Boris Johnson’s call for another meaningful vote on the Brexit agreement on Monday.

Safe havens remained generally flat, with gold losing 0.01% and the yen weakening 0.01% against the dollar. The Dollar Index inched higher to 0.05%. US Treasuries yields jumped on Monday, with two-year yields spiking 5bps to 1.62%, and 30-year yields advancing 4bps to 2.29%.

Meanwhile, stocks in Asia tracked US equities gains, as the Hang Seng Index and Straits Times Index opening 0.33% and 0.46% higher.

Today’s analysis: US-China trade pact to weigh on gold?

US officials announced on October 11th that the US and China are working towards the first phase of a trade pact. Since then, news of the US-China trade dispute have been mostly positive, with officials from both sides indicating that there is progress towards a deal.

The trade pact will most likely include rollbacks on previous tariffs, a currency pact and purchase agreements (possibly for China to make large purchases on US agricultural products).

But it is important to note that the US’s main goal of the trade war is to negotiate protection of US intellectual property and equal opportunities for US companies in China. This pact is therefore only a short-term win, meaning that the trade dispute is still a long way from being resolved.

The trade pact is likely an incentive for both countries to stimulate their respective economies, as both show sign of a slowdown. China’s GDP for Q3 this year slowed to 6% year-on-year and the US economy has also shown signs of slowing down, especially in the manufacturing sector. The Institute for Supply Management’s (ISM) Purchasing Managers Index (PMI) for the US’s manufacturing sector fell short of expectations for September, reaching 47.8 - its lowest level since June 2009.

Since it is in both parties’ interests to make a deal, it is likely that we will see more positive developments before the APEC meeting. But as US officials have signalled, a trade pact may not be finalised by November. Gold will likely continue its downward trend thanks to easing trade tensions, as investors shift to riskier assets. As the APEC meetings get closer, gold is likely to break 1482.09 levels to trade between 1459 and 1482 levels before recovering slightly if no deal is made. But before then, gold will likely see little change, trading between 1496 and 1482 levels, unless Johnson delivers Brexit before the October 31st deadline.

US-China relations should continue to ease, but a trade deal before November looks unlikely

Gold to continue its downward trend (H4)

The bears look set to exert more downward pressure on gold as they try to break the support level of 1482.09. If the chances of Brexit happening before October 31st increase today, expect bears to win, pushing gold back down to range between 1482 and 1459. As US-China trade talks are progressing positively as well, gold could continue trending downwards as the bulls lose steam.