Tuesday, September 17, 2019

Wall Street down amid oil supply worries. Recent trade war developments only a short-term win

  • China
  • Dollar
  • Gold
  • Euro
  • Stocks

Market recap: RBA keeps low interest rates unchanged, while a Fed rate cut is less likely after oil prices surge

The Aussie fell sharply yesterday to 0.6830’s level against the dollar, as the Royal Bank of Australia (RBA) released its policy meeting’s minutes and announced it would leave interest rates unchanged at 1%. It cited a steady unemployment rate and record low mortgage rates, while also acknowledging there are rising concerns over the outlook for global growth.

Meanwhile, the European Commission announced the UK has still not proposed a solution to the Irish backstop conundrum. Even though UK PM Boris Johnson met with EU president Jean-Claude Juncker on Monday, the EU’s statement is in sharp contrast to claims from Johnson that a deal is being developed between the two parties. The EU and UK, it seems, are still miles apart from an agreement, and sterling remained flat despite yesterday’s meeting and headlines.

Oil stocks (such as Exxon Mobil Corporation) rose as investors braced themselves for disruption to oil supplies following Saturday’s drone attack on a petroleum plant in Saudi Arabia. Wall Street though dropped as oil dependent stocks (including American Airlines Group and Southwest Airlines) fell on the news. The DJIA sunk 143 points (or 0.52%), while the S&P 500 fell 0.31% and the Nasdaq dropped 0.28%. Investors are clearly keeping Wednesday’s Fed meeting in mind – the chances of rate cuts have been greatly reduced after the drone strike at the weekend, as high oil prices will most likely affect inflation. According to the CME Fedwatch tool, the probability of a 25bps rate cut at September FOMC meeting has shrunk to 65.8%, down from last week’s probability of 88.8%.

Gold spiked on open but eased slightly and ended the day 0.58% higher, thanks to geopolitical risks associated with the strike on Saudi Arabia. The yen strengthened against the dollar initially on Monday but pulled back as the dollar rose after President Trump announced the approval of US oil stockpiles after the attack on the Saudi Aramco facility.

Today’s analysis: The latest trade war developments – are we any closer to a deal?

The past couple of weeks have seen positive headlines regarding the trade war, which have boosted the global economic outlook.

The latest trade war developments - are we any closer to a deal?

China’s announcement that it would cancel additional tariffs on imports of soy beans and pork from the US is the latest of a series of goodwill gestures between the two countries. The announcement is likely influenced by a reduced pork supply in China after an outbreak of African swine fever, and to show goodwill ahead of talks with the US, which are scheduled for October.

Since then, global markets have rallied and US markets in particular rose 2.74% (DJIA) in reaction to the news.

US Market Index Performances since 05th September

China’s announcement to buy US agricultural products is likely an attempt to introduce different concessions and to help renegotiate the dispute’s key issues (the protection of US intellectual property and equal opportunities for US companies in China).

In order to meet US demands, China would have to make structural change to its industrial policy and state subsidy. But the Asian superpower is unlikely to agree to a deal that would cause a further slowdown to its economy. The upcoming US elections in November 2020 are another reason why China is reluctant to give in to Trump’s demands and while the recent mellowing of tensions (and delay of certain tariffs) between the two countries have been welcomed by the market, they are not seen as proof that an end to the trade war is in sight.

In the short term, the outlook may improve as both countries look to reduce the impact the war is having on their economies. And this isn’t the first time either side has made concessions on tariffs, meaning the long-term prospects of a trade deal remain unchanged.

Gold prices reached 1512’s level after the attack on the Saudi oil facility, although it retreated back below 1500’s key level, mainly due to less friction between the US and China. US Treasury Bonds yields (two-year, 10-year and 30-year) have been rising since last week, but safe-haven assets may continue to sink in the short term as per our previous forecast. Gold’s price may drop to 1450-1480’s level while the Japanese yen may reach 108.90’s level this week.