Risk Markets Surged on Receding Political and Trade Uncertainties

Market overviews

Risk aversion eased notably further last week as some of the imminent risks receded. New Italian government was sworn in as 5-Star Movement and bitter rival Democratic Party agreement to form a coalition. UK lawmakers passed a bill to force Prime Minister Boris Johnson to delay Brexit if no deal could be made. Johnson’s push for general election in October also failed so far. Most importantly, US and China appear to be back on negotiation table and the teams are working towards a face-to-face meeting in October.

Over the week, commodity currencies ended as the strongest ones, as led by New Zealand, Australian and then Canadian Dollars. Yen was the weakest with the turn on sentiments, followed by Dollar and then Swiss Franc. Euro and Sterling are mixed. Euro will face the risk of ECB monetary easing this week. Pound will continue to pay attention to UK political and Brexit developments.

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US-China to meet on trade again in Oct, risk of escalation receded

Officials from US and China confirmed that they’re planning for a face-to-face trade meeting in October, after a phone call between Chinese Vice Premier Liu He, US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin. Most importantly, that came after China backed down from retaliating to the latest additional 5% tariffs of US. Without Chinese retaliation, there is no excuse for US President Donald Trump to escalate trade war further for now.

Though, it would be overly optimistic to expect any form of solid breakthrough in October’s meeting. Even White House economic adviser Larry Kudlow warned that it could take years to resolve trade conflicts. He said that on Friday that “the stakes are so high, we have to get it right, and if that takes a decade, so be it.” He also said that “we would like to go back to where we were last May, but I don’t know if that’s possible, and I don’t want to predict any outcomes. This is a difficult matter.”

US stocks jumped on trade optimism, heading to new record high

US stocks responded rather positively to the trade developments. S&P 500 took out 55 day EMA last week with last week’s strong rally. The development suggests that corrective pull back from 3027.98 has completed at 2822.12. The solid support from 55 week EMA indicates that medium term up trend from 2346.58 is not over yet. Further rise is now in favor through 3027.98 record high. Though, S&P 500 will then face key fibonacci level of 61.8% projection of 1810.10 to 2940.91 from 2346.58 at 3045.42. Also, bearish divergence condition is seen in daily MACD. Thus, strong selling might emerge above 3027.98 and the break could be brief.

Chinese stocks also given a strong boost

Reactions from China Shanghai SSE was also positive. The breakaway from 55 day EMA also suggests that corrective fall from 3288.45 has completed with three waves down to 2733.92. That came after drawing support from 61.8% retracement of 2440.90 to 3288.45 at 2764.66. 3050.02 resistance will be an immediate focus this week. Firm break there will pave the way back to 3288.45 resistance next.

Markets still expecting a -25bps Fed cut this month

Market expectation on Fed rate cut remained steady after last week’s events. As of now, fed fund futures are pricing in “only” 91.2% chance of a -25bps cut this month to 1.75-2.00%. It’s at least not 100% and there is no pricing for -50bps cut. Fed Chair Jerome Powell acknowledge “significant risks” facing the US economy, citing trade uncertainty, global slowdown and muted inflation. Though, he added “we are not forecasting or expecting a recession. But he also admitted that “we are clearly at a time where there is a range of views”.

Dollar index staying bullish despite weak momentum

Dollar index edged higher to 99.13 last week but retreated sharply to close at 98.39. Upside momentum remains very unconvincing. Yet, there is no sign of bearish reversal yet. As long as DXY stays above 55 week EMA, we’d expect further rally to 78.6% retracement of 103.82 to 88.26 at 100.49.

Gold got not support from Dollar, might be topping

One development to note is that Gold didn’t ride on Dollar’s pull back last week. Instead, it weakened notably towards the end to close at 1506.49. The development is a clear sign of easing risk aversion. Also, gold could be topping just ahead of 161.8% projection of 1160.17 to 1346.71 from 1266.26 at 1568.08. Immediate focus is back on 1490.26 support this week. Break will indicate short term topping, at least, and bring deeper pull back through 55 day EMA (now at 1463.40).

AUD/USD’s rebound from 0.6677 resumed last week and closed strongly at 0.6849. Initial bias stays on the upside this week for 0.6910 support turned resistance, and possibly above. At this point, such rebound is seen as a corrective move, thus, upside should be limited below 0.7082 resistance to bring fall resumption. On the downside, below 0.6807 minor support will turn intraday bias back to the downside for retesting 0.6677 low.

In the bigger picture, decline from 0.8135 (2018 high) is seen as resuming the long term down trend from 1.1079 (2011 high). Next target is 0.6008 (2008 low). On the upside, break of 0.7082 resistance is needed to be the first sign of medium term bottoming. Otherwise, outlook will remain bearish even in case of strong rebound.

In the longer term picture, prior rejection by 55 month EMA maintained long term bearishness in AUD/USD. That is, down trend from 1.1079 (2011 high) is still in progress. Sustained break of 0.6826 will target 0.6008 low and then 61.8% projection of 1.1079 to 0.6826 from 0.8135 at 0.5507.

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