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.
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”