The markets are idling ahead of the US-China trade talks. While President Trump’s executive orders have lessened the “cliff-edge ” premium, it has not as yet parted the clouds of uncertainly hanging over potential additions to the stimulus package.
US equities were stronger, and oil markets were higher on Monday as investor sentiment improved as the White House gave financial help to households.
And while the “cliff-edge scenario” premium has significantly been reduced so far, that unilateral action has not prompted congressional Republicans and Democrats to return to the negotiating table. Still, it seems like Treasury Secretary Steven Mnuchin said there are areas for compromise which should be favourable for risk.
The markets seem to be idling before taking its next leap of faith with investors busily reassessing the already hard poached tensions between the US and China ahead of this week’s trade talks.
And there remains a palatable level of ambiguity about what President Trump’s executive orders over the weekend mean. Indeed, it certainly has not parted the clouds of uncertainly hanging over potential additions to the stimulus agreement just yet.
But hope remains eternal, President Trump’s announcement will provide impetus to negotiations with the Democrats that have stalled lately.
Given the number of “what if “scenarios likely clouding judgment, I expect the equity market skew to be more defensive in Asia compounded by the region’s gnarly predisposition to the trade talk risk.
Oil is holding up in pre-Asia trade on signs that the US may move forward with another economic stimulus deal that could bolster consumption. And as the growth in new coronavirus cases in the US begins to ease but with Covid-19 resurgent winter risk around the corner, I do not suspect traders want to load up too many eggs in that basket yet.
Currency Markets: The Euro
The EURUSD continues to consolidate lower, and just like when you put two violin experts in a room and attempt to appraise a 17th-century fiddle, you get five different answers.
That seems to be the case right now as market participants are reaching for reasons why the consensus short US dollar trade has suddenly turned astray.
With the FX markets tending to follow, not lead, the fading momentum in the EURUSD rally may reflect a growing focus on the path of COVID-19 in Europe.
Although the new case count remains far below the pace seen during the pandemic’s peak, many countries have seen a pick-up as their economies reopened. The headlines remain challenging. Germany’s latest data shows the most significant daily increase in new cases since May.
The Malaysian Ringgit has been predictably backpedalling ahead of this week’s US-China trade talks. The MYR has given ground to the US dollar after last Friday’s better than expected US employment report which has seen US dollar demand pick up across the board. Still, more negative for local bond inflows is that US yields have shifted slightly higher.
Gold remains supported
Gold remains supported by the geopolitical risk and potentially more US fiscal package delays. The next leg higher could prove more challenging with the US dollar showing signs of returning to form, and as US bonds yields move higher on better than expected US economic data.
US yields are admittedly low, and this is supportive, but the yield on the 10-year has inched up in the last couple of days, and the USD is slightly higher.
That is not to say gold can not move higher if nominal yields flatline or move marginally higher from current levels; it just means the load falls on other factors to enhance gold from a bullish perspective.
To get the gold smelters working in overtime and add jet fuel to the rally, the Fed will need to do to the heavy lifting vie inflation targeting, or macro scrim will need to see inflation breakeven normalize higher via higher oil prices.
Gold loves uncertainty, and there is plenty of that to go around while the yellow metal remains unquestionably supported by monetary accommodation, geopolitical risks, and the US fiscal standoff.
But we’ve to hit some of the most bullish year-end targets already suggesting profit-taking could remain a course of action the longer it takes gold to launch higher.
International markets analysis and insights from Stephen Innes, Chief Global Market Strategist at AxiCorp