US equities were stronger overnight with the S&P rising 0.4% to a fresh record.

The market sentiment was given another leg-up after Chinese and US trade officials reiterated their commitment to the Phase One trade accord signed in January. A formal review of the deal took place Monday evening US time between US and Chinese officials.

The S&P 500 is on its longest winning streak of the year with four consecutive weekly advances and notched another record high. Investors do not appear intimidated by the record-setting pace expecting markets to advance further, amid progress on Covid-19 treatments and vaccines.

The outlook for risk assets is also supported by low yields, which have made investors willing to pay more for a dollar of future earnings. And even as yield rises, they are coming from such a superficial level that the rise is having zero impact on financial conditions as stocks continue to trade higher.

US dollar consolidates

The US dollar is fractionally weaker this morning after yesterday’s “risk-on” mood extended a little unconvincingly when US consumer confidence disappointed in August, posting a reading lower than seen at any point in the pandemic so far and the lowest since May 2014.

The US dollar continues its consolidation phase, albeit one of marginal USD softness so far today.

The FX market has slipped into a holding pattern ahead of Fed Chair Powell’s speech at Jackson Hole on Thursday (09:10 EST). The clear risk for USD bears is that his speech reads like the July FOMC minutes and fails to provide much sought-after clarity on the Fed’s ongoing policy framework review.

It seems unlikely that Chair Powell would use the symposium to reveal the conclusions of the review and, instead, will most likely reiterate the bases covered in the minutes.

Euro higher on better than expected IFO reading

EURUSD is higher this morning after Germany’s IFO posted further gains in August. The headline reading rose to 92.6 from 90.4 in July (consensus 92.1), with increases in the current situation and expectations components.

After last week’s disappointing PMIs, there was likely relief that this was not mirrored in yesterday’s IFO release.

However, the biggest disappointments in the PMIs came in services, not manufacturing. Which echo a similar theme around the globe in that stimulus can stoke the manufacturing engines but cannot get people spending nor returning to regular activity to any significant degree.

Asia FX

USDCNH is trading back towards 6.90 on a slightly weaker US dollar amid positive news on US-China trade. CNH positioning remains less aggressive dollar short than in mid-July likely due to the increased US-China tensions that having impacted sentiment of late.

So, if global risk continues to trade on a favourable keel, especially on beneficial vaccine news flows, and US-China frictions remain less noisy, the CNH could benefit from more equity inflows.

Malaysian Ringgit

And I think the market remains more inclined to trade USD/Asia shorts more selectively against pairs with a stable beta to RMB. And the ringgit fits that bill.

The Malaysian ringgit benefits from the positive trifecta of improving risk sentiment on the back of favourable vaccine news flow, better US-China trade news, and higher oil prices have seen USDMYR trade below the critical 4.17 level.

Gold markets

Gold shifted lower on higher yields amid vaccine optimism, and positive news on the US-China trade front but pared losses after the dismal US consumer confidence report. Now gold investors look to Fed Powell’s Jackson Hole address for support. Which should hold the sticky demand between $1900-$1925 in force today.

Gold pared losses late in US trading, but the market still looks very fragile. Any rise in US interest rates, especially the 10-year yield, could threaten gold. Surging equities on positive vaccine news could extend amid progress in the healthcare front, which could lessen support for gold. There is a high risk that gold could break USD1,900/oz before it rallies back above USD2,000/oz.

The US dollar weakness is not having much a price effect on gold so far, partially due to the “risk-on” nature of the soft dollar sell-off as its not getting driven US market negativity.

Gold and FX traders are currently positioning for a limited upside impact from an announcement of a soft average inflation target. It has been well-telegraphed by Fed public statements.

If announced, traders would still expect the policy change to have longer-term bullish implications for the dollar’s gold and negative consequences. But it also provides asymmetrical near-term inflation risk to the view, especially when approaching the target from below.

International markets analysis and insights from Stephen Innes, Chief Global Market Strategist at AxiCorp