Asia Market update : Phase one investor response

Phase one response

Phase one of the trade war pause was greeted most favourably by Asian investors as at this stage; frankly, it's hard to argue that things are not moving in the right direction.

While the increased purchase of US agricultural products, China IP protection, and opening more areas of Chinas financial services industry are not new.

But the news of a "Yuan accord " is significant as it will neutralise and de weaponise the Yuan as a tariff offset. And as such, traders continue to pile into the Yuan, taking it down to 7.05 level reflecting their views on phase one optimism around the trade war detente.

Nothing like a weaker US dollar to awaken those bullish animal spirits in ASEAN investors.

Moving forward

If there are no more tariff hikes, in theory, China GDP growth could stabilise; albeit probably closer to 5.8 -.9%, and buttress global growth sentiment and if we get complete removal of all existing tariffs that will go a long way to repairing the trade war damage done.

Optimism is building in markets, but as we move through to phase 2 and 3 of the deal, the risk monitor is far from clear. Hence the reason why investors remain cautious.

 While improving sentiment from   US-China trade should continue to filter into risk assets, but the key for the critical global growth narrative is if multinational business involvement via the survey data picks up which could provide a significant tailwind for the investment sentiment.

Gold markets

Gold traders are looking for support in the macro scrim as the market toggles "risk-on" in the wake of phase one trade war detente. Precisely, the weaker run of global economic data, supported by this morning's China trade data which provided further evidence of a softening Chinese economy. But when combined with the downcast financial data out of Europe and the US, it continues to suggest that central banks will keep interest rate policy lower for longer. The prospect of lower interest rates has been golds primary driver throughout 2019

Gold market headwinds

But over the near term, gold could face significant fundamental headwinds in the form of higher US yields and improved equity market risk sentiment especially as we move through to phase 2 and 3 of the US-China trade deal. And if a comprehensive trade deal is inked in November, then the heft long gold positions could be prone to a significant correction lower.

FX Traders who are caught offside are looking for the opportunity to pare back currency risk aversion trades, as such gold investors need to respect the underlying movement on the Yuan and Yen.  USDCNH 7.0 and USDJPY 109.00 are a hugely critical "risk-on" sentiment levels, and frankly, I wouldn't want to own a significant position in gold if either of those levels breaches.