China Receives An Early Birthday Present

The nascent thaw in U.S. and China trade relations appears to be gathering momentum ahead of October trade talks. This morning President Trump agreed to postpone the latest round of tariff hikes until mid-October as China celebrates its 70th birthday on October 1st. The early birthday present follows China’s announcement yesterday that it will exempt some U.S. products from its tariff schedule.

The effect has been immediate with S&P futures jumping 0.50% in Asia with the Nikkei 225 and ASX 200 both leaping higher as well. It follows a robust Wall Street session as the street prices in a substantial easing and resumption of quantitative easing by the ECB this evening and further easing by the Federal Reserve and Bank of Japan next week.

Financial markets are now firmly positioned for Central Bank love globally, but I feel the newly found bullish consensus is built on fragile foundations. The initial risk, of course, is that the ECB disappoints in its scope this evening at 1930 SGT. ECB President Draghi will have to win over several hawks on the ECB Board which is by no means guaranteed.

Just as the presidential tweet on tariffs this morning has injected more momentum into stocks and most likely emerging-market assets, what one hand gives, the other can take away. We are only one social media posting away from a thoroughly unpredictable President turning sentiment on its head. The U.S. President doesn’t drink, and for that, we can probably all be grateful.

I note that gold is stubbornly refusing to roll over and collapse even as global sentiment seemingly improves, continuing to hover around the $1500.00 an ounce region. It implies that there is still plenty of demand for the safe-haven asset on this dip in prices which contrasts with the bullish euphoria elsewhere.

Japan machinery orders fell by 6.60% this morning from a month earlier versus an expected drop of 9.90%. It screams volumes about how financial markets are fitting reality to the story, that such a huge drop is being painted positively. The reasoning being the drop was less worse than expected and is thus good news. Running with herd may give the impression of safety; but if you all run off a cliff, you’ve all run off a cliff. Just because you all run off it together doesn’t make the outcome less harmful.

Moving on from lemmings, the Malaysian Central Bank announces its rate decision at 1500 SGT. At this stage, I expect the central bank to hold at 3% despite deteriorating data despite some forecasting further easing. A rate cut will have a negligible effect as the deterioration is driven by external factors — namely the U.S.-China trade war. I expect the central bank to keep its powder dry for a rainy day and await direction from the global heavyweights over the next week.

Equities

Even before the presidential tweet boosted markets in Asia this morning, the region was poised for a positive start after a robust Wall Street session. China’s tariff exemption of some U.S. goods yesterday spurred on the apparently benign risk environment, propelling the S&P 500 higher by 0.75%, the Nasdaq 1.05% and the Dow Jones by 0.85%.

The S&P 500 e-mini futures, Nikkei and ASX, are all higher by over 0.50% this morning with the Shanghai Composite rising 0.30% and the China CSI 300 rising 0.35%. That positive sentiment should continue across the region today as markets anticipate a large scale easing package from the ECB this evening at 1930 SGT.

Currencies

The Euro fell to 1.0985 overnight before recovering back above 1.1000 to close 0.30% lower at 1.1010. The anticipated ECB easing weighed on the single currency with stop-losses and options knock-outs being triggered at 1.1000. The Euro will remain heavy into the rate decision, but any disappointment from the ECB could set up a potentially damaging short-squeeze.

USD/JPY continued to climb, backed by rising U.S. treasury yields and the unwinding of Yen safe-haven positioning. The dollar index rose 0.30% to a five day high of 98.626.

Regional currencies could buck the strong dollar trend today as investor sentiment turns sharply bullish, spurring inflows into Asia.

Oil

Another fall in official U.S. crude inventory data could not save oil overnight, with Brent crude collapsing 2.15% to $61.00 a barrel and WTI plummeting 2.50% to $56.00 a barrel. The removal of national security advisor John Bolton yesterday has oil markets speculating a rapprochement between the U.S. and Iran is on the horizon. The possible return of millions of barrels of Iranian crude to the international market quickly overcame the benefits of a possible further thawing in U.S.- China relations.

The postponement of the next round of China tariffs by President Trump this morning though has the global growth story back in full swing. Brent and WTI have both risen by 0.70% today. From here, further rallies in Asia look limited today ahead of today’s ECB rate decision.

Gold

Gold rose 0.80% to $1498.00 an ounce overnight, defying a stronger dollar, an improved risk environment and higher U.S. and German bond yields. The fact that gold stubbornly clings to its $1480.00 to $1500.00 range in the face of ordinarily negative external factors should be a significant warning against further irrational exuberance elsewhere. Gold has refused to go quietly during the recent risk-seeking rallies and appears to be doing the same again now.

It is perhaps telling us, that short-term euphoria aside, we need to see more concrete evidence of improved U.S.- China relations. With a probable wave of central bank easing’s upcoming in the next week, speculating on gold’s demise is premature.

Gold has technical support at $1480.00 and $1450.00 an ounce. Short-term resistance is at $1500.00 an ounce followed by $1530.00.