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  • Government shutdown

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Risk appetite returns on trade talks hope

It's been a strong start for equity markets on Wednesday, with investors buoyed by encouraging signals on Sino-US trade talks and the government shutdown.

It goes without saying that the prospect of further escalations in the trade conflict between the world's two largest economies is a major risk factor for markets. We may not have reached a point at which an agreement is imminent but the acknowledgement that they could let the deadline slide is encouraging, both in terms of it being a sign of progress and the elimination of near-term tariff risks.

It's clear that the next few rounds of tariffs were going to be the most damaging for both sides and that the best solution was to come to an agreement that removed the risk of them being imposed. The environment right now may not be as favourable for Trump to be taking big risks in order to get what he wants but he's shown himself to not be particularly conventional countless times before so it would be foolish to assume he's bluffing now. Hopefully, the latest comments are a sign that it won't come to that and a truce extension is the best realistic outcome we could have hoped for following only 90 days of talks.

One area where the President appears to have been forced to swallow some pride is on the border wall, with the previous shutdown having not gone the way he assumed. Trump is yet to sign the deal that was struck earlier this week but it would appear he's going to which will avoid another long shutdown but force him to source the majority of the funds for the wall from elsewhere. The only question now is how he'll sell this as a victory to his supporter base and where the funds for the wall will come from because I doubt Trump's going to give up this easily.

USD topples on trade reports, offering relief for gold

One casualty in the recent developments has been the US dollar which toppled yesterday as the news was coming out, ending an impressive eight session winning streak. The greenback has typically underperformed during periods of progress in the trade conflict and that's exactly what we're seeing now. It's slightly up today but I think that's just a little profit taking on yesterday's moves.

This has provided some relief for gold, which has been under pressure over the last couple of weeks as the dollar has climbed back to late 2018 levels. Still, it's shown impressive resilience and held above $1,300 in that time, a sign of confidence among gold bulls unwilling to relinquish control. This is quite a bullish signal for the yellow metal which remains range-bound between $1,300 and $1,320 for now. A break above here would draw attention to $1,340, a prior area of support and resistance.

Saudi surprise buoys oil prices

Oil is another that's had a rather good 24 hours, with a culmination of factors helping it off its recent lows. A weaker dollar and improved risk appetite are both supportive factors for WTI and Brent, but the most important factor was the report that Saudi Arabia is planning to cut output by 500,000 barrels more than it committed to at the end of last year. Clearly they're concerned about the current supply/demand dynamics, with US production at record highs and rising, global growth slowing and Russia dragging its feet on its commitments. This is certainly a bullish factor for crude in the near-term.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities.

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