Demand for risky assets has risen

3 December, 2018

The U.S. and China have declared a truce in the trade war, and have agreed not to introduce new tariffs, and try to reach to an agreement in the next 90 days. As a result, the U.S. dollar has been languishing at lower levels while the stock markets have been rapidly climbing upwards.

Shanghai’s stock exchange, blue chip index, China A50, has risen by more than 3% so far while Hong Kong’s Heng Seng has increased by 2.7%. Meanwhile, futures for the American S&P 500 have climbed by 2.5%, marking a 6.8% growth over the last 10 days.

The dollar retreated to its monthly lows against the Chinese yuan, decreasing by 0.7% since the start of the day. Crude oil, has increased by more than 5%, thus rising to $62 and $53.4 per barrel for Brent and WTI respectively.

In addition, oil price surged due to the expectation of a decline in production in 2019 following the meeting of OPEC and other major exporters scheduled for this week.

It seems that investors preferred to focus on the positive signals and in particular, on the fact that there will be no new tariffs in the next three months. Meanwhile, the pressure arising from the fears of growth slowdown in the light of trade tariffs had pushed the shares of the Chinese companies down in the preceding months. As a result, the China A50 index had reached a lower level of trading range for the last 5 months, below 11,000. In the case of the development of positive dynamics, China A50 index, which is now at 11,250, may not meet substantial resistance up to 11,800.

S&P 500 will have to pass an important test earlier. During the knee-jerk reaction on Monday, the index climbed above the 200-and 50-day moving averages, which according to technical analysis, is a strong signal to buy. At the moment, futures are situated around 2810, at which point the index retreated to a decline in October and November. Thus, its ability to climb above that point will reflect the positive attitude of market participants and as a result, it may rapidly return to the October’s highs.

The dollar will have to pass an equally important test. The dollar index fell by 0.5% this morning, testing the support area for its uptrend. The demand for risky assets has been growing and the main reasons were the expectations of a breakthrough in trade negotiations as well as the softening of the Fed’s tone. All these factors may break the U.S dollar’s upward trend.

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