Markets portray semblance of calm

7 August, 2019

Following the selloff at the onset of the week, US equities rebounded while Asian equities saw a mixed start to the day. The Dollar index (DXY) couldn’t hang on to its recent two-year high around the 99 level, and the steep unwinding in DXY has prompted gains in most G10 and Asian currencies.

The PBOC’s daily reference rate on Wednesday, while just a hair below the psychologically-important 7 level, signals further attempts to stabilise the CNY and assure investors that weakness in the onshore Yuan is mitigated.

Has the US-China conflict reached a point of no return?

Risk appetite is expected to remain soft amid intensifying concerns over the global economic landscape that has already been weighed down by the protracted US-China trade impasse. Despite the next round of US-China trade talks slated for next month, the looming additional US tariffs on Chinese goods set for September 1, coupled with China’s pledged “necessary countermeasures”, have only caused investors’ shoulders to slump further. Market participants are growing increasingly fretful that the prospects of a US-China compromise are at risk of being snuffed out completely.

With tensions between the world’s two largest economies now officially extending beyond trade and tech into the currency arena, the bar has been significantly raised on the likelihood of a near-term trade deal. Investors will remain vigilant over any potential headlines pertaining to the US-China conflict, even as markets are still licking their wounds from the recent unexpected developments that only point to an intensifying deadlock between the economic giants.

Such concerns only serve to ensure that safe haven assets remain in vogue, with Gold having breached the psychologically-important $1480 level, while yields on 10-year US Treasuries have now dipped below 1.69 percent.

Dollar could see bouts of volatility in lead up to September FOMC meeting

Markets have been given a reinvigorated sense that the Federal Reserve will be forced to belie its less-than-dovish stance, given the growing economic headwinds stemming from the intensifying US-China tensions. The Fed Funds futures at present still point to three more Fed rate cuts in 2019, despite Fed officials insisting that policymakers are not embarking on a prolonged easing cycle.

With the ramp up in underlying demand for safe haven assets such as US Treasuries, that should create a relatively supportive environment for the Greenback. Still, the Dollar’s performance this month is expected to be heavily swayed by shifting market expectations over the Fed’s policy path, which could spark further bouts of volatility in DXY over the near term.

Brent dips into bear market

Concerns over the escalating US-China conflict have dragged Brent futures into a bear market, which is now trading around the $59/bbl mark at the time of writing. Any further deterioration in global economic conditions, dragged down by more trade barriers imposed either by the US or China, could cripple global demand for Oil. That is likely to fuel Oil’s bias for weakness, despite the best efforts by OPEC+ producers to put a floor underneath crude prices.

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