Risk sentiment edges higher

5 November, 2019

Risk-on sentiment is coursing through Asian markets, amid news reports that the US is considering lifting some of the tariffs currently imposed on $112 billion worth of Chinese goods. Asian stocks are mostly higher, while the Japanese Yen weakened by some 0.1 percent towards the 109 psychological level versus the US Dollar and Gold eased around 0.2 percent to trade closer towards the $1506 mark. The Chinese Yuan is edging higher against the US Dollar, while most Asian currencies are paring Monday’s gains.

Global equities have enjoyed a double-boost of late, with the ongoing US earnings season as well as optimism surrounding US-China trade talks helping stocks climb, although it remains to be seen whether such buying momentum can be sustained. If the US does roll back existing tariffs, the positive spillover will extend beyond financial markets, as such a move would alleviate the downwards pressures on global trade conditions as well.

Global economic outlook, sustained risk sentiment contingent on US-China limited trade deal

Still, until that keenly awaited “phase one” trade agreement is signed between the world’s two largest economies, investors may continue keeping their exposure to riskier assets in check. Investors are still very much aware of the toll that heightened trade tensions have exerted on the global economy, evidenced by the steady stream of contracting manufacturing PMI readings out of the US, Europe, and Asia. In order to preserve hopes of a global economic rebound, investors must be able to at least rule out the threat of more tariffs being imposed on world trade going into 2020, although it must be noted that such a risk has subsided significantly in recent weeks.

Oil boosted by risk-on mode, aided by softer Dollar

Brent futures climbed to its highest in six weeks and is closing in on its 200-day moving average, having breached the $62.50/bbl mark for the first time since September before moderating. The softer Dollar environment, coupled with the risk-on mood, have allowed Oil prices to pare recent losses, even as Brent remains more than 12 percent lower from its year-to-date high of $71.52/bbl on April 25.

If some of the existing tariffs were to be dismantled, that should restore some measure of global demand for Oil as economic and trade conditions recover. A significant de-escalation in US-China trade tensions would lift some of the gloom surrounding Oil’s outlook, while allowing OPEC+ to back away from having to trigger deeper supply cuts.

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