Rebound in equities, caution in FX after G7 summit

Summary:

• US equities finished the first trading day this week clearly higher following a slew of misleading comments from both China and the US on trade wars
• More caution in the FX market with capital flowing into the Japanese yen
• Giuseppe Conte likely to remain at the helm of a new ruling alliance

Optimism across equities

Monday was full of ups and downs as far as risk sentiment is concerned due to a lot of misleading comments from both Beijing and Washington regarding the ongoing trade spat between the world’s two largest economies. Either way, equity investors could be cheerful looking at yesterday’s close on Wall Street where major indices finished broadly higher - NASDAQ added 1.3%, SP500 rose 1.1% and Dow Jones increased 1.05%. Improved sentiment has also been seen in Asian markets with the Shanghai Composite leading the gains this morning and climbing as much as 1.5%. Optimism could have been sparked, to some extent, by a Trump’s softer stance toward China. During a press conference concluding the G7 summit Donald Trump focused on a “conciliatory message” sent reportedly by Chinese Vice Premier Liu He. Let us also remind that Lie He said on Monday that he was “willing to solve the problem through consultation and cooperation with a calm attitude,” as Chinese media reported. However, things do not seem to be closer to be sorted out when it comes to the trade dispute, and with Donald Trump you never know what he could do next. This poses a material downside risk to global economic growth in the medium-term. Nevertheless, for equity investors the softer stance toward China has been good enough to pour money into risky assets again. Anyway, we doubt yesterday’s pick-up could be more than a dead cat bounce given strained trade environment.

The CHNComp is struggling to stay above its crucial support above 9960 points this morning. Source: xStation5

FX traders remain cautious

Although we saw a nice rebound in US equities on Monday (positive sentiment has also been shared among Asian investors), the same cannot be said about FX traders which have struck a more cautious tone. As a consequence, the Japanese yen is leading the gains this morning being up 0.4% against the greenback, while the New Zealand dollar is falling 0.35% at the same time. Looking broader, one may notice that the yen is the sole major currency which has made a notable gain against the US dollar so far today (other currencies like GBP, CAD and CHF are also trading higher but these gains look minor). Taking into account that we got no comments concerning the Japanese economy overnight. The increase in JPY could be viewed as rising demand for haven assets, a clear sign that not everything is right following the G7 summit. 

Yesterday’s pick-up in JPY ran out of steam at around the 23.6% retracement of the latest downward move. Source: xStation5

In the other news:

• Italy’s Five Star Movement and the Democratic Party are reportedly close to an agreement which would give Giuseppe Conte a possibility to remain Prime Minister in a new alliance

• Chinese industrial profits bounced 2.6% YoY in July after falling 3.1% YoY in the previous month