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Risky assets gain momentum as US-China trade tensions set to ease

7:00 AM January 9, 2019

Summary:

  • Commodity-related currencies lead the gains in early European trading on Wednesday

  • Trump unlikely to announce a state of emergency in order to get funds to build a wall

  • Asian stocks surge, China could extend its fiscal deficit target

Risk-on switches on

Beginning with the FX market one may notice that commodity-related currencies have had the excellent start to Wednesday’s European trading as both NZD and CAD are leading the gains in the G10 basket. The former is rising 0.45% while the latter is climbing 0.3%. Other currencies whose valuation depends on various commodity prices are also up this morning - NOK is moving up 0.3% and AUD is adding 0.15%. Only the Japanese yen and the greenback are down on a daily basis, these losses have been modest though. The Swiss franc is trading flat. All of that signals an increased demand for riskier assets which could be tied to ongoing trade negotiations between the US and China. Let us remind that these talks were extended into Wednesday whereas the latest news suggest that US delegates are expected to return to the US Wednesday evening. While no official announcement has been released so far, some reports are doing the rounds. First of all, US President Donald Trump is unlikely to declare an emergency at the Southern Border, according to the Wall Street Journal. This idea was announced by Trump last Friday, however, some pundits suggested that even if Trump declared a state of emergency, it would not automatically release funds to build a wall without the House approval. On top of that, Donald Trump is reportedly getting more eager to strike a deal with China in order to boost stocks that have slumped on concerns over the trade battle, according to Bloomberg citing people familiar with internal White House deliberations. This seems to be coincide with a series of Trump’s tweets suggesting that talks with China are going very well.

After heightened volatility seen over the past few days, the NZDUSD is gradually approaching its crucial resistance nearby 0.6780. This level is underpinned by the 50% retracement of the latest slide therefore could prove to be a hard nut to crack for bulls. Source: xStation5

Asian stocks climb

Increased risk appetite is also seen in Asian stock markets where the Hang Seng (CHNComp) is rising as much as 2.4% at the time of writing. Other indices are climbing as well, the Shanghai Composite is going up 1.4% while stock markets in Australia and Japan finished the day with a gain of 1% and 1.1% respectively. During Asian trading hours we were offered quite an interesting report from the China’s finance ministry suggesting that it will propose a higher annual fiscal deficit compared to this seen in 2018. The deficit for 2019 is expected to be 2.8% of GDP after having a deficit of 2.6% of GDP last year. This appears to be in accordance with an array of steps taken by Beijing aimed at reviving stuttering economic growth. Last week the Chinese central bank decided to cut the reserve requirement ratio ahead of the Chinese New Year proceedings when liquidity is often thinner. In turn, in 2018 Beijing announced a raft of measured including infrastructure projects. Moreover, officials have pledged to more aggressive tax reductions in 2019, and if implemented it would lift the annual budget deficit closer to 3% mirroring a fiscal boost.

The China’s Hang Seng has bounced off its rock-bottom support around 10000 points and it could begin heading toward 11000 points or so. Note that a consolidation between these levels were present basically by the entire second half of 2018 and nothing signals the price could leave this range in the nearest future. Source: xStation5

In the other news:

  • Japan’s labour cash earnings increased 2% YoY in November smashing the consensus of a 1.2% YoY rise, real cash earnings jumped 1.1% YoY which was also above the median estimate of a 0.4% uptick

  • Australian building approvals for November plunged -9.1% MoM falling short of the median estimate of a 0.3% MoM decrease

  • World Bank slightly cut its global growth outlook seeing a 2.9% rate of growth this year, down from 3% in 2018 and a slight revision of 0.1 percentage point compared to its forecast from June 2018

  • Oil prices rise roughly 1.2%, gold trades 0.2% down, the US 10Y yield moves back subtly to trade at 2.715%

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