Global financial markets have calmed overnight after President Trumps tweets had created a huge jump in volatility and concerns over global growth earlier in the day. Risk still remains firmly to the downside with the latest update on the trade negotiations being that a depleted Chinese delegation will still go to Washington this week despite further comments from the US side that they intend to raise tariffs on Friday. Stock markets remained under pressure for most of the day although US indices did rally later in the session on that news that talks will still continue, the Dow closing down just 0.25% with the S&P negative 0.45% and the Nasdaq 0.5% in the red. In the currency space, haven trades remained bid with Jpy strong against the greenback and on the crosses and the Yuan is trading much lower although like the stock market the initial moves have receded somewhat.
Investors will continue to monitor the trade situation closely over the next few days and will continue to hope that the fairly dramatic change of stance that we’ve seen from the US side is a tactic in the negotiation process rather than a fait accompli. Any updates that indicate that this week’s trip to Washington by the Chinese team is a wasted effort will not be received well by the market and could lead to some significant repricing across asset classes. Implementation of the increased tariff levels on Friday could be a final nail in the coffin for these trade talks as well as the equity bull run which we’ve seen since the beginning of the year.
It looks like being a busy day for traders in the Asian markets today as they deal with any fresh updates on the Sino – US trade situation, the return of Japanese markets after over a week on holiday and the first live RBA meeting for nearly two and a half years. The Aussie will remain in focus for the majority of the session, not only is it a major risk proxy for China and global growth but we have Retail Sales data out this morning followed by the RBA rate announcement. The market is pricing in the chance of a rate cut slightly more than them holding firm and investors are keenly debated whether the events of the last 48 hours have swayed the banks hand in favour of a cut. A combination of a cut from the central bank and further escalation in the trade situation could see the currency tumble to the early year flash crash levels in short order. However a cut now does represent a very sharp turn in policy from a central bank not renowned for such moves and with a general election looming they may choose to keep their powder dry at least for another month.
Looking at the rest of the days trading and any updates on the trade negotiations between China and the US is set to dominate market direction. After the RBA there is little of note out in the Asian session and only second and third tier releases due out in the European time zone. Ivey PMI numbers out of Canada will turn some attention north of the border at the start of the New York day but expect traders to remain closely monitoring their screens for news updates as the day progresses.