By Deepta Bolaky
Many dubbed this week as the “busiest week” of the year with important central bank meetings and trade talks in Shanghai. The week took an unexpected twist with tweets from President Trump.
It was the first time since the G20 meeting that both countries met to resume talks. There were not many expectations of a trade deal, but investors remain hopeful as long as there is some dialogue between the two countries.
Even though there are little chances of a trade deal anytime soon, the markets are expecting the talks to de-escalate trade tensions. However, the face-to-face trade talks in Shanghai brought little relief to the markets.
The statements from Beijing and Washington have been conflicting. China’s Commerce Ministry said in a statement on Wednesday evening that the two sides conducted a:
“candid, efficient, constructive and in-depth exchange on major issues of common concern in the economic and trade field.”
The US did not make an immediate statement on Wednesday, but President Trump renewed attacks on China during the negotiations days claiming China is not holding the end of the bargain with the buying of more agricultural products.
Markets have gotten a glimpse of the progress of the trade negotiations during the trade talks itself. President Trump’s tweets put investors on edge earlier this week. Along with blaming China for not committing to their promises, the President also mentioned that if China is waiting for the 2020 election to get a chance to renegotiate with the Democrats, if and when he wins, they will get a much tougher deal.
The markets turned risk-off on Thursday when the US President announced the new tariffs of 10% on the remaining 300bn dollar of goods and products coming from China as from the 1st of September 2019.
The President mentioned that there were “constructive talks”, and look forward to continuing a “positive dialogue with China on a comprehensive trade deal”, but reiterates the lack of commitment in buying the US agricultural products.
The Federal Reserve (Fed)
Among the central bank meetings this week, the Federal Reserve was the highlight of the week. The US Federal Reserve cut interest rates overnight by 25 basis points, taking the US Federal Funds rate to 2.25%. It was the first quarter-point interest rate cut in a decade long of economic expansion which was widely expected.
However, the Fed failed to meet markets’ expectations as the rate cut was mostly seen as a hawkish one. In the press conference, Chair Powell said that the central bank’s rate cut was a “mid-cycle adjustment to policy” rather than “the beginning of a long series of rate cuts.”
As the world’s central banks are in a race to cut interest rate to stimulate their economies, investors wanted to see if the Fed lead the global push towards easing policies. The Fed put cold water on investors’ expectations.
Bank of England (BoE)
The Bank of England was also in the spotlight as the chances of a hard Brexit increased exponentially, and the Pound fell to a 30-month low. The BoE left the interest rate unchanged at 0.75% on Thursday and did not provide much indication of lowering interest rates as other major central banks did.
The central bank was more concerned on the entrenched Brexit uncertainties and its effect on demand, supply and the exchange rate.
“The monetary policy response to Brexit, whatever form it takes, will not be automatic and could be in either direction. In all circumstances, the Committee will set monetary policy appropriately to achieve the 2% inflation target.”
Trade tariffs and the Federal Reserve mostly drove the price action in the markets. We saw the stock markets moving firmly to the downside after the presser of Chair Powell. Any rebound in global stocks was short-lived due to the tariffs news. Towards the end of the week, risk sentiment soured again weighing on the global stock market.
Wall Street retreated from last week record highs.
In the local share market, after briefly hitting an all-time high earlier this week, the ASX200 is back in the red. As of writing on Friday, the equity benchmark already lost 40 points to 6,749 within one hour of trading.
Before the trade tariffs hit the markets on Thursday, the US dollar was gaining strength against major currencies on a less-dovish Fed. The US Dollar Index traded at a new 2019 high at 98.82.
The threat of tariffs caused the greenback to ease back, but major currencies were still in the red for the week.
Source: Bloomberg Terminal
The Japanese Yen and the Swiss Franc were the only two currencies among the G10 to trade higher on the back of safe-haven flows.
The Australian dollar broke key support levels this week despite upbeat CPI and Manufacturing data. The Fed and trade tariffs were the same catalysts that affect the local currency. AUDUSD is trading at 7-month low and is moving towards levels seen during the flash crash at the start of the year.
AUDUSD (Daily Chart)
Source: GO MT4
The Pound has a tough week dragged by prospects of a hard Brexit, the Fed and trade woes. The GBPUSD fell to 30- month low a 1.2123.
GBPUSD (Daily Chart)
Source: GO MT4
The safe-haven metal made modest gains at the start of the week but fell heavily following the Fed’s comments. However, new trade tariffs combined with the launch of a new North Korean projectile prompted a rally in gold prices.
As of writing, XAUUSD was trading in the $1,433 mark.
Source: Bloomberg Terminal
The Fed and trade tariffs roiled oil prices. WTI and Brent Crude plummeted to $55.09 and $61.92.
UKOUSD and USOUSD (Daily Chart)
Source: GO MT4
|Monday, 05 August 2019|
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