Financial market research and analysis

Equity markets extend gains, regardless of the US President Donald Trump’s threats to raise tariffs again on Chinese goods, if the Chinese President Xi refrains from meeting him at the G20 summit. Visibly, investors prefer turning their head away from the US – China’s trade war story for a while and concentrate on the dovish shift in global monetary policies.

Hence, the prospect for cheaper market liquidity is clearly what explains the positive investor sentiment across the globe, as more central bankers join the doves’ party.

As a quick recap, the Reserve Bank of New Zealand (RBNZ) was the first central bank among G10 to lower its rates in May, the Reserve Bank of Australia (RBA) followed with 25 basis point cut last week. The Federal Reserve (Fed) President Jerome Powell hinted that the Fed could also pull the trigger at the coming meetings, pushing the probability of a July cut to 80% and the European Central Bank (ECB) President Mario Draghi delayed the possibility for a first European rate hike to mid-2020, from spring 2020 as discussed previously.

Finally, the Bank of Japan (BoJ) President Kuroda said that the bank has tools to add more stimulus if needed, and given the global easing trend, the need will likely be felt sooner rather than later. Data showed that the Japanese M2 and M3 money stock increased more than expected in May. The Japanese yen has been the biggest loser against the greenback among the G10 currencies since Monday.

Gold slipped below $1330, as capital poured into riskier assets.


Chinese stocks outperform

The S&P500 (+0.47%), the Dow (+0.30%) and the Nasdaq (+1.05%) closed the Monday’s session in the green.

Australia’s ASX 200 gained 1.44% in Sydney, as Vocus Group jumped more than 8% after AGL Energy Ltd. bid AUD3 billion ($2.1 billion) in pursuit of interesting synergies by combining energy and data services. The AUDUSD remained capped below the 0.70 mark as NAB business conditions index fell 2 points to 1 in May. Though the business confidence index surged from 0 to 7.

The Nikkei (+0.31%) and Topix (+0.44%) edged higher on the back of a dovish BoJ and a softer yen.

Shanghai’s Composite (+1.87%) outperformed in the morning session, as Beijing promised to boost funding to support the major projects through the actual challenging times. The surprise rise in Chinese exports has also been a relief for traders in the middle of a tense conflict between China and the US. The yuan depreciation has perhaps done the trick in balancing the deterioration in Chinese price competitivity abroad. According to President Trump, the Chinese government would also subsidize exporters to temper the shock due to tariffs. All in all, the offshore yuan trades just shy of the 7 mark against the US dollar (at 6.93), the cheapest levels year-to-date, with solid psychological resistance seen at this level.


FTSE to challenge 7400p

In the UK, the FTSE closed 0.59% higher on Monday despite the disappointing production and growth data. The UK recorded its biggest GDP decline (-0.4%) since March 2016, as the industrial (-2.7% m-o-m versus -1.0% expected) and manufacturing production (-3.9% m-o-m versus -1.4% expected) contracted faster than expected in April. Yet the cheaper pound has visibly been a powerful boost for stock investors in the UK, as Cable slipped below the 1.27 mark following the soft economic data released on Monday.

The UK will release the April job figures on Tuesday. The average weekly earnings may have declined from 3.2% to 3.0% (3m/y-o-y).

The pound will likely remain under a decent selling pressure in the coming weeks, as the political uncertainties loom following Theresa May’s forced exit. Ten Conservative leaders officially launched campaigns to become the UK’s next Prime Minister, among them, Boris Johnson is perhaps one of the most controversial candidates.

The FTSE 100 is preparing to challenge the 7400p level on the back of a cheap pound, but the UK’s ambiguous political scene could be a turn-off for many investors, as there are many interesting opportunities to seize across the board.