Financial market research and analysis

Escalating trade war is all the US got from imposing a 10% tariff on additional $300 billion worth of Chinese imports, from calling China a currency manipulator and most recently from holding off on giving licenses to companies wishing to do business with Chinese telecommunications giant Huawei.

China said that it won’t buy the US farm products in return.

Now it is up to the Federal Reserve (Fed) to clean up the mess.

The US dollar weakened against all G10 currencies in Asia on Friday. The US 10-year yield remained below 1.70% as the probability of a 50-basis-point Fed rate cut in September stood at 35%.

Due today, the US factory-gate prices may show a 0.2% m-o-m increase in July from 0.1% printed a month earlier. But the data will certainly do little to change the Fed doves’ minds regarding their clear demand of another rate cut as early as in September.

Equities in Japan traded marginally higher on Friday, as investors preferred leaving the trade tensions aside and follow up on the strong US session gains.

Chinese and Australian equities lagged on prospects of more protests in Hong Kong during the weekend, while the US equity futures were offered on the back of news that the US government decided to hold off on its decision to let companies do business with Huawei. Nasdaq futures (-0.75%) led losses due to US tech companies’ higher sensitivity to unpleasant Huawei news.

Gold consolidated above $1500 an ounce, as the rising two-sided volatility in equities and the increasingly unpredictable trading environment encouraged investors to find refuge in the precious metal. Meanwhile, all-time low sovereign yields should continue giving a solid support to the yellow metal.

WTI crude stabilized above the $52 a barrel and energy stocks gained 0.85% in Sydney.

FTSE futures (-0.06%) hint at a softer start in London, after the British blue chips closed 1.21% higher on Thursday. Fresnillo extended gains to 686p per share in the sixth straight positive session. Sustained demand in gold could encourage a further rise in goldminers’ shares. Fresnillo could surf on the actual positive momentum and step in the bullish consolidation zone clearing the critical 705p level, the major 38.2% Fibonacci retracement on July – August drawback.

The FTSE is expected to open 24 points lower at 7261p ahead of the UK’s second quarter GDP data release. The British gross domestic product may have stalled in the second quarter, versus a 0.5% advance a quarter earlier. The yearly GDP growth may have slowed to 1.4% from 1.8% printed previously. A slowing growth in the UK would be no surprise to investors, nor to the Bank of England which has revised its 2019/2020 growth forecasts significantly lower at its latest meeting due to increased no-deal Brexit risks.

But a big miss in Britain’s GDP data could trigger fresh headwinds in the pound and bring the possibility of a decline toward the 1.20 level against the US dollar back in perspective.

For now, the pound holds ground above the 1.21 mark against the US dollar, as the euro-pound bounced lower from a fresh two-year high (0.92655) on rising political uncertainties in Italy after Deputy Prime Minister Matteo Salvini called for an early election hoping to gain enough field to govern the country on its own. Italy’s 10-year yield jumped past the 1.50% on rising risks of larger debt-to-GDP ratio if Salvini took the reins of the country. But Prime Minister Conte said that Salvini has no decision power on when to hold a confidence vote in the Parliament.

Italy’s political tensions translate into widening yield spread between German and Italian bonds, adding some downside pressure on the single currency, along with rapid rise in dovish expectations that the European Central Bank (ECB) could opt for a stronger rate cut in its September policy meeting. The probability of 20-basis-point cut in ECB’s deposit facility rate rose to 27%, from 12% a day earlier.

The EURUSD eased to 1.1180, but today’s call option expiries above 1.1050 should give some support to the single currency versus the brittle US dollar.