Financial market research and analysis

Escalating tensions between the US and China painted the equity markets in red, as investors finally surrendered to the idea that the US-China talks may not lead to a deal at this week’s high-level negotiations.


What’s new in the US-China trade saga?

US imposed travel bans to Chinese officials, after having blacklisted eight Chinese tech companies pointing at the violation of human rights in the Xinjiang region of Northwest China. Uncomfortable with the US sticking its nose into its internal affairs, China said it will retaliate in an official announcement.

Tensions around Hong Kong protests and the NBA ban in China added more fuel to the fire.

All in all, China’s agreement to buy US farm products, which has revived hopes of a potential deal a couple of weeks earlier, may not suffice to break the impasse in trade negotiations.

In contrary, it looks like this week’s negotiations will be held in quite a tense atmosphere. The trade war between the US and China is taking a perilous political turn. If it comes down to an ideology clash, then the world should prepare for further disruptions in global trade.

According to South China Morning Post, a news provider banned in China, Chinese officials could even cut their visit in Washington short by a day if they see no light at the end of the tunnel. The direct consequence of this would be higher tariffs on additional Chinese imports by next week, a further deterioration in the US-China trade war and a decent reaction sell-off in global stocks.


Equities down, gold up

US equities traded lower on Tuesday. The S&P500 (-1.56%), the Dow Jones (-1.19%) and Nasdaq (-1.67%) closed in the red.

Shanghai’s Composite erased 0.61%, as Hang Seng index fell 0.68% in Asia.

Nikkei (-0.67%) and Topix (-0.50%) erased Tuesday’s gains despite a softer yen thanks to a broadly stronger US dollar.

Australia’s ASX 200 slid 0.76%. Energy stocks (-1.82%) led losses in Sydney as oil slipped on rising fears of a further slowdown in global demand amid heightened political tensions between the US and China hinted at more trade disruptions ahead.

FTSE futures (+0.04%) tested the 7100p support. British blue chips are set for a positive start in London. The overall direction will reflect a balance between a gloomy market sentiment and a cheaper pound – which could make the British stocks look attractive even with a morose risk appetite.

Gold climbed above the $1500 handle, though gains above this level have recently proved to be vulnerable to the slightest windfall in the markets.


Fed Powell says no QE, USD gains

The Federal Reserve (Fed) President Jerome Powell said at a speech yesterday that the Fed would continue buying treasury bills to avoid another liquidity crunch in the US money markets, but policymakers will refrain from a broader expansion of the Fed’s balance sheet, as opposed with a Quantitative Easing (QE) program.

The US dollar gained, sending the EURUSD tumbling to 1.0941. The USDJPY recovered past the 107.00 mark.

But to blow off steam, the Fed Chair left the door open for a further action on interest rates and Chicago Fed’s Evans said he ‘wouldn’t mind another cut’ in a separate discourse.

Henceforth, a third consecutive rate cut is likely around the corner at the FOMC’s October meeting. The activity in the US treasury markets suggest 81% chance for a 25-basis-point cut by the end of this month. Though, lower interest rates may not outshine the US dollar, as the dovish central bank expectations elsewhere should keep the USD-bears contained.


Pound is perhaps treading near the bottom, as hopes of a Brexit deal fly to pieces

The pound tanked to 1.2195 against the US dollar, after Boris Johnson accused Angela Merkel of making a deal ‘essentially impossible’. Not that investors have ever bet on a Brexit deal before the October 31st deadline, but the likelihood of a consensual divorce within the next two weeks is now down to nil, unless a miracle happens by then. This is not a surprise to any down-to-earth investor and the pound’s actual valuation fully reflects a no-deal scenario before the October 31st deadline, with a sprinkle of an unplanned Brexit menace if Boris Johnson found a way to bypass a law prohibiting him to take the country out of the EU without a deal in hand.

Hence, there is a tiny risk of a no-deal Brexit lingering, which, if materialized, would trigger a sizeable sell-off in sterling, but a relief rebound seems more plausible in the short term, if an untimely Brexit could be avoided. In other words, the pound is certainly close to a short-term bottom near the 1.2000 mark versus the greenback and the extension of the Brexit deadline will likely encourage a short-term recovery targeting the 1.25 handle.