Tension is still floating in the air and we saw some take-profit flows last week (which might last until mid of this week) – it’s just a sentiment we couldn’t have possibly missed as S&P500 and oil futures dropped almost 2.5% and 10% respectively last week.
Rates market has fully priced in a Fed’s rate cut by the end of the year. US-China trade deal still faces major uncertainty with a stalemate situation, and market players are now eyeing at the G20 Summit end of this month as the next stage for the trade deal talks.
China maintains its stance not to be bullied while subtlety increased its own threats including possible curb of rare earth exports. They also implicitly sent the message across that while they were putting effort to defend RMB (which benefits the US), it remained a chip on the table for the trade deal.
The market players, however, are betting that PBoC is not keen with a weaker currency and jeopardizes capital outflow – which we can clearly observe from spike price action on Friday. This coincided with some USD selling against Asian EM currencies as fast money started to make money off the table (we mentioned last week that they have been long US dollar! – Read My Market – Trade War Intensified 26th May 2019 edition).
One possible reason why Trump is aggressively playing his chip is the relatively strong US economic indicators in the past few months. He even extended the trade tariff to Mexico and stopped India’s special trade status. Hence, the US data next week, ISM manufacturing PMI and Non-Farm Payroll will be very critical – as a gauge, if the trade war impact has circulated back to its originator.
If the data is weak we will see further USD selling continuation and further upward pressure on the bond market (amidst bond-equity month-end rebalancing). While we still maintain our risk-off view with a preference for cautious safe-haven positioning, we should be looking forward to capital inflow into EM (fresh inflow) and US Treasuries selling as immediate reaction should US-China trade war situation improve.
