Last week we saw what was best described as cautious optimism on US-China trade talks over the G20 meeting.
Stocks (S&P500 -0.12%) and US 10 yr yield (-0.9 bps) ended up flattish though slightly lower during mid-week. But this optimism can be better observed via AUDJPY (+1.3%) and oil futures (0.98%) which are better proxies on risk-on sentiment.
Gold dropped slightly from its recent peak. Many traders who gain from recent bull waves find it an easy bet on gold in the anticipation of G20 meeting outcome. If the trade tension increases, it would cause risk-off environment (gold is a safe haven asset), on the other hand, if G20 outcome is promising, then we will see further US dollar sell-off, which will also cause gold to be supported – so yes, gold has been very good insurance!
At the time of writing, the Trump-Xi meeting at the G20 summit apparently leaves much hope for the continuation of the talk. Trump puts on hold the new tariff threat on China import and allows US companies to continue selling to Huawei (as long as it’s not national security-sensitive). We know that China is always constructive towards collaboration, hence this cautious optimism will likely continue in the coming weeks.
Next week we should see a full market activity despite the 4th July holiday in the US. China PMI, RBA cash rate, and US non-farm payroll numbers on Monday, Tuesday, and Friday respectively will be the top economic headlines to watch.
If non-farm payroll data reverse completely last month weakness, it may change the Fed outlook (the market has priced in a cut in July), and this will see stock prices drop for consolidation – this will then give the opportunity to buy given US-China trade talk continues to be positive (as in for a long term, US-China collaboration is good for the stock), the tech sector, in particular, will be supported. We are also likely to see the continuation of capital in-flow into Asian emerging market (EM bonds).
