With Asian stocks following Wall Street lower on Thursday, the US-China trade tensions appear to have knocked the wind out of risk-on sails for now. Equity investors have been left to float aimlessly as they await a new gust of developments that could signal the next direction for global markets.
US President Donald Trump isn’t easing up on the tensions with major economies, as he reiterated criticisms against Germany over defense spending and its gas pipeline with Russia. Markets are having to grow accustomed to heightened global tensions, where risk sentiment remains easily swayed by the prospects of further deterioration in relations between major economies. Should Trump’s sharp rhetoric translate meaningfully into more downside risks for global trade, that is sure to deal another significant blow to the already fragile market sentiment, which could trigger another sell-off in risk assets.
Oil drops as tensions rise within OPEC+ amid waning global demand outlook
Brent futures are testing the psychological $60/bbl mark, after shedding some 5.5 percent over three consecutive days of declines. This is fuelled by concerns over rising US stockpiles, amid a backdrop of heightened US-China trade tensions that risk dragging global growth lower. Markets are hoping that the slump in Oil prices will be enough for OPEC+ members to overcome tensions within the group and collectively focus on the task at hand – to rebalance global markets and put a floor under Oil prices.
Oil’s recent decline indicates that OPEC+ producers may have little choice but to extend its ongoing supply cuts programme going into the second half of the year. Should global demand shrink further despite the supply cuts extension,this may result in a marked return of oversupplied conditions which could see Oil unwind the remnants of its year-to-date gains.
UK leadership transition to add more uncertainty to Pound’s outlook
The Pound has been drifting along the 1.27 level against the US Dollar since last week, with investors awaiting the next chapter in the UK’s political saga, as the first of several rounds of votes are cast on Thursday in the Conservative Party’s quest to find Theresa May’s replacement. The UK leadership transition adds another layer of uncertainty over Sterling’s outlook until the new Prime Minister is appointed, potentially by the end of July.
Should markets get the sense that a hard line Brexiteer has the likelier chance of taking over at 10 Downing Street, such expectations could see GBPUSD test the 1.244 level, with stronger support potentially arriving at the psychological 1.20 mark. It remains to be seen how the new PM will overcome the challenges that May faced in passing a Brexit deal that was palatable to all stakeholders, with such uncertainties ensuring that the Pound remains politically sensitive leading up to the October 31 Brexit deadline, where a no-deal Brexit remains the “worst-case” scenario for markets.
