European markets and US futures are trading higher today as investors are less concerned about the currency war. This was the primary focus for investors which lead a massive sell off for global stocks. It was a fear of currency war which broke all hell for US Treasuries, the 30-year Treasury yield nearly touched a record low yesterday. In fact, it was for the first time that the S&P 500 dividend index became more attractive for investors than the 10-year Treasury since Trump took the office.
PBOC’s Export Data, Trade Surplus & Yuan Fixing Game Sparked Risk On Rally
The concerns around the currency war have soothed nerves because the People’s Bank of China decided to fix Yuan. This sparked interest for riskier assets among traders. However, the volatility index is still up more than 62% from its recent low of $12.15 (formed back on July 25th). For now, as long as the Yuan’s reference rate remains below the recent high, markets are likely to remain calm.
Another form of relief for investors was embedded in the Chinese economic data- it showed that the Chinese export performed better than the estimates. More importantly, trade surplus with the United States also soared by 11.1%.
Remember, Trump has always paid enormous amount of attention to this particular factor, he wants China to have a larger trade surplus with the United States. Thus, looking from the optimistic lens, one may argue that this is a positive development between the two countries especially, when they are locked in a nasty trade war.
Gold Speculators Aren’t Convinced But Ready To Shave Some Profit
Speculators are still not convinced that we are out of the woods. The reason is that the precious metal is still holding on to his enormous gains which it scored over the last few weeks. The resistance of $1,500, more of a psychological level, melted yesterday and today, gold made a high of $1,509, the highest level since early 2013. The reason for this is that traders are still sceptical of the PBOC stance about fixing the Yuan.
Traders believe that this cease fire move isn’t going to last and the currency war is only a matter of time not if it will take place. This is the reason that money continue to pour in bond market and also in gold ETFs.
It is likely that the gold price may retrace from its recent highs, (traded at 1500 at the time of writing this) and fall below the $1,500 mark. The near term support sits at $1,480 followed by the $1,460 level.
Saudi Oil Cut Isn’t The Solution
The only asset which is ripping the market is oil. WTI is up whooping 3.17% and Brent over 2.81% and the reason for this optimism is that Saudi Arabia, the biggest player in the oil market, has played the old game- it wants to reduce the oil supply by working with other oil producers. This eased off the selling pressure for oil after it suffered its biggest weekly drop in nearly 8 months.
The reason for the sell-off was primarily based on the views that the global economic growth isn’t going anywhere. In fact, it isn’t too far from touching recession shores. As long as the trade war continues, and the risk of a currency war looms, no matter how much supply cut oil is introduced, the oil price would fall.
Hence, betting on this dead cat bounce may not be the best idea. I will say that the recent bounce could be a great opportunity to short if the trade war maintains its current momentum.
