Risk aversion decreases amid easing tensions on trade war front
Despite a clear improvement of the overall market sentiment over the last couple of days, the good mood failed to spread to all asset classes. Most equities extended gains on Friday morning amid positive news over trade war negotiations between China and the US. S&P 500 futures are on their ways to test the 2,940 resistance area once again. That level has been able to hold since the beginning of August; it would therefore requires more than a vague enthusiastic headline to break it to the upside. Indeed, market participants are becoming less and less sensitive to positive announcements from the Trump administration. Over the last year, Donald Trump has been feeding the market with extremely positive/negative tweets about the ongoing trade negotiation with China but it would appear that no progress has been made. In Europe, equity futures are also blinking green with the EuroSTOXX 50 climbing towards 3,430, while German DAX futures are currently testing the 11,933 resistance (50% Fibonacci on February 2018 – January 2019 sell-off).
In the FX market, investors are more cautious as they continue to favour less risky assets (or are just trying to avoid paying a carry). The greenback continued to strengthen against most of its peers. The dollar index climbed to 98.60, up 0.10% on the session. At the time of writing, only the Japanese yen was able to resist the buck’s appreciation. USD/JPY stabilised below the 106.75 resistance at around 106.45. Given the high level of uncertainty, mostly generated by the trade war, we believe that cautions still applies, especially ahead of the week-end as Trump may drop a tweet of two during the weekend.
JPY set for weekly loss ahead of Labor Day
Financial markets appear willing to close this week’s session on a positive mark, as “positive” statement made by US President Donald Trump confirm that a series of phone calls to set up a September face-to-face meeting are occurring, a news that seems sufficient to convince most investors, despite previous comments mentioning calls, subsequently rejected by Beijing this week. In any case, US Labor Day must also contribute to this trend. In this context, safe-haven JPY is likely to stay flat following a contrasting batch of data for the month of July while a trade agreement between Japan and the US, announced earlier at the G7, is expected to be ratified in September 2019.
Indeed, the recent data release of July year-on-year retail sales at -2% (prior: 0.50%), the largest decline since August 2016 due to a sharp decline in machinery and equipment amid poor weather conditions surprises, as the looming consumption tax hike from 8% to 10% is expected to be introduced as early as 1 October 2019. On a positive note, July unemployment rate came lowest since August 1992 at 2.20% (prior: 2.30%), with the job availability ratio standing at 1.59x (prior: 1.61x) while the number of new job offers declined for the second consecutive time by -1.60% month-on-month. Additionally, industrial production data from July also surprised to the upside, with the year-on-year gauge given at 0.70%, (consensus: -0.60%; prior: -3.80%). As a result, it seems that the situation in Japan is likely to improve, as Japanese and US counterparts have finally agreed on substantial tariffs cut for US agricultural products while Japanese automakers should benefit from tariff eliminations and reductions for exports to the US. The new trade agreement, following the signature of both leaders, requires the approval of Japanese Parliament in Autumn 2019.
Currently trading at 106.40, USD/JPY is expected to remain along 106.60 short-term due to lower trading volumes ahead of US vacations.
