Daily reviews

01.07.2019

US and China to restart trade talks as expected

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It was a nervous week for global markets as investors were awaiting the crucial G20 summit amid the ongoing geopolitical tensions.

  • Stocks mixed during a volatile and nervous week
  • Dollar unchanged against the euro in the weekly charts
  • Fed dampens hopes for a half-point interest rate cut
  • The U.S. economy grew at a healthy 3.1% rate in the first quarter
  • Oil prices marginally lower on bearish industry data from the US
  • US and China agree to restart trade talks

Asian equities

It was a nervous week for global markets as investors were awaiting the crucial G20 summit amid the ongoing geopolitical tensions. Asian markets ended the week on the dismal note, with the Chinese Shanghai Composite fell 17.91 points or 0.60% to 2,978.88 and Japan's Nikkei 225 was down 62.25 points or 0.29% at 21,275.92. Investors waited for a meeting between Presidents Donald Trump and Xi Jinping that they hoped will produce a truce in spiraling U.S.-China trade tension.

After the meeting, US President Donald Trump said trade talks with China had been successfully revived and new tariffs were on hold. US officials characterized the session as an opportunity for both to gain a better understanding of each leaders' position as they work to resolve a dispute that carries immense political risk for both men. As a reminder, the talks came after trade negotiations broke down in May. The US said China backed out of previously made commitments to enact certain reforms in exchange for tariff relief. The trade truce could give some reprieve to risky assets in general but it is clear that the it will take time for the two countries to make a deal, and further issues are likely ahead.

US equities

The S&P closed Friday at 2941.76, up 16.84 points, or 0.6% on the day and 3.8% for the second quarter. The Dow Jones Industrial Average rose 73.38 points, or 0.3%, to 26599.96 and is now up 14% in 2019. Dow logged a 7.2% gain for the month, representing its best June gain since 1938, while S&P 500 index rose 6.9% on the month, its best June return since 1955. Wall Street’s gains were restrained as investors awaited the Trump-Xi trade meeting.

As for individual stocks, Apple Inc.’s shares closed steady as the reaction to Jony Ive’s departure from the iPhone maker to start his own venture was rather muted. Boeing Co. shares ended little changed after losing nearly 3% earlier on news that the company’s 737 MAX fleet, which has been grounded since March after two fatal crashes, could take much longer to receive regulatory clearance to bring the jets back online.

Currencies

The dollar was mixed during the week, with economic data was ambivalent while the Fed sent some mixed signals on a rate cut. Also, traders were cautious ahead of the G20 summit outcome. On the data front, Chicago Fed national activity Index pointed to a pickup in economic growth in May, Philly Fed non-manufacturing index fell 16 points to 12.2 in June, home prices in April were 3.5% higher than a year earlier, consumer confidence fell to 121.5 in June versus 131.3 in May, new home sales dropped for second straight month, the Dallas Fed’s gauge of manufacturing in Texas slumped to a three-year low of minus 12.1, durable-goods orders drop 1.3% in May, but business investment picked up, the international trade deficit was $74.5 billion in May, up $3.6 billion from $70.9 billion in April, consumer sentiment weakened in June on tariff concerns. As for the key report, the U.S. economy grew at a healthy 3.1% rate in the first quarter. The gain in the gross domestic product was unchanged from a month ago, while the components of growth shifted slightly with stronger business investment and consumer spending slowing more than previously estimated.

Meanwhile, in the Fed, Kaplan said it was ‘too early’ to decide if interest rates need to be cut. Jerome Powell defended the central bank’s independence from President Donald Trump and financial markets, both of which seem to be pushing for aggressive rate cuts. He said the central bank is currently grappling with whether uncertainties around U.S. tariffs, Washington’s conflict with trading partners and tame inflation require a rate cut. St. Louis Fed President James Bullard said that he thought a quarter-point cut would be a wise “insurance” move and noted that he didn’t see the need for a half-point cut. As a result, the officials have somehow dampened hopes that the Federal Reserve will deliver half-point interest rate cut.

After a volatile trading, EURUSD finished unchanged around 1.1370. Earlier, the pair failed to make a clear break above 1.14 but managed to stay above the 200-DMA at the same time, which points to a fairly neutral sentiment towards the euro. The selling pressure on the greenback has eased, which prevented the pair from a rally after a positive previous week. Further on, EURUSD will closely follow the overall sentiment towards the greenback as well as risk sentiment in the global financial markets.

Commodities

Brent crude oil for September delivery was down 0.71 percent for the week. Initially, prices were marginally down after Trump decided to impose fresh sanctions on Iran amid escalating tensions with Tehran, fueling concerns over global crude supply and softening demand. Then, the barrel recovered and turned positive after both API and EIA reported a remarkable decline in U.S. crude supply. U.S. Energy Information Administration reported 12.8 million barrels decrease of crude oil inventories during the week ending June 21.

Prices also gained amid expectations of extension output cut deal by OPEC+ during an upcoming meeting this week. But Brent gave up most of the gains towards the end of the week on the reports of a surge in U.S. crude oil output in April. According to a monthly report by the U.S. Energy Information Administration, U.S. crude supply hit 12.162 million barrels per day in April, a substantial increase of 246,000 bpd from the previous month. Meanwhile, the number of active U.S. rigs drilling for oil increased by 4 to 793 for the week ending Friday, said Baker Hughes. The reports dampened market sentiment and sent Brent below $64.50 from highs around $66. In the days to come, the market will focus on the OPEC+ meeting. Extension of output cuts could drive the prices higher in the short term.