LCG: Equities, commodities fall on rising US-China trade tensions, gold hits $1456 as safe-haven assets gain

5 aug 2019

The yuan weakened past the psychological level of 7.00 against the US dollar, as the Chinese services PMI came in worse-than-expected in July, but the composite PMI improved from 50.6 to 50.9 on stronger manufacturing activity. The People’s Bank of China said the move was normal and that it has the means to stabilize the foreign exchange fluctuations.

Investors moved capital from risky to safe-haven assets at the start of the week. Government bonds, gold, Japanese yen and Swiss franc gained, as New Zealand, Canadian and Australian dollar eased against the greenback.

WTI crude cheapened to $55 a barrel, as the growing angst of a waning global demand outweigh the tensions in the Persian Gulf after Iranian Revolutionary Guards seized a third vessel since mid-July.

Nikkei (-2.29%) and Topix (-2.38%) fell, as the Japanese yen appreciated 0.50% against the US dollar.

Swiss franc strengthened 0.35% versus the greenback. An ounce of gold traded at $1456 as risk averse investors found refuge in the precious metal.

Hang Seng index (-2.89%) led losses in Asia on rising fear of a Chinese military intervention in Hong Kong, which could further weigh on domestic businesses.

Shanghai’s Composite eased 0.81% and Australia’s ASX 200 fell as much as 1.53%. Mining stocks erased 2.30% in the morning session in Sydney. Rio Tinto dropped 3.47% and BHP Group fell 3.17%, as copper dived 3.75% in Dalian commodity exchange and LME copper slid 2.87%.

The FTSE 100 erased 2.34% on Friday and the FTSE futures (1.23%) hint that the British blue chips could gap lower at the open. Energy and commodity shares will likely remain under a decent selling pressure on lower oil and commodity prices.

The FTSE 100 is expected to open 95 points lower at 7312p. This would bring the index below its 100-day moving average (7385p). The key support to this year’s positive trend stands at 7272p, the major 38.2% Fibonacci retracement on January – July rally, before 7192p, the 200-day moving average.

AUD under pressure ahead of RBA meeting, euro and pound stable

The Reserve Bank of Australia (RBA) is expected to maintain its cash rate target unchanged at 1.00% on Tuesday, but to deliver a dovish accompanying statement to help businesses coping with a further slowdown in China, its biggest trade partner. In 2018, exports to China stood for more than 43% of Australia’s total exports. The Australian 10-year yield tanked to a fresh all-time low below the 1.09% mark. The AUDUSD eased to 0.6748, a decade low, on rising dovish RBA expectations. Presently, the pair trades in the oversold territory, with the 14-day relative strength index pointing at 26%. Though an upside correction would be healthy at the current levels, traders will likely chase top-selling opportunities before Tuesday’s policy decision and Friday’s policy statement, as carry traders are offside due to tightening AU-US yield spreads. There are mixed option expiries near the 0.68 mark.

The euro and the pound were relatively stable against the US dollar in the Asian trading session.

Cable gained up to 1.2188 despite louder rumours that Boris Johnson could call a snap election after leading the UK out of the European Union on October 31st. The Brexit negotiations got so chaotic that investors, as well as the Bank of England’s Mark Carney, started openly voicing their preference for a no-deal Brexit on October 31st rather than a prolonged period of uncertainty. If the market starts feeling more comfortable with a seemingly inevitable no-deal Brexit, the pound could bounce higher and quickly, in a market heavily congested with short positions. According to the latest CFTC data, the net short speculative positions in sterling increased to the highest levels since March 2017. This hints at a higher risk of a short squeeze, as a recovery in sterling could encourage speculative sellers to cash in and trigger a rapid liquidation of short positions.

Data-wise, the UK final services PMI data could confirm a slight improvement to 50.3 in July, versus 50.2 printed a month earlier. A better-than-expected data could send the pound higher, as services stand for nearly 80% of the British economy.

Lower rate conspiracy

The US 10-year yield slipped below the 1.78% as the probability of another rate cut from the Federal Reserve (Fed) in September topped at 100%. Moreover, the probability of a 50-basis-point cut increased to 27% according to the activity on the US treasury markets. The fact that the Fed bases its interest rate policy on US-China trade tensions rather than the economic data raises the suspicion that Donald Trump may be adding fuel to the flames on the Chinese side to increase pressure for lower rates. Hence the Fed is now cornered by the market, which already fully prices in lower interest rates at the FOMC’s next meeting, on the back of harsher trade talks with China as Donald Trump keeps on toughening his stance.

Opening calls

FTSE is expected to open 95 points lower at 7312

DAX is expected to open 137 points lower at 11735