Markets cheering the trade truce

While a packed data calendar lies ahead in the day, expect the positive glow from the temporary tariffs delay to be the key driver for price movements.

Truce provides only short-term support for markets

Following the Thursday reports of a trade truce, the outcome from the G20 meeting had perhaps not been a surprise for markets upon materialization. That said, having had feared for worse including a potential breakdown in talks that could jumpstart further tariffs implementation, the lesser evil would nevertheless be one to relief markets of some of the jitters that had built up into the end of last week.

The fact of the matter, however, is that the latest truce provides little material changes from the previous one into end-2018. The market may need more signs of resolution in the medium term to keep the momentum going. At the bare minimum, further happy talks from the resumption of trade talks will be expected for markets to stay supported. The lack of a timeline for the current delay of course further tariffs provides some flexibility for negotiators, but the market’s patience may eventually run out so the resolution of various outstanding issues will be necessary down the road for investors not to lose hope on a deal.

Given the added political and economic growth pressures weighing on both US and China, the base case remains one of a resolution through a trade deal. The uncertainty would be with the timeline in light of the apparent lack of duration determined for the latest tariffs delay. The letting up of the stance on Huawei from President Donald Trump in allowing US companies’ to supply the Chinese telecommunications company had been a positive sign, but it remains a bargaining chip amid the lack of a lift of the blanket ban.

Look to the short-term boost for riskier assets while the havens could see some selling pressure. USD/JPY (大口） could edge towards $109.10 with a surge above the immediate $108.23 resistance while gold price may stay submerged below the $1400 level handle.

Asia open

As told, Asia markets will have the trade truce relief to induce buying interests. Hong Kong will be away for a holiday at the start of the week but watch the rest of the region find synchronised gains at the start of the week. This is despite the miss seen over the weekend with China’s official manufacturing PMI at 49.4 against the consensus 49.5. Services PMI likewise pared back from May’s figures showing a collective slowdown in activity, one to watch the Caixin readings this week for confirmation. Separately, this morning saw to Japan’s Q2 Tankan big manufacturers’ index missing the consensus slightly among others, though given the USD/JPY jump, the Nikkei 225 had partaken the gains.

For the day ahead, China’s Caixin manufacturing PMI and the US ISM manufacturing index will be two key pieces of data to track today, but look to the positive sentiment stemming from the weekend political events to keep markets in green.