No rest on trade for Asia markets

Trade war on various fronts

It may not be too much of a push to regard the new flavour of US foreign policy as broadly confrontation after what we have seen in the month of May. This works both ways in the attempt to pressure trade partners such as China, deal with immigration concerns but also bring allies closer in the form of tariffs delay for Europe. The Trump administration’s various policies had been at the heart of the fragile market sentiment through the first month of 2019 in which we have seen markets across the US S&P 500 index to the MSCI Asia ex-Japan index tumble on a monthly basis.

Going into June, it should not come as a surprise that the abovementioned remains the case. The start of the month had certainly seen to pressure continuing across early movers such as the ASX 200 and the Nikkei 225. Prices were seen down 0.6% and 1.1% respectively, more than an hour into the trading session. China’s rhetoric over the weekend through their white paper had continued to reflect the impasse in trade relations as they noted both the willingness to talk and the unwillingness to be pressured into recessions.

More importantly, however, it is the economic impact one might have to grapple with as we head into June to look back at May’s performance. It appears that investors had been more careful in pricing in the trade impact this time round after the overreaction, it seems, from late 2018 when the US-China trade conflict first escalated. Nevertheless, concerns over the growth impact from the trade aspect can be seen slowly seeping into the markets going into end-May. The US 3-month/10-year treasury yield curve can be seen sinking deeper into inversion at the end of last week. Watch the assortment of data due in the week with special attention this Monday on the manufacturing PMIs from both China’s private Caixin gauge and the US ISM number.

Levels check

S&P 500: The S&P 500 index can be seen edging down below its 200-day moving average. Look to see if this trend will sustain which would mean further downsides for the index amid the on-going trade woes within the market.

Source: IG Charts

As far as the sectoral breakdown is suggesting, this trade war theme continues to see to risk sentiment being a driver. The cyclicals sectors – IT, energy and industrials had been losing the most in the past month while the defensives stay relatively unscathed.

Source: Reuters, IG

XLK ETF: The IT sector on the S&P 500 index had given up its year-to-date lead in the past month as the defensive real estate sector charged ahead. It had also been one to chalk up the biggest 1-month slide across the index. Looking at the sector’s ETF, prices are now on its way to test both the 100-day and 200-day moving averages, ones that could unleash further downsides this week if we should see a firm break.

Source: IG Charts

HSI: Looking at the Hong Kong HSI, prices have charged past the 200-DMA as with the US market, but had also entered into oversold territory. This could offer some support, though with the Caixin PMI expected to be soft, this may mean prices may remain battered into the start of the week.

Source: IG Charts

USD/JPY (大口）: The risk barometer, USD/JPY, had certainly reflected the heightened risk sentiment to the tee last week particularly with President Donald Trump’s threat on Mexico, sending jitters through markets. Prices have now come to the $108 level key support which had largely kept prices rangebound since late 2017. It could be a tough one to break, but if it does, the next strong support only comes in much later towards $104.60.

Source: IG Charts

Spot gold: On commodities, gold prices had noticeably exhibited a deviation from the downtrend since February with the risk sentiment play. This had also been a charge past the $1300 psychological level. There remains room on the upside should the series of data come in soft this week, one to follow.

Source: IG Charts

Friday: S&P 500 -1.32%; DJIA -1.41%; DAX -1.47 %; FTSE -0.78%