Risk appetite diminishes as trade-war develops new dimension

Risk appetite dull at the start of big week

Stocks closed Friday’s trade on the back-foot, after reports flowed through the market on Friday night that the US was considering curbing investment from Chinese companies in the US. That news backed up a lukewarm set of economic figures out of the US to end the week. China will be in deeper focus today, as markets prepare for the release of the country’s PMI data, before it takes a 1-week holiday in the week ahead. In broader news, the Pound has tumbled off-the-back-of greater expectations of a BOE rate-cut. And oil has oil also dipped on diminished fears of all-out war in the Middle East.

A new trade-war dimension stoked risk aversion

Market sentiment during Wall Street’s Friday session was legged by headlines that read “White House Weighs Limits on U.S. Portfolio Flows Into China”. The claims have since been denied by the US Treasury over the weekend. But that didn’t come until well after the bell to end last week’s trade. So, the S&P 500 took a spill into the close of the week, shedding over 0.5%, as investors began to assume that this trade-war was beginning to move from limiting physical trade, to stifle capital markets, too. The news knocked SPI Futures down in Friday’s trade, with the ASX 200 expected to open 12 points lower today.

US economic data on Friday mixed

Investors had one eye on a big batch of US economic data on Friday, centred on the demand side of the economy. And ultimately, it delivered a mixed set of results. The US PCE Price Index revealed a weaker inflation print than estimated, reaffirming that price pressures in the US economy remains limited. US Core Durable Goods Orders roundly beat expectations, alleviating some concerns about business conditions in America. Consumer spending missed expectations. However, doubts regarding the strength of the US consumer were ameliorated by a beat in US Consumer Sentiment figures.

Fed expected to cut 2 more times

The net effect of all that news was to alleviate some fears that economic activity had precipitously declined recently, while leaving wide open the room for the US Federal Reserve to cut rates again before the end of the year. The move was marginal, but the odds of another Fed cut increased slightly on Friday, with the USD subsequently dipping across the board. As it presently stands, the interest rate futures curve suggests the US Fed will be probably cut interest rates again in December, in a sequence of a further two rate cuts to end this cutting cycle by the end of 2020.

Oil prices fall on Saudi olive-branch

Tensions in the Middle-East and its knock-on effects on oil prices remain a hot issue in global markets. Brent Crude prices plunged -1.3% to end the trading week, after Saudi Arabia announced that it would impose a partial cease-fire Yemen. The war in Yemen is considered a proxy war between the Saudi’s and Iran, so the announced cease-fire is being read as a possible olive-branch from the Saudi’s to de-escalate broader tensions in the region. Oil prices are close now to trading back at where they were prior to Iran’s alleged attack on a Saudi oil production facility.

Pound rallies as bets of a BOE cut climb

The UK economy, Brexit and its consequences for the Bank of England grabbed attention during European trade on Friday night. The Pound tumbled back into the 1.22 handle – subsequently, driving the FTSE 100 1% higher – following a statement by BOE member Michael Saunders that the central bank may need to cut interest rates, even in the event of a Brexit deal. Saunders justified his view on the basis that economic uncertainty is likely to persist even in the event of a deal. A rate cut from the Bank of England is currently priced-in for May 2020 now.

China data highlights day’s trade

China’s economy steals focus in the Asian session today, before Chinese markets fall into radio-silence ahead of the Middle Kingdom’s Golden Week holiday. Official PMI data is released this morning, and will give a vital read into the strength of China’s economy. After last week’s major European PMI data miss, which economists attributed in large part to the effects of the trade-war, market participants remain on high alert for further signs of weakness in China’s economy. Today’s Manufacturing PMI is expected to show just that, printing at a “contractionary” 49.6 – though it must be stated that, if realized, will mark an improvement from last month’s figure.