Market Drivers August 29, 2019
Risk reverses on China encouraging rhetoric
German labor data inline
UST 10Y 1.507%
Oil $56/bbl
Gold $1539/oz
BTC/USD $9456
Europe and Asia:
EU GE Unemployment 4K vs. 4K
North America:
USD GDP 8:30
Risk flows reversed in early European trading after China came out with some encouraging rhetoric noting that it did not want to exacerbate the trade tensions and that it was preparing for bilateral meetings in September.
The news quickly flipped USD/JPY and kept it bid as it rose to a high of 106.35 in the morning London dealing. The standoff between China and the US remains fluid and still highly unpredictable given the mixed messages from both sides, but today’s conciliatory tone out of Beijing suggests that there is a growing internal pressure to ease the conflict as the economic burden is clearly starting to take its toll.
As several economists have pointed out most of US tariffs have been on intermediate goods which provide some degree of elasticity in demand while the Chinese tariffs have been on commodities with the result that food prices in China are rising at an alarming rate just as growth is slowing which will no doubt squeeze the Chinese consumer going forward.
While markets hold out hope that the war of attrition between China and the US may have finally pushed both leaders to consider a more flexible negotiating posture, the more immediate catalyst for any further gains in USD/JPY will be today’s US GDP report. Granted that this will be a second revision reading it may still have an impact if the release prints at better than 2% consensus rate.
The combination of steady growth and hope of trade deal would act as a powerful booster to risk trades today and could push USD/JPY through the 106.50 level. On the other hand, a weak GDP reading would only add to fears that the Fed will cut 50bp in September and could send the pair back to 105.00 figure as the day proceeds.