It is not a deal, but there is hope.
Trump and Xi gave investors what they wanted at the G20 meeting in Osaka this Saturday: hope. The two leaders agreed to resume the trade talks that have halted in May. The U.S. decided to hold off on the new round of tariffs on some $300 billion additional Chinese goods and even scale back restrictions on Huawei - the U.S. companies could again do business with the Chinese tech giant. A deal is not sealed just yet, but the two countries showed mutual willpower to end the deadlock and move on with the talks.
Asian stocks rallied at the open. Shanghai Composite gained past 2% before easing into the lunch break. Technology and communication stocks jumped up to 4.01% and 2.74% respectively in the morning session. Shanghai Shenzhen CSI 300 stocks added 2.93%.
Hong Kong was closed on the 22nd anniversary of its return to China. Protesters are back on the streets, unsatisfied with the delay, and not the complete withdrawal, of the extradition bill. The HK unrest may have curbed the upside potential by the mid-day in China.
Nikkei (+1.95) and Topix (+1.78%) soared, as Japanese yen eased 0.39% against the U.S. dollar.
The U.S. equity futures jump-started on pleasant news as well. The Dow (+0.80%) and NASDAQ Composite (+1.33%) hint at a strong positive open in New York.
Gains in Australia remained timid, however. ASX 200 added 0.50% and the Aussie-dollar remained capped by the 100-day moving average (0.7036) ahead of the Reserve Bank of Australia’s (RBA) policy meeting on Tuesday. The RBA is expected to lower its benchmark rate by 25 basis points to 1.00%, leaving the carry traders on the sidelines before the decision.
The Swiss franc (-0.61%) and gold (-1.30%) fell, as investors moved capital into riskier assets to celebrate the ceasefire between the US and China. Gold traded at $1384 an ounce and there is potential for a deeper downside correction following last month’s strong risk-off rally. A key support is eyed at $1375, the 38.2% Fibonacci retracement on May – June rally. This level should distinguish between the actual positive trend and a short-term bearish reversal.
Copper (+1.20%), iron ore (+0.85%) and oil (+2%) rallied on improved global sentiment.
UK and European equity futures gained as well. FTSE (+0.58%) and Dax (+0.88%) futures joined the global risk rally.
The British stocks are set for a strong positive start in London. The FTSE 100 is expected to open 54 points higher at 7479p. Dax is seen 126 points higher at 12525.
Technology stocks will be in focus on optimism following the encouraging US-China talks. Meanwhile the surge in oil and commodity prices will likely boost the energy and mining stocks at the start of the week.
OPEC+ could extend production cuts to 1Q, 2020
OPEC and its allies meet today and tomorrow to discuss a further extension of production cuts. OPEC+ is expected to carry on with its low production regime at least until the first quarter of 2020 to cope with a slower global demand and rising US shale production. The two biggest producers, Saudi Arabia and Russia agreed on further cuts at the G20 meeting on Saturday and OPEC Secretary-General Mohammad Barkindo said that a longer horizon would give a stronger certainty to the market and that most of the forecasts are ‘shifting toward 2020’. OPEC will certainly do what the market demands to support the oil prices. Hence, an extension of the production cuts for another six-to-nine months seems plausible.
Speaking of U.S. shale production, a recent EIA report showed that the U.S. net oil exports turned positive on week to June 21. This was the third time that this happened since Washington removed ban on exports in 2015. Though a week’s data is not enough to jump on a conclusion regarding U.S. oil independence, there is a visible positive trend in the oil import-export balance in favour of the U.S..
WTI crude tests the $60 a barrel, as Brent crude rebounded past $66 after having shortly dipped to $65 on Friday. We note that the expectations of further OPEC production cuts are mostly factored in the actual oil prices. Therefore, the OPEC meeting may not spur a significant rally in oil prices.
June final manufacturing PMI data due today
The final June manufacturing PMI data in the Eurozone, the UK and the U.S. will likely bring no surprise on the table on Monday. But the ISM index may hint at a slower expansion in the U.S. manufacturing in June. The U.S. construction spending may have stalled in May for the second consecutive month as well. But the markets are fully confident that the Federal Reserve (Fed) will lower the interest rates in July to give support to the economy. Unless a very bad surprise, the weak economic data will unlikely ruin the positive mood in the market at the start of this week.