10 Apr 2018

Market Brief: Xi pledges greater openness amid trade wars

Shaun Garrett

Dealing team

A major turnaround in the risk environment was witnessed in Asia overnight, after the much-awaited speech from the Chinese president Xi Jinping.

Market overview

A major turnaround in the risk environment was witnessed in Asia overnight, after the much-awaited speech from the Chinese President Xi triggered a renewed risk-on wave and lifted the demand for the risk/ higher-yielding assets at the expense of the safe-havens such as the Swiss franc, the Yen and gold. Across the FX board, the Aussie outperformed on Xi’s softer stance on the US-China trade dispute, as he advocated global cooperation, multilateral trading system and the need to widen markets. His speech also warned against returning to a ‘Cold War mentality.’ The Kiwi followed suit amid a risk-on rally in the Asian equities and oil prices while the Yen slumped against its US counterpart and printed daily lows at 107.25.
 
Elsewhere we saw comments from IMF Deputy Managing Director Furusawa, who suggested that the global economy continues to strengthen led by investment and trade. He also mentioned that US tax reforms are likely to raise growth temporarily but strategies are needed to ensure fiscal sustainability and financial resilience.
 


Yesterday afternoon Federal Reserve Bank of Dallas President Robert Kaplan stated that it is too early to judge the economic effects of all the tariff talks, but he does think that trade issues will be solved quickly once trade talks do begin, although Kaplan did point out that rhetoric has been aggressively elevated and if both sides don't come to the negotiating table soon then it could be damaging to the economic outlook. He then discussed interest rates and suggested at least 3 rate hikes in 2018, stressing that the Fed needs to raise rates because the US is nearing full employment, and the US is facing skilled shortages. Kaplan also expects to see firming up in inflation pressure over the year. Wednesday’s release of headline inflation is likely to be closely anticipated after Powell and Kaplan both reinforced that inflation will head towards the 2% target in the coming months. 

 

The day ahead

Today’s EU macro calendar remains quiet, with no first-tier releases, leaving the FX space at the mercy of the risk sentiment. The EUR, GBP traders eagerly await the speech by the Bank of England (BOE) Chief Economist Andy Haldane for fresh trading impetus. Haldane is scheduled to speak about the role of central banks and societal inequality at the David Finch Public Lecture, in Melbourne. This afternoon US PPI data is released at 13:30, shortly after the US final wholesale inventories data will be reported.

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Thought of the day

The success of Black Panther continues. Following immense ticket sales since its release, Marvel's epic superhero film just surpassed Titanic to become the third highest-grossing movie of all time at the North American box office. Black Panther finished Friday 6 April with a domestic total of $659.3 million. Given the speed of the movie’s success, toy companies have struggled to keep up with the demand and it is believed that new Wakanda-inspired toys won’t hit shelves until the fall.

 

It’s clear that toy companies underestimated the success of Marvel’s latest hit. In the world of markets, financial participants can also underestimate the extent of some events and fail to keep up with the speed of change in markets. A recent example of this is Trump’s potential ‘Trade War’ with China. Many believed that President Trump will not follow through with his protectionism claims but he did. Now, many are of the belief that things will not escalate and a resolution will be agreed between the US and China. If you would like to discuss recent market events and hedge yourself against unexpected moves then call the Investec FX team today.

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