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China GDP Menacing Markets, Trade War End Would Come with Costs

China GDP Menacing Markets, Trade War End Would Come with Costs

2019-01-21 00:00:00
Daniel Dubrovsky, Analyst

Asia Pacific Market Open – US China Trade War, Donald Trump, China GDP, Japanese Yen

  • China offer to alleviate trade surplus with US boosted S&P 500, foreign exchange markets diverged
  • US shutdown talks still appear to be at an impasse post weekend offer from President Donald Trump
  • Market focus shifts to China GDP next, gains in Nikkei 225 may be at risk if Fed rate hike bets rise

See our study on the history of trade wars to learn how it might influence financial markets!

Market mood considerably improved last Friday as the S&P 500 had its best day since January 4th, rising about 1.31%. Reports crossed the wires that China is planning on offering a path to eliminate the US trade imbalance. This followed conflicting cues from the White House on Thursday about possible tariff rollbacks. The markets seem to be welcoming the idea that the US-China trade war may come to an end soon.

Not only did stocks rally, but sentiment-linked crude oil prices rose and closed at their highest since November 23. Looking at foreign exchange markets, the typical ‘pro-risk’ Australian and New Zealand Dollars curiously declined. This may have been due to increased 2019 Fed rate hike expectations as US 2-year government bond yields climbed. As a result, the US Dollar appreciated (see chart below).

Divergence Between AUD/USD and the S&P 500

Financial markets react to hopes for end of US-China trade war

Chart created in TradingView

Meanwhile the Canadian Dollar outperformed as well, bolstered by a better-than-expected headline inflation report. The core measure of CPI remained mostly unchanged however. Still, local front-end government bond yields rallied, which signaled increasing Bank of Canada rate hike expectations. As such, the central bank could outpace its Australian, European and New Zealand counterparts this year as estimated in my top trading opportunities for 2019.

US President Donald Trump Made Announcement on Southern Border

Over the weekend, US President Donald Trump hosted another live broadcast about the ongoing partial government shutdown that still seems to be at an impasse. In exchange for funding a wall on the southern border, Trump offered compromises such as 3-year legislative relief for 700k DACA recipients and a 3-year extension of TPS impacting roughly 300k individuals. But Democratic House Speaker Nancy Pelosi rejected it. From here, this sets the stage for debate on Capitol Hill as the Senate votes on a funding bill perhaps this week. With that in mind, the focus for markets in the interim shifts across the Pacific Ocean.

All Eyes on China GDP

Keep a close eye on the fourth quarter Chinese GDP report as the new week begins. According to Citigroup, data out of the country has tended to increasingly underperform relative to economists’ expectations. A downside surprise may trigger a bout of risk aversion as global growth slowdown fears increase. This would bode ill for crude oil prices on weakening expectations for demand from its largest consumer. The anti-risk Japanese Yen may rise and the Australian Dollar could look particularly vulnerable. China is Australia’s largest trading partner.

Join Currency Strategist Ilya Spivak as he will be hosting live coverage of China GDP to go over the reaction in the Australian Dollar as well as talking about what you may expect ahead.

It will also be interesting to see how Asia Pacific markets react to the possibility of an end to the US China trade war. The divergence between foreign exchange markets and stocks on Friday serves a reminder of how impactful monetary policy expectations can be. Trade wars being taken off the table may alleviate some of the pressures that the Federal Reserve is anticipating in their economic projections. A sudden increase in Fed rate hike bets can spook investors, countering optimism from an end to spat between Beijing and Washington DC.

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--- Written by Daniel Dubrovsky, Junior Currency Analyst for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter

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