The outcome of the trade negotiations between the US and China will continue to impact on market sentiment this week, but the tier one US data will also be in focus with Advance GDP and the Fed’s preferred inflation measure along with the forward looking PMIs all key. We look at the impact on forex, equities and commodities.
Since April last year a trade dispute between world’s two largest economies has dogged the global economy. A cyclical downturn may have already been hinting, but the Chinese economy is undoubtedly slowing down, whilst growth in the Eurozone has stalled across several of the region’s major economies. However, the trade dispute could be coming to an end as President Trump has extended a 1st March deadline for negotiations to avert a significant escalation in tariffs. Avoiding a downward spiral into all out trade war could be crucial for the global economy. If these talks breakdown and end acrimoniously (anything is possible with someone such as Donald Trump involved) then the world will be on the path towards a significant economic slowdown that could plunge many major western economies into recession. However, with Trump’s extension, equity markets are quickly moving to price in the good news. This could give rise to buy on rumour in the coming weeks until the agreement is signed which may then lead to sell on fact move, but that may only be a near term move. The economic benefits to come from maintained supply lines and economic relationships restored will increase risk appetite. This would reverse the track of lower yields, helping to attract investors to higher risk currencies again (such as the Aussie and Kiwi), whilst the yen would be the ultimate underperformer. With yuan depreciation capped (seemingly part of the negotiations), this would also drive dollar underperformance, whilst benefitting emerging market currencies.
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