Tariff Dust-Up Settles, Markets Await New Developments; Oil Comes Back

After a veritable stock-market bonfire in Asia yesterday – the Shanghai Composite fell 5.5% and Hong Kong’s Hang Seng dropped 2.9% – the European and North American markets spent the day convincing themselves that President Trump’s tariff tweets were a negotiation ploy to bring the Chinese back on message. As a result, they spent much of the day retracing Asia’s early losses, most notably on equities and oil.

Say what you want about the U.S. president – and I know many do – but predictability and subtlety were never part of his election pledges. China has most certainly found this out the hard way and that likely explains why they are still sending their full delegation to this week’s round of trade talks in Washington DC. I take much greater comfort in China’s pragmatism than the president’s Twitter account, but the markets should take a leaf from China’s playbook and not assume the president was merely bluffing. Bond yields fell overnight and stayed lower in a none-too-subtle warning to that effect.

Trump’s itchy social media trigger finger and its fallout should take a back seat in Asia this morning as attention turns to the land down under. Australia releases tier-one data at 0930 Singapore time in the form of retail sales and balance of payments, which is followed at 1230 Singapore time by the Reserve Bank of Australia’s (RBA) interest rate decision. As a bellwether to global trade and with a strong correlation to China, Australian data is always watched closely – even more so with an impending election and a housing market taking on water.

However, yesterday’s shenanigans will not be enough to panic the central bank, and the RBA will take comfort in improving Asian data and the full-steam-ahead U.S. economy. The domestic picture is far gloomier, but my base case remains that ahead of an election and with interest rates already at record lows, the RBA will want to keep its easing powder dry for as long as it possibly can. We can likely expect an unchanged rate decision but with a potentially much more dovish forward guidance than previously.

The Malaysian Central Bank also releases its latest interest rate decision this afternoon, and the markets appear to be leaning towards a 0.25% cut to 3% as inflation continues to be elusive. Like Australia, I suspect they will look to keep their powder dry and unchanged.

FX

The Aussie dollar has traded around its 0.7000 waterlines overnight, following the Monday open knee-jerk sell-off of the AUD and its New Zealand counterpart. Although the AUD never recovered its losses, at least they did not deepen, giving some solace to traders. This morning’s retail sales and balance of payments data will undoubtedly introduce some short-term volatility, but the RBA will be the main event. Markets will be looking for a more dovish central bank, and this could see the AUD come under more pressure this afternoon.

Elsewhere, the U.S. dollar gave back much of its early safe haven gains and finished mostly flat against the majors, with the dollar index unchanged. The Japanese yen continues to outperform on haven buyer interest.

Regional currencies should enjoy some respite today as the tariff dust settles and we await new developments on the trade talk front.

Equities

Regional markets should take heart from the rebound on Wall Street, where all three major indices finished only slightly lower. This leaves both Shanghai and Hong Kong primed for a possible corrective bounce given the scale of their sell-offs yesterday. Other regional markets could see toes tentatively dipped in the water as Asia takes a no-news-is-good-news approach.

Oil

Both Brent Crude and WTI staged a comeback worthy of a Rocky movie last night thanks to the U.S. Department of Defense, which announced it was deploying a carrier strike group to the Middle East to warn Iran against attempting any mischief. I won’t let the fact the U.S. usually has at least a couple of them in the general vicinity get in the way of a good story.

Suffice to say, oil rode a geopolitical surge, erasing early 2% sell-offs on both contracts. Brent Crude finished the day USD1.25% higher at USD71.75 a barrel, while WTI rallied 1.50% to reach USD62.90 a barrel.

With headlines and not fundamentals driving oil volatility at the moment, Asia traders will likely prefer to watch from the sidelines as events play out on the world stage elsewhere.

Gold

Gold initially surged on safe haven buying early yesterday morning, but could not maintain its gains, closing flat at USD1,280.00 an ounce. The inability of the yellow metal to move higher, even on surprise geopolitical event risk, should be somewhat worrying to gold bulls everywhere. The price action likely implies the worst is not yet over and that gold will find plenty of sellers on any rallies for now.

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