Investors Expect a Big Monday for Currencies and Stocks

(Bloomberg) -- Early action in the currency market on Monday pointed to an optimistic response from investors following an agreement between the leaders of the U.S. and China to keep a trade war from escalating.

  • The offshore Chinese yuan strengthened and commodity-related currencies including the Australian and Canadian dollars gained. The Mexican peso and South African rand led a rally in emerging-market currencies.
  • S&P 500 index futures jumped as much as 1.8 percent in Asia.
  • Havens such as the yen slipped and the greenback was lower against most of its large developed-market counterparts. Treasury 10-year futures fell 7/32 to 119 7/32.
  • U.S. President Donald Trump and Chinese President Xi Jinping promised to halt any new tariffs for 90 days as the countries continue negotiations. The U.S. had been scheduled to push ahead on Jan. 1 with increased tariffs on $200 billion worth of Chinese goods, but that’s been paused following the highly anticipated meeting between the two leaders on the sidelines of the Group-of-20 summit.
  • At the G-20 meeting itself, world leaders agreed that the global system of rules that’s underpinned trade for decades is flawed, according to the official communique, which omitted for the first time a reference to the risk of protectionism.
  • Another meeting on the summit sidelines could also prove key for markets, with Russian President Vladimir Putin announcing that he and Saudi Arabia’s Crown Prince Mohammed bin Salman had agreed to extend into 2019 their deal to manage the oil market.

Key Insights

  • Financial markets may get a breather Monday given that “the key thing was to avoid tariffs on January 1,” according to Steven Englander, global head of G-10 foreign-exchange research at Standard Chartered. “It’s hard for me to see that they’ll come up with an agreement in three months, but I think if they keep making progress, they’ll extend the moratorium on tariffs.”
  • The ceasefire could be a boon for equities and emerging-market currencies, which received a boost last week after Federal Reserve Chairman Jerome Powell told markets that interest rates are “just below” the so-called neutral range. Traders will be focused on both local markets and S&P 500 futures when action gets underway in major Asian financial centers later on Monday.
  • “The thaw in U.S.-China trade tensions should give risk appetite a short term boost,” Westpac analysts including David Goodman wrote in a note. “The caution is that this outcome was more or less priced in,” they said, noting that the deal is better characterized as a “mini-breakthrough” that pauses trade tensions.
  • While the truce is “better than the market expected,” the coming period won’t be without its fair share of volatility, according to Citigroup. “The huge divide remaining continues to suggest a bumpy ride ahead,” analysts including Li-Gang Liu wrote in a report.
  • “Markets will be elated,” according to Aninda Mitra, senior sovereign analyst at BNY Mellon Investment Management. “I would see this is as a short-term risk positive development and safe havens should under-perform in coming days.”

Market Action

  • Australia’s dollar, which is widely viewed as a proxy for sentiment toward Asia’s biggest economy, rose as much as 1.1 percent to 73.83 U.S. cents, while the New Zealand dollar climbed to its highest since June. Other commodity-related currencies such as the Canadian dollar and Norwegian krone also gained.
  • The Japanese yen, a traditional safe haven retreated as much as 0.3 percent versus the greenback, and the U.S. currency slipped against most of its major developed-market peers.
  • The Mexican peso, lira and the rand each jumped at least 1 percent
  • Reduced appetite for havens could potentially weigh on Treasuries and stall the recent slide in yields that’s been fueled by a pullback in expectations for Fed rate hikes, although comments from key central bank officials in the coming week will be a major focus for the market, along with America’s jobs report.
  • Brent crude, which has been in freefall, also rallied following the Saudi-Russian accord.
  • China’s promise to start buying U.S. agriculture products could also shift other commodity markets such as soybeans, which have become something of a poster child for the trade dispute.

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