After a muted session in Europe, and the U.S. markets closed for Presidents’ Day, investors seem to be moved by news flows coming from U.S.- China trade negotiations. Asian stocks were near a four-month high on Wednesday driven by Chinese and Australian markets, but gains were later surrendered after China accused the U.S. of fueling cybersecurity fears.
On the trade negotiations front, we have so far learned that China is willing to decrease its trade surplus with the U.S. by substantially increasing the amount of goods and services it purchases. This sounds like good progress, but it may not be enough to end the trade dispute. The crucial points remain on matters related to intellectual property, forced technology transfers and subsidies that China provides to its domestic firms. These issues are likely to be more complicated than just reducing the trade deficit and without a meaningful agreement, markets will not respond positively.
We still think there is a long way to go to end the current dispute. The most important component needed for any deal to be reached is trust. A memorandum of understanding without an enforcement mechanism may suggest that an achieved deal is weak and may break any time. The base case scenario is likely to be the extension of the March 1 deadline, to allow for more time to negotiate a meaningful deal.
While trade optimism encouraged risk-taking for several weeks, signals from central banks across the globe have played a more important factor in lifting risky assets, particularly from the Federal Reserve. On Wednesday, the FOMC Minutes will provide insight into whether the tightening cycle has come close to an end or we still need to expect further rate increases in 2019. More importantly, markets need to know whether the Fed is prepared to slow down or is likely to end the unwinding of its balance sheet.
Gold has rallied significantly since the beginning of the year rising 3.4 percent, a gain of more than 14 percent from August 2018 lows. The recent rally in Gold came despite a strong dollar, weak inflation expectations and a strong recovery in equities. This hasn’t been the case in the past. Gold used to have a negative correlation with the U.S. dollar and equity prices. The difference this time is that markets are beginning to anticipate a new round of quantitative easing, making the yellow metal the major beneficiary of central banks' policies. The FOMC Minutes tomorrow will further highlight whether we’re getting closer to a shift in policy.
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