US equities registered their biggest intraday rally since March following Fed chair Powell’s dovish speech last night, alleviating concerns over quarterly rate hikes that viewed as too fast and harmful to sustainability of economic growth.
In his comment on monetary policy, Mr Powell highlighted that current interest rates is ‘just below a range of estimates of so-called neutral level’, and neutral level is widely suspected to be around 2.5-3.5%. That said, raising interest rate by 25bps in December will hit the lower bound of the ‘neutral level’ range, boosting the likelihood for a slowdown or even pause in rate hikes next year.
Dollar index sank 0.56% to 96.77 area, from two-week high of 97.30 area. AUD/ USD surged as much as 1.4% to 0.732 before erasing some gain this morning and came back to 0.729 area. The Aussie is also backed by the rally of copper and strong rebound in iron ore prices. EUR/USD rebounded 0.68% to 1.136 area this morning, ending a three-day lose strike. GBP/USD advanced 0.65% to 1.282 area, but the outlook is clouded by Brexit uncertainties as challenges remains for Teresa May to gather enough support for her withdrawal deal in the parliament. The sterling is likely to remain subdued before the 11 December Brexit vote.
Crude oil prices tumbled over 3% overnight, extending their downward trajectory as overcapacity and glut concerns suppressed energy prices. The US DoE weekly petroleum status report shows that US commercial crude inventory rose 3.57 million barrels last week, much higher than earlier expectation of a 700k increase, signalling the demand and supply is far from balancing yet. The US crude stockpile has built for 10-consecutive weeks, marking the longest stretch seen in years. Meanwhile, market is waiting for major oil producers excluding US to deliver positive breakthrough of output freeze in this week’s G20 meeting or in the upcoming OPEC meeting days after, but market is lack of visibility of that yet.
This Friday’s G20 summit is widely viewed as an opportunity for China and US to break a negative spiral in financial markets. Market remains cautiously optimistic about the ‘Trump-Xi’ meeting as recent market volatility and weakness in macro data suggest trade war has started to punish not only China but also affect US economy and broad market confidence.
Although there are still significant divergence in areas of security, intellectual property, trades and technology, even a temporary ceasefire in trade tariffs competition will likely calm market nerves. Given the fact that this is a delicately prepared, high stakes meeting between the two countries’ top leaders, any negative surprise like what we saw in the previous APEC summit is unlikely to repeat in Buenos Aires.
The downside is that market has partially priced-in, not in full, of the event of breakdown in talks and further tariffs on all the remaining Chinese goods. Therefore, a breakdown of the talk will lead market to price-in a full tariff scenario and thus bad for stock markets.
The meeting will likely re-shape the trade negotiations and make communications more transparent for both sides, whether or not a major deal can be reached. The last few rounds of negotiations didn’t yield much positive results and ended with escalating trade tariffs, which hurts global investment sentiment. Market is hoping that this meeting will be different.
US 30 - Cash
By Margaret Yang in Singapore
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