Risk-on rally extends on US-China tariff delay

China granted tariff exemptions on certain US products on Wednesday, a warm gesture that raised the prospect of more constructive moves for the upcoming October meeting.

A few hours later, President Trump responded positively by delaying the increase of 25% tariffs on US$ 250 billion worth of Chinese goods to October 15th; allowing a two week grace period to pave way for the upcoming trade negotiations.

Hong Kong’s Hang Seng index surged 1.78% to 27,159 points and Singapore’s Straits Times Index jumped 1.23% to 3,194 points on Wednesday and this rally was well supported by the positive trade news overnight.  

US equities closed broadly higher and futures extended rally during Asia hours. The S&P 500 index closed just above the 3,000 points, lifted by healthcare (+1.01%), information technology (+1.01%), utility (+0.98%) and materials (+0.96%). Real estate (-0.32%) and energy (+0.02%) were lagging behind. Similar trading pattern is likely to repeat for Asia equity trading today.

Positive sentiment led to further decline in safe-haven assets – government bonds, gold and Japanese yen. US 10-year treasury yield advanced for a sixth consecutive day to 1.765%, whereas short-term treasury bills were little moved. The treasury yield curve has become less inverted recently, reflecting a recede in recession fears as US and China go back to the negotiation table.

In currency markets, AUD, NZD and CAD are outperforming the other G10 peers as risk sentiment improve on trades. EUR/USD slumped to 1.101 area ahead of tonight’s European Central Bank (ECB) meeting, in which traders anticipate interest rate cuts and dovish monetary policy guidance to be announced by Mr Draghi.

In a surprise move, the Hong Kong Exchange (HKEX) made a bid for the London Stock Exchange (LSE) in a proposed £32bn deal. LSE’s share price surged as much as 16% before erasing earlier gains and closing 6% higher. However, according to the Financial Times, the LSE is likely to reject this proposal due to doubts about ‘political risk and deal structure’. 

Crude oil prices slumped on Wednesday evening despite a much larger-than-expected draw in the US commercial crude inventory filed by the US Energy Information Administration (EIA). The US crude stockpile fell by 6.91 million barrels last week, compared to a forecasted 3.0 million drop. This also marks a fourth consecutive week of inventory decline, suggesting stronger energy demand which by right should support oil prices.

The ouster of US national security advisor John Bolton led markets to speculate that President Trump will likely consider easing sanctions on Iran and meet Iranian President Hassan personally. Removal of Iran sanctions will pump more production into the global oil market and lead to a fall in its price.  

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