US equity markets ended a five-day rally over political uncertainty surrounding the US-China trade deal at the upcoming G20 meeting. President Trump said he will hold up a trade deal with China and he is going to ‘either do a great deal with China or we’re not going to do a deal at all’.

On Monday, he threated to impose tariffs of 25% or ‘much higher than 25%’ on the remaining US$300 billion of Chinese goods. China’s official media, however, responded with silence.

Wall Street’s rally since early June is probably taking a pause here, allowing profit-taking and changing of hands. Meanwhile, market participants are re-assessing the trade risk and likelihood of a US rate-cut in July. Both are big drivers behind stock market movements lately.

Despite negative sentiment across US markets, Japan’s machinery orders reading might provide some positive catalyst for Asian markets on the open. Japan’s machinery orders – a leading indicator of production – has jumped 2.5% year-on-year in April, compared to a -5.3% forecast. The reading has flipped positive for the first time in over three months, suggesting the world’s third-largest economy is showing resilience amid slower global demand and trade uncertainties.

It is worth noting that the improved orders were driven by government spending and non-manufacturing sectors like telecommunications, information services and real estate. The manufacturing sector remains a lagging factor, in particular due to the slowdown in China.

In the currency market, AUD and NZD were among the worst performing currencies in G10 as sentiment turned sour overnight. EUR/USD rally may have more room to go beyond the current level at 1.133 as President Trump criticized the Federal Reserve for rate hikes and complained about the euro’s devaluation against the dollar. The dollar index has fallen to 96.6 area from recent peak of 98.0. A soft dollar led to rebound in emerging market currencies and capital flew back to those markets seeking for yield.

Singapore’s STI opened 0.5% higher on Wednesday to 3,221 points. SingTel, DBS and Venture Corp were among the biggest drivers of the benchmark index. In the short term, real estate, financial and cyclical sectors may outperform the defensive ones for a catch-up rally.

EUR/USD chart

 

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