Traders and investors moved to the sidelines in overnight trading ahead of the expected signing of a China / US trade deal tonight. The clearing of trade clouds is a key factor in the recent stronger performances in risk assets. However event risk over the next 24 hours is significant, and there was little appetite to push shares and industrial commodity prices any higher.
The danger for risk assets in the short term is two-fold. If the scheduled signing does not go ahead, investors are likely to reverse recent buying. If the agreement is inked, there is still potential for a sell down because this positive news may already be reflected in market prices, meaning there is no further buying support. This potential “sell the fact” reaction looms over today’s trading in the Asia Pacific region.
Investors may look through any short-term negativity on the back of recent data releases. Trade data from China yesterday showed surprisingly strong activity and an increasing trade balance, defying analysts’ gloom. US inflation data softened slightly, back towards the US Federal Reserve’s 2% target. Stronger growth and a benign inflation environment is a green light for risk.
Currency markets showed little response to the numbers. The recent strengthening of the Chinese Yuan is seen as a positive development for trade peace.
Despite the positive developments, gold prices remain elevated and longer bonds rallied overnight. Crypto currencies are rallying this morning. These moves indicate at least some investors remain somewhere between nervous and frightened.