Dow Jones and S&P 500 erased intraday gain and closed briefly lower for the day, following news of the involvement of Peter Navarro – a China Hawk – between President Trump and Chinese President Xi’s dinner at G20 added uncertainty of the meeting outcome.

This approach probably aims to exert pressure on China in an attempt to negotiate a better deal for the US, but Xi is unlikely to give concessions that easily if the counterpart shows no respect. Investors are very cautious and taking a wait-and-see approach before this weekend’s G20 meeting paints a clearer picture of the trade relations.

Given the hint from President Trump and lack of information from Beijing, a likely outcome is probably a partial deal or some progression on certain trade conditions such as US agricultural products, soybeans and pork, better trade practices, transparency etc. US will probably hold back the additional tariffs until spring next year.  I remain sceptical to a major breakthrough in trade talks in the tough issues regarding national security, intellectual property and forced technology transfer. I do not think China will give a large concession on those issues. 

US-China Trade is at the top of an iceberg, under the water surface is a full range of competition in areas ranging from manufacturing chain, revolutionary technology development like AI and automation, geopolitical influences to military power etc. This lays the ground for a long-term confrontation in many areas that will not be easily resolved. 

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 talks will lead market to price in a full tariff scenario and thus bad for stock markets.

In the short term, markets are trying to strike a balance of softened Fed tone, which is positive to stock market, and trade uncertainties which is negative for the market.

In the mid-term, however, some of the advanced US economic data has shown signs of weakness, such as durable goods, capax and housing data. Those are leading macro data. This adds on concerns of a potential cyclical downturn as technology shares earnings have probably peaked as well.

Meanwhile Russia is in talks with OPEC regarding production cut in an attempt to support oil prices. Oil prices are still in a clear bear trend, but if a meaningful deal is reached between OPEC and Russia to tackle glut problems, we can probably expect a meaningful rebound in energy prices.

AUD/USD is highly sensitive to base commodity prices and China data, therefore is susceptible to higher volatility in relation to this weekend’s G20 outcome. AUD/USD has breakout above a bearish channel and formed a double bottom pattern in October. Immediate support and resistance levels could be found at around 0.722 and 0.737 area respectively.

AUD/USD

By Margaret Yang in Singapore

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