Sino-US Trade Talks Keep Invigorating The Risk Rally

The State of Affairs in Financial Markets — Jan 21

The unambiguous ‘risk on’ profile keeps on going with no end in sight so long as the US and China continue to signal that a more protracted trade deal is in the making or we get evidence that supply is returning back into the equity markets. We imagine the Fed Put is undoubtedly also working it magic too.

The offer by China to reduce the trade surplus to the US to zero by 2024 was enough for risk-seeking strategies to perform exceptionally well, even if significant uncertainties still remain as the US maintains its hardline stance by demanding more ambitious concessions if a deal is to be sealed. For instance, the US is looking to reduce the trade deficit it has with China over 2y.

For now, the net result is clear, as the bellwether for equities (ES) jumped by over 1.5% led by Industrial Goods with Technology also faring well.

The ebullient mood received an accelerant by higher yields in the US fixed income market, where the US 30-year bond rate is now retesting 3.1% daily resistance as flows head back into riskier bets (equities). The US Dollar, against conventional belief, is also riding higher on the risk-friendly mode, as the Euro and the Chinese Yuan trade on the backfoot.

It’s worth noting that the renewed momentum in the USD, technically speaking, allows further upside leeway after the breakout of a 1-week long range in the DXY. The break lower in Gold also solidifies the outlook for the USD short-term, an important development to strengthen the ‘risk-on’ tone.

Interestingly, the improved sentiment has been spreading into the broader market spectrum, with equity investors returning with a higher degree on confidence into international markets such as the Euro Stoxx 50, China’s CSI 300, Hang Seng, Nikkei to name a few, all rising with vigor as the market keeps discounting the removal of the Chinese tariffs by the US in return to more reciprocal and fair trade conditions. What’s more, the renewed commitment by the Chinese government to flood the system with additional liquidity via fiscal and monetary easing is also underpinning the risk profile.

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The Daily Edge is authored by Ivan Delgado, Head of Market Research at Global Prime. The purpose of this content is to provide an assessment of the market conditions. The report takes an in-depth ...

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