Risk-on revisits financial markets once again

Summary:

• The US and China have reportedly agreed to a truce in the ongoing trade war
• Trump warns there will be substantial additional tariffs if no progress on a trade deal is made during the G20 summit
• New Zealand business activity indicators deteriorate in June

US-China truce at hand

The United States and China have supposedly agreed to a truce in the ongoing trade battle, according to revelations brought by South China Morning Post and Politico. These reports suggest that details of the agreement are to be announced in a press conference yet before the official meeting between Chinese President Xi Jinping and US President Donald Trump. The meeting has been scheduled for Saturday, 2:30 GMT, the White House announced. Let us specify what does a possible truce between the two sides actually mean? In our view, it does not mean a cancellation of previous tariffs, instead both countries may agree to not impose additional duties for some time. This would mean that the US will not slap China with an additional round of duties on $300 billion of imported goods, at least for the time being. Nevertheless, it looks like the G20 summit in Osaka - it begins on Friday - could be crucial as Donald Trump has already warned that he is ready to place more painful tariffs on Chinese products if there is no progress on a trade agreement after the planned meeting with Xi Jinping. 

As you can see, many unknowns are still there and actually everything could happen by the end of this week. Either way, investors have cheered thus far focusing on another wave of optimism giving hope that there will no further escalation of the trade war. As a consequence, Asian equities have risen meaningfully: the Hang Seng is 1.3% up, the Shanghai Composite is 1% up and the Japanese NIKKEI is 0.9% higher. A risk-on mode has also been experienced in the US bond market with the government 10Y bond yield recovering to as high as 2.07% overnight. It has moved down a bit since then and it is trading at 2.055% at the time of preparing this commentary.

The Hang Seng is back again around the 50% retracement of the latest huge bullish swing. A move through this area would see the price rising up to 11100 points. Source: xStation5

Business confidence deteriorates in New Zealand

In terms of macroeconomic releases we got overnight it is worth mentioning soft indicators from New Zealand presenting business confidence and activity outlook. The former slipped to -38.1 from -32 while the latter slid to 8 from 8.5 points. In the comments to these releases ANZ, the bank releases results of these surveys, wrote that the outlook for the economy was murky. However, it also added that there was no reason for the economy to fall into a deep hole (mainly due to record low interest rates, the tight labour market and decent commodity prices). The bank concluded that it expected two more OCR cuts this year from the RBNZ. The NZ dollar is barely changed this morning as this negative impact is offset by rising demand for riskier assets.

Business confidence deteriorated in New Zealand in June. The index still hovers around its lows. Source: Macrobond, XTB Research

In the other news:

• Japanese retail sales grew 0.3% MoM in May, falling short of the median estimate of a 0.6% MoM increase

• Chinese industrial profits rose 1.1% YoY in May after falling 3.7% YoY in April

• Boris Johnson said that odds for leaving the EU without a deal are “million to one”