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The Daily Edge is authored by Ivan Delgado, Market Insights Commentator at Global Prime. The purpose of this content is to provide an assessment of the market conditions. The report takes an in-depth look of market dynamics, factoring in fundamentals, technicals, inter-market in order to determine daily biases and assist one’s decisions on a regular basis. Feel free to follow Ivan on Twitter & Youtube.
Mr. Market made one of the most commanding moves as part of the month-long risk aversion chapter we are so deeply entrenched into by sending the Yen sky high in response by yet again more retaliatory soundbites by US President Trump, this time announcing that Mexico is next up to be taxed on all imports. In a matter of days, with both sides scheduled to meet this Wednesday for talks, we will find out if Trump is bluffing or he really means it, as you never know what to expect. Nonetheless, the latest Mexican developments acted as the nail in the coffin in the terrible performance in risk-sensitive assets such as the S&P 500 or US yields during May, the latter signaling the Fed should start to seriously consider accommodative policies as we head into H2, a scenario Fed Vice Chair Clarida gently hinted on last week. But leaving Mexico aside, the dominant driving factor continues to be the escalating US-China trade tension, with the latter making its posture even more explicit after the publication of a White Paper, essentially telling the US that they are ready to have a long fight if necessary. A game of chicken with no end in sight. After all said and done, the crosscurrents in the currency market saw the USD hit the hardest in the G10 space (aside from MXN and CNH), while the CAD also suffered equally harsh selling pressure on mounting negative inputs (GDP, Oil …). The Euro showed a combatant stance as did the AUD, with both currencies facing its respective Central Bank policy meetings this week. The AUD will gaer most of the attention as the RBA is set to finally end its long-held thoughtful wait by announcing its first rate cut in years while the ECB is set to stay cautiously sidelined on new measures.
* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.
The one-way street fall in US yields and the DXY comes in response to a market spooked by the latest threat by US President Trump to tax all import goods from Mexico. The bold move by Trump, indirectly, has the market discounting that China will be, at the very least, further disillusioned about the prospects of pursuing a comprehensive trade deal with the US in the first place. Mexico spent over 1 year negotiating the ratification of a modified NAFTA agreement only to receive this reprimand by Trump over border issues, so the Chinese may be asking themselves, why bother? Through the eyes of China, this new chapter against Mexico is mounting evidence of how dicey the environment can be when trying to talk serious business with the Trump administration. The bottom line is that the more signs of trade disputes in existence with no end in sight, with China at the forefront, the more the market is set to selloff to adjust its true valuation. Let’s not forget that a large part of the epic recovery rally in risk through Q1 came on the basis of a high degree of certainty, to the point of being fully priced, that the US and China would ink a deal. Every day, we seem to be moving further apart from that anticipated event, hence why the risk off remains well justified. It doesn’t matter what asset class one looks at, the message is unambiguously clear. The deleveraging phase is well and alive, and the closes in risk assets, from the S&P 500, through the US 30y bond yield, to the Japanese Yen index, all suggest a market with a null appetite to catch a falling knife.
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