Asian markets traded on varied risk sentiment on Friday, as a bag of mixed news left investors undecided on whether to enter or to exit risky assets.
OECD warned that the global growth fell to the lowest levels since the last financial crisis amid the trade war between the US and China dampened the global economic activity and investors’ confidence. Anti-China protests in Hong Kong took a toll on the city’s businesses, and the HK case was brought to the attention of the US lawmakers, which now discuss a yearly review of the situation in Hong Kong when it comes to the ‘special status’ of the city. Meanwhile, geopolitical tensions between the US and Iran escalate, as Iran threatens of an ‘all-out war’ if Saudi or the US strike on the country as a response to the Aramco drone attacks.
WTI held ground above $58 a barrel, as Brent crude advanced past $65. Tensions in the Middle East are probably here to stay. Hence, oil prices will continue swinging higher with the mounting risk of further supply-side disruptions due to geopolitical tensions, and lower with the fears of a deepening global slowdown. But overall, oil prices are expected to settle above the pre-attack levels.
NY Fed injects hundreds of billions to cool down pressure on borrowing costs, as the Fed remains muted
In the US, the short-term liquidity crisis prolonged to a fourth day. The New York Fed said it would inject another $75 billion in the economy via a renewed repo operation on Friday. In total, the NY Fed would have injected $278 billion in the market this week to cool down the upside pressures on the short-term borrowing costs.
Other than that, the Fed downplayed this week’s repo crisis, which happened as a result of a coincidence of unrelated factors such as Treasury auction settlements, tax payments and a broad-based sovereign bond sell-off that happened a week earlier, obliging primary dealers to buy a massive amount of assets from investors.
As it appears, the Fed’s muted reaction to the tightened short-term liquidity trimmed the dovish expectations for the coming meetings. Investors hope that the Fed will at least pull out a popular easing tool, the Quantitative Easing (QE), to remedy to the short-term squeezes in liquidity before the end of the year.
Markets mixed
The US equities did little on Thursday. The S&P 500 closed where it opened. The Dow Jones erased 0.19%, while Nasdaq recorded a timid 0.07% advance.
The mood was better in Asia. Japanese stocks gained on building hope that the Bank of Japan (BoJ) could ease its policy at next month’s meeting, as inflation excluding fresh food closely monitored by the BoJ eased to 0.5% in August as expected, from 0.6% printed a month earlier. The USD/JPY traded near the 108.00 mark.
Australian equities gained, but energy stocks lagged.
Hang Seng remained on the back foot, as investors preferred staying away from Hong Kongese stocks into the weekend, which could see more anti-China protests.
FTSE 100 Futures (-0.53%) edged lower, as Cable rallied to 1.2560 after EU’s Juncker suddenly changed his mind from a ‘palpable’ no-deal Brexit risk to a possible deal by October 31st. Positive comments came after Irish Prime Minister Leo Varadkar said he would meet Boris Johnson to seek agreement on the problematic Irish border issue. Johnson’s response is yet to be seen.
On the other hand, Johnson said that he would not refrain from shutting down the parliament again, if the Supreme Court finds the actual suspension unlawful. Still, the pound is avid about any good news. Cable could extend rally if the MPs can return to parliament immediately.
Progress in US-China talks could give a positive spin to stock markets, but risks prevail
On the US-China front, some progress is being made in trade negotiations. Recently, we have seen President Trump softening his stance against China, bringing the possibility of a temporary deal on the table. And given that the two countries are still far from achieving a full agreement, a provisional solution should give a significant relief to investors and send the US equities to fresh record highs.
Especially with a 'timid' Fed, investors need fundamentally good news to regain confidence. There is only so much that a central bank could do. And President Trump now faces the fact that the Fed won't be as accommodative as he wished it would be. So, there is another way to send these stocks rallying into the 2020 election year – getting a deal done with China.
Of course, the extent of an eventual rally depends on several factors. The dovish shift in global central banks' policies provide an investor-friendly environment for new highs in the US stock markets. This said, the Trump administration remains the biggest downside risk to an interim deal with China, or to a rally following a potential deal. No one can guarantee that Donald Trump won’t walk away suddenly, even if an interim deal is sealed in the coming weeks.