(08 MAY 2020)DAILY MARKET BRIEF 2: Negotiations betweenUS and China have been advanced to next week

In the currency markets, the US dollar is down on the back of an untouched risk appetite, but the US treasuries remain in demand. The US 10-year yield remains capped near the 0.70% mark.

The USDJPY attracted buyers near the 106-support, as the USDCHF reached the 200-day moving average (0.9785).
Gold is better bid above the $1700 per oz, as we doubt that the recent positive correlation between gold and risk assets could also be an increased hedge against the possibility of a swift downside correction in equities. But buyers continue defying the bad economic and corporate data and push stock indices higher with a solid determination.

The EURUSD rebounded from 1.0766 on the back of a softer US dollar and the European Central Bank (ECB) President Lagarde’s defense of the monetary policy amid the German court decision that the massive PPSP purchases may be unproportionate, hence partially illegal. Lagarde blinked at investors saying that the ECB will give the necessary financial support ‘undeterred’ and added that the principle of ‘proportionality’ is already a factor in ECB’s decision making. Given the ECB’s mandate to revive the rock-bottom Eurozone inflation, the amount of bond purchases could be adequate, however, in absolute terms, the ECB holds a massive pool of government debt, and its balance sheet continues ballooning by the day. And in reality, it somewhat comes down to the central bank printing money to finance government debt. If the euro remains strong amid the massive cash printing, it is because investors have blind faith in ECB and the euro.

But, despite Lagarde’s determination to fight back the German court decision, gains in euro will likely remain capped below the 1.10 mark, as the ECB’s justifications are yet to be approved by Germans, if not the entire ECB program could collapse, pulling the rug from under the European economy at the worse imaginable time. Solid intermediate offers are eyed prior to 1.09.
Cable bounced to 1.24 after yesterday’s dip at 1.2265 on hope that at his speech on Sunday, Boris Johnson may relax some confinement measures starting from next Monday. But the overall expectation is the extension of most measures until the first week of June.

Today, Britain and France are closed for bank holiday. DAX is poised for a positive start following a risk-on overnight session.

Finally, negotiations between the US and China have been advanced to next week, after US President Donald Trump threatened to walk away from the phase-one deal using the fact that China hasn’t purchased the equivalent of whatever they had promised in the first four months of the year. Of course, China had a good excuse to fall behind its schedule, but it is always difficult to tell whether they could make their voice heard. On the other hand, only China could make a miracle happen by purchasing decent amounts of US farm products when it is the most needed. Henceforth, we remain positive regarding the US - China talks, even though the Trump risk will remain a permanent shadow on negotiations due to the President’s unpredictable temperament and unexpected comments and tweets.