Risk sentiment still sensitive to US-China trade tensions

Asian stocks are mostly in positive territory, encouraged by the Dow Jones Industrial Average posting a new record high above 27,000 while the S&P500 is just shy of the psychological 3,000 level. Markets appear set to end the week in risk-on mode, as the Japanese Yen remains above the 108 psychological mark against the US Dollar, Gold has moderated closer to the $1400 support level, while yields on the benchmark 10-year US Treasuries remain elevated above 2.10 percent at the time of writing.

US-China trade tensions continue to loom over global sentiment, with investors still awaiting developments from the revived negotiations between the world’s two largest economies. In the interim, investors are once again reminded about how the protracted US-China conflict is dampening global growth. China’s imminent announcement of its June external trade data could also dictate whether the risk-on tone is sustained for the rest of the trading day. Risk appetite will be hit by a steeper deterioration in the global growth outlook, although such downcast sentiment could be mitigated by the prospects of incoming stimulus from major central banks.

Fed still on course to cut rates, despite better-than-expected US inflation

At the time of writing, G10 currencies are advancing against the Greenback, while Asian currencies are mixed. The Dollar Index (DXY) is hovering around the 97 handle, even as the latest US inflation data appears to muddle the case for the widely-anticipated Fed rate cut this month. US inflation posted a broad-based rise in June while also exceeding market projections.

However, a month’s data doesn’t make for a trend, and the latest inflation follows Fed Chair Jerome Powell’s dovish comments, highlighting the risk that muted inflationary pressures may be persistent. The recent positive surprises in the US jobs and inflation data aren’t likely to dissuade the Fed from cutting US interest rates later this month. Subsequent economic indicators could however influence market expectations over the scope of US monetary policy easing, and dictate whether multiple Fed rate cuts are warranted over the rest of 2019.

Oil’s gains to be capped by OPEC’s forecasts of global oversupply in 2020

Brent futures are closing in on the $67/bbl level, while New York crude remains above $60/bbl, even as OPEC expects a global oversupply next year. The surge in US shale production has been blunting OPEC+ producers’ attempts to rebalance global markets, while the demand for Oil continues to waver in the face of heightened US-China trade tensions. The prospects of an oversupply also raise serious questions about whether OPEC+ members can afford to exit its current production cuts campaign in March and risk another slump in Oil prices.

OPEC’s projections for excess supply in 2020, despite its extended production cuts, are likely to keep Oil prices pinned down, barring a sudden escalation in geopolitical tensions that meaningfully constrict global supplies.