Financial, forex trading to be muted on looming US-China trade deadline

The March 1 deadline is less than 3 weeks away with no resolution reached, renewing fears on global economic growth

By MARK RAO

Weakening risk appetite will likely cap gains in the Malaysian financial and foreign-exchange (forex) markets this week, as the 90-day US-China trade truce nears its deadline with no concrete resolution tabled yet.

The March 1 deadline for an amicable trade arrangement between the US and China is less than three weeks away with no resolution reached, renewing fears on global economic growth.

FXTM chief market strategist Hussein Sayed said anxiety and concerns over global economic growth have returned after a strong rally in risk-based assets since the start of 2019.

“This was evident in the currency markets last week where inflows returned to the US dollar despite a dovish US Federal Reserve (Fed),” he said in a research note yesterday.

He added that Washington and Beijing failing to reach an agreement on trade could result in more than double the amount of US-led tariffs on Chinese goods and thus fuel further risk aversion.

On global economic growth, he said fixed-income markets globally are pointing to signs of an economic slowdown.

“Japan’s 10-year bond yields have fallen below zero once again, the German 10-year bunds yields are trading at their lowest level since October 2016 and US 10-year Treasury yields are 19.3% below the peak reached in October,” he said.

“While this does not necessarily mean a recession is near, fixed-income markets are indicating a significant slowdown in global economic growth.”

To recap, monetary easing by central banks worldwide led by the Fed, coupled with the prospect of reconciliation between the US and China had bolstered sentiment across emerging and risk-based markets in the beginning of the year.

The ringgit continues to gain ground against the US dollar following the holiday-thinned trading week, trading at as low as the RM4.06 mark yesterday, while Malaysia’s equity market also closed higher.

Up by 0.12% or 2.04 points, the FTSE Bursa Malaysia KLCI closed at 1,688.56 yesterday as some 2.58 billion shares were traded for RM1.66 billion.

However, Oanda Corp senior market analyst Jeffrey Halley said politics rather will overshadow markets this week as US Trade representative Robert Lighthizer and Secretary of the Treasury Steven Mnuchin head to Beijing for another round of trade talks.

“There’s a sense of urgency to this round because the US has imposed a March 1 deadline by which, they expect the Chinese to put a deal on the table,” he said in a research note.

“If no deal is agreed by then, a belligerent US President Donald Trump and US Congress will be more than willing to simply extend the trade war, so China will need to make the first move if they are to reach a detente.”

He said the progress of the US-China trade talks stands to weigh heavily on regional currencies, including the ringgit, as virtually all have a high beta to China and are intimately entwined economically.

“Malaysia and Indonesia, in particular, could feel the chill winds if the talks don’t go well.”

On the dollar front, he said the US dollar remains strong against major and regional currencies.

“Talk of (the greenback’s) demise could be premature in the bigger picture because — of all the developed nations — the US at least partially normalised interest rates before the Fed called time in January.”