The deterioration of relations between the United States and China in the wake of growing pressure from Washington, which is claiming Beijing about American intellectual property, has a strong negative impact on the demand for risky assets, primarily for the shares of companies. Against this background, the local high-tech sector in the United States fell on Tuesday, pulling the rest of the stock market along with it.
Investors are frightened that the escalation of tensions between the United States and China, due to Huawei, can only increase the barrier to achieving a trade agreement between countries, which is already stalled and may not be concluded in the near foreseeable future.
In general, there is currently no coordinated dynamics in the markets, as has usually happened in recent years. Rising fears tend to increase the demand for defensive assets including government bonds of economically developed countries, gold, the Japanese yen, the Swiss franc, and the US dollar. However, we did not observe this on Tuesday, which can only be explained by the market expectation on the significant from the Fed and the ECB on monetary policy prospects, as well as the publication of the May meeting minutes in which market participants will be careful to look for signals to the Fed about the prospective reduction in interest rates. For the ECB, the option of long-term preservation of a soft monetary rate.
On Tuesday, the market can recover, that is if the head of the Federal Reserve, Jerome Powell, will report something new on the economic conference. But we doubt that this will happen, since a high degree of uncertainty in world markets, particularly the negotiation process between the Chinese and the Americans and the lingering risks for the American economy will restrain the activity of the regulator.
With regard to the currency market, we note that radical changes are hardly expected. Major currencies will most likely continue to trade lower against the US dollar, as the market is increasingly dominated by the view that the Fed may delay its pause in the decision to change something in monetary policy. In turn, competing currencies will remain under pressure, as there is no reason to expect changes in the direction of tightening by the Central Bank, which represent them.
As we have previously indicated, most likely, we should expect the option of continuing the pause for an indefinite time on the part of the Fed, which will support the rate of the US currency.
Forecast of the day:
The AUD/USD pair is trading below 0.6935 amid a signal from the RAB about the likelihood of lower interest rates at the June meeting. The pair has the potential of a local decline to 0.6825.
The NZD/USD pair also declines under the pressure of the AUD/USD pair. It is likely that it will continue to decline to 0.6485 after overcoming the level of 0.6510.
