Asian Markets Mixed on Concerns Over U.S.-China Relations

The major Asia-Pacific markets are trading mixed on Monday with investors still digesting the events from last week, while assessing the potential impact of new developments this week. Last week, the primary driver of the price action was the dovish tone set by the U.S. Federal Reserve.

Although Fed policymakers voted 9 to 1 to keep rates on hold at this meeting, and didn’t actually say interest rates would be cut, they left enough hints to indicate that investors should prepare for one. And as we all know by now, cheap money drives the stock market higher despite all the warnings out there about lower profits due to tariffs, sanctions and boycotts.

The first clue that a rate cut could take place before the end of the year was the Fed dropping the word “patient” in its monetary policy statement. The second clue was the projection of at least one rate cut in the FOMC members’ “dot-plot” forecasts. The third clue came from Fed Chair Jerome Powell, who said policymakers are prepared to become “accommodative.”

U.S. Treasury investors priced in a 100% rate cut for the end of July as they drove the benchmark 10-year Treasury yield below 2% for the first time since late 2016. This drove the U.S. Dollar sharply lower against the major currencies as well as Asian currencies and emerging market currencies.

The weaker dollar could help the emerging market countries recover from economic weakness, which could help revive the overall Asian economy.

Investors Watching US-Iran Relations

Soaring crude oil prices could help derail the rally in Asia if they become too volatile due to an escalation of tensions between the U.S. and Iran. Prices remain firm early Monday, but they could ease as the week goes on if the two countries agree to negotiate among other things, Iran’s nuclear program.

President Trump said the U.S. would go into any negotiations with “no preconditions”. Secretary of State Mike Pompeo reiterated the President by saying, “We’re prepared to negotiate with no preconditions.”

Trump-Xi Meeting at G20 Summit

Although both the United States and China agreed to a meeting between U.S. President Trump and China President Xi Jinping, there doesn’t seem to be any excitement in the markets over the upcoming event scheduled for this weekend.

This suggests there may be doubts that the meeting will lead to anything major regarding renewed trade negotiations. Furthermore, the U.S. hasn’t made life any easier for the Chinese since the meeting was announced early last week.

For example, the U.S. Commerce Department on Friday added five Chinese technology companies to the so-called entity list that effectively prohibits them from buying parts from U.S. companies.

Furthermore, China fired back that it would like the U.S. to cancel “inappropriate” actions against Chinese companies, according to Wang Shouwen, vice minister of commerce, said Monday.

I place the odds of a meeting between Trump and Xi taking place at 50/50, and if it does take place, it’s another 50/50 that they’ll reach any substantive agreement.

Look for stocks to give back some of last week’s gains if the meeting is cancelled and to rally if they agree to renewed trade talks.