The much-anticipated meeting between US President Donald Trump and China’s President Xi Jinping happened on Thursday before European and US markets opened. Since then, financial instruments have behaved slightly positively, if generally muted in response to the major geopolitical event. It seems traders are moving on quickly, but there are some important issues that could drive currency markets.
Markets were largely expecting no major breakthroughs at the meeting, so the result isn’t a major surprise. However, traders did take note of the differing messages provided by Beijing and Washington, as they indicate the underlying interests of the two superpowers. Trump was notably effusive towards his counterpart, talking about friendship and trade. Xi also talked up cooperation and trade, but issued a stark warning about the Taiwan issue. Both also offered different views on Iran, with China not mentioning it, while the US readout said Xi agreed that Iran cannot have a nuclear weapon and shouldn’t obstruct the Strait of Hormuz.
Markets Looking for Direction
Following the meeting, market risk was generally positive, if with a little bit of caution. Analysts suggests that the fact nothing of particular note happened at the meeting as a positive for equities. The meeting ended a certain amoutn of uncertainty, and essentially affirmed the current conditions. That allowed stock traders to focus on AI growth, with bourses rising.
For Forex, which is more sensitive to geopolitical tensions, the situation is more complex. The Yuan rise to the highest level against the dollar in nearly three years, as China’s economy appears to be bolstered. However, the greenback also gained against other major currencies, as markets resumed their concerns about the geopolitical situation. In other words, the risk-on sentiment around tech is being hedged around war risks, supporting the dollar.
New Fed Chair, Record Yields
On Wednesday, the US Senate officially confirmed Kevin Warsh as new Fed Chair to replace Jerome Powell when his term is up on Sunday. Warsh is seen as more dovish. But, the market is coming to the conclusion that the hawks will win out, and the next move from the Fed will be a hike. After a strong PPI indicated that inflation pressure was rising, the odds of a rate hike by the end of the year rose to 40% from 20% just a week ago.
At the same time, the US Treasury auctioned off 30-year bonds, with a yield of over 5%. That’s the first time since the the subprime crisis that yields on that particular issuance is that high. The benchmark 10-year Treasury was also at a year high, suggesting growing investor nerviousness about US government spending and economic growth.
Dollar Winner in Yields Battle
Yields around the world have been higher as markets price in higher inflation and central banks turning hawkish amid the energy crisis. However, the dollar is one of the few currencies strengthening on higher yields, while European currencies remain under pressure.
Economic growth prospects are likely to be the focus for how currencies are driven by monetary policy in the coming months. After the Trump-Xi meeting, the focus could turn to signs of deals made behind closed doors that would alleviate trade tensions between the countries and support their respective economies.
