Summary:

• China’s President Xi Jinping reiterates his pledge to greater openness, increased imports
• Risk-correlated assets get a boost as Xi’s speech could be seen as a turning point
• Federal Reserve Kaplan claims it’s too early to judge an effect of tariff talks, he opts for three rate hikes this year

The long-awaited keynote speech from Chinese President Xi Jinping was finally delivered, and it brought some peaceful remarks with regard to the ongoing trade battle. The bottom line is Xi decided to strike market-friendly rhetoric affirming that China is going to open its sectors including auto manufacturing, increase imports, lower auto import tariffs, cut foreign-ownership limits on manufacturing as well as expand protection to intellectual property. During his speech to the Boao Forum in Asia, being Chinese answer to Davos, he also warned against “a cold war mentality” adding that the country should push for free trade and uphold multilateral trading system. All of these comments turned out to be markets positive as they seem to signal the second largest economy in the world is not interested in deteriorating relations with the US. Having said that, China is surely not going to sit around if the US side keeps rolling out further trade restrictions. Therefore, after Xi speech it seems that we have to wait for an official response from the White House in order to know if the US rhetoric changed.

The Australian dollar keeps climbing in the morning in the aftermath of improved risk appetite. After bouncing off the support localized at 0.7650 it’s possible the pair will be able to touch 0.7740. Source: xStation5

Markets are responding unequivocally to the Chinese President speech as it’s seen as a turning point in the ongoing trade dispute. However, it appears that the jury is still out whether the issue has been already solved. Admittedly, Xi Jinping avoided inflaming trade rhetoric, which helped improve risk sentiment all around the world, the details of a potential trade agreement have yet to be hammered out, and on that account caution seems to be warranted at least until some binding steps are taken. On the currency front the Australian dollar has been undoubtedly the biggest winner so far while the Japanese yen has been on the back foot due to improved risk-on sentiment. The US 10Y yield moved up 3 basis points whereas Asian stock markets stayed broadly higher after the Xi speech. As far as the Aussie is concerned it’s worth mentioning that the trade war thread outweighed deteriorated business conditions and confidence we were offered overnight. The NAB business conditions index slumped to 14 from 21, and the confidence gauge eased off to 7 from 9 in March. Nevertheless, despite the weaker readings both indicators remained above their historical averages pointing to robust business activity in Australia.

Finally, let us mention Federal Reserve Kaplan comments from Beijing following Chinese President appearance. He said that “it is too early to judge how this is going to affect the economy”, and added that ” the rhetoric (Chinese), if it goes on for long enough at this level, is having somewhat a chilling effect”. Otherwise, he reiterated his view that three rate hikes are his base scenario suggesting the Fed should raise rates because the economy is near full employment. He also assured that the US yield curve shape deserves more attention as inverted yield curves were not positive in the past.

The SP500 (US500) jumped following Xi remarks but the major obstacle remained in place. A sustained move above 2680 points would entail further gains albeit there is still some way to go before seeing it. Source: xStation5