Traders at the New York Stock Exchange. Despite bullish sentiment in the US, global markets remain sensitive to any new trade war headlines and this has driven some investors to bonds. Image Credit: Bloomberg

Dubai: US markets are likely maintain positive momentum going into midterm election week, thanks to US-China trade talks.

US President Donald Trump and Chinese President Xi Jinping were closer to a breakthrough on trade talks after an initial round of duty hikes on imported items from both countries. However, Larry Kudlow, Trump’s top economic adviser, is reported to have told a channel that the administration hasn’t been working on a trade plan with China. Both the leaders are scheduled to meet on the sidelines of the G20 meeting in Argentina.

slide in the Dow at close on Friday to end at 25,270.83

“Earlier this week, the US president threatened to apply tariffs on all remaining Chinese imports but then a phone call, the first in six months, between the two leaders suddenly lifted expectations that a solution could be found. We would strongly suggest that this is nothing more than theatre designed to boost the market ahead of next Tuesday’s midterm elections,” Ole Hansen, head of commodity strategy at Saxo Bank, said. US midterm elections are due on Tuesday.

The Dow Jones Industrial Average snapped a two day gaining streak on Friday, closing 0.43 per cent lower at 25,270.83. The index rose 2.36 per cent last week. The S&P 500 index closed 0.63 per cent lower at 2,723.06 on Friday, after gaining 2.42 per cent in the past week.

slide in the S&P 500 on Friday to close at 2,723.06

“Global markets will remain very sensitive to any new headlines over eased potential trade tensions, while investors also need to prepare and monitor possible risks with the US midterm elections next week,” Jameel Ahmad, Global Head of Currency Strategy and Market Research at FXTM said.

Bonds and cash

Some of the investors are ploughing money in bonds and some are sitting on cash, according to Andrew Milligan, Head of Global Strategy at Aberdeen Standard.

“Some money is flowing back into bonds, not much though as yields are only the same levels as late September. It is difficult to be very overweight bonds when most investors still think the US Federal Reserve will keep tightening interest rates into 2019. Some money is simply flowing back into cash, although surveys suggest holdings are already above average,” Milligan said.

The Federal Reserve is expected to continue to hike rates in the backdrop of better than expected jobs or growth data, pointing to sustained recovery in the world’s largest economy. The Fed has hiked rates thrice this year to 2-2.50 per cent, and analysts expect two more hikes between now and December 2018.

Investors “face a fork in the road” situation, Milligan said.

“If they agree with our view that a global recession is still some quarters or even years away, then this correction is a buying opportunity, especially for beaten down stocks, sectors and markets,” he added.