Burning Down The House | Daily Market Commentary with Jeffrey Halley
There are rather too many “Talking Heads” attempting to burn down the House for both President Trump and financial markets at the moment. Reuters reported overnight that an interim trade deal might not happen until the new year, well past the December 15th date for the next round of US tariffs. President Trump himself, while touring an Apple manufacturing facility that was incredibly, actually in the United States, said that China wasn’t playing ball on his demands.
President Trump would probably love to be burning down the House as well, in this case, the US House of Representatives. The House quickly passed the Senate’s Hong Kong law yesterday with only one dissenter. It now heads to President Trump to be signed into law or vetoed. The President has made known his distaste for the bill, but will probably have to sign it anyway, or risk Congress overriding him. What the Chinese will make of it, and what potentially harmful effect it could have on trade negotiations has both the President and financial markets nervous.
The House is also continuing its impeachment hearings of President Trump; another reason cans of petrol, matches and old newspapers are being kept well away from him by his aids at the moment. The US Ambassador to Europe, Gordon Sondland, appeared to dig shallow graves for just about every senior administration figure yesterday, over the Ukraine affair. What he stopped short of, was directly fingering the President himself. It will no doubt be seized on by Senate Republicans that no beyond reasonable doubt has been tabled to impeach the President. It continues to be my base case that Teflon trump will dodge this bullet with their being zero chance of the Senate mustering a 2/3rds majority to oust him.
Nevertheless, turmoil on the Hill, reports of possible trade deal delays and negative comments from the President himself on the state of trade play weighed on stock markets. Wall Street finally, but reluctantly, giving up some of its trade deal global recovery rally last night. US bond yields also continued falling as they have been for the past week.
Asia has been nervous about the state of trade play all week with equities ex-China underperforming. The early price action this morning suggests that the cautious walk to the exit may be turning into an unruly every man for himself.
Singapore’s GDP rose 0.50% YoY this morning, as expected. The City-State produced green shoots across broad sectors of the economy except for its problem child, electronics. The data reflects the increase in confidence in the world economy as China and the US moved towards an apparent interim trade agreement. Developments overnight will have dampened those expectations. With such a high correlation to world trade, it could be a bit too soon to be breaking out the champagne over this morning’s GDP data.
The Bank of Indonesia announces its interest rate decision this afternoon at 1500 SGT. We expect Indonesia to pause unchanged at 5.0% after four cuts this year. Indonesian officials have signalled that they are prepared to widen the government deficit to support growth in the economy fiscally. Having completely missed out on the trade war “not made in China” dividend enjoyed by Thailand and Vietnam, this is probably a sensible decision. Indonesia faces serious challenges ahead on labour reform for example, and with nationalist protectionism voices never far away, will likely continue to bronze medalist nobody remembers at the Olympics.
Asia and Australasia equity markets are an ocean of red this morning as Wall Street’s modest pullback, and trade worries see the region’s investors hit the sell button repeatedly. The Nikkei 225 is 1.0% lower, and the Kospi is down 1.15%. China’s Shanghai Comp and CSI 300 falling 0.15 and 0.40% respectively. Australia’s ASX200 has fallen by 0.50% and the Singapore Straits Times by 0.80%.
Over in Hong Kong, the Hang Seng is 1.80% lower, making it the worst-performing market today in Asia so far. The successful Alibaba secondary listing yesterday has already been forgotten, with investors taking fright over the US Congress Hong Kong Law, trade negotiation impasses and no sign of a de-escalation of the protests that have so severely disrupted the economy. If anything fears are likely increasing that Washington’s actions will embolden protestors even further, and I cannot see any scenario that ends positively in that case.
The dollar strengthened overnight against the major currencies as fears of a trade impasse gathered pace. The dollar index rose 0.06% to 97.92. The currency market continues to remain in a slumber generally and will require concrete detail on trade negotiations, for good or for ill, to awake from hibernation in the G-7 space.
USD/CNH rose 0.20% to 7.0400 overnight and has traced out another small gain to 7.0430 this morning. China’s Chief Negotiator, Liu He, said he remained cautiously optimistic about reaching a phase-1 trade deal. It has limited the fall-out amongst both USD/CNH and Asian regional currencies this morning, which are mostly unchanged against the dollar.
Oil prices surged overnight after the official US Crude Inventories posted a 1.40 million barrel rise. Brent crude rose 2.80% to $62.40, and WTI rose an incredible 3.30% to $57.00 a barrel.
The scale of the overnight rallies has left me somewhat confused after oil fell so strongly the day before and against a background of very negative trade sentiment. After the massive increase in the API Crude Inventories, the day before to 5.95 million barrels, a much slower growth in the official numbers – almost exactly as forecast in fact – may have sparked a short-covering rally.
The size of the rallies on both contracts overnight, perhaps implies that liquidity is falling on oil futures, as disappointing trade progress, extended long positioning and intra-day volatility takes its toll. I can think of no other sensible reason for oil’s price action overnight.
Gold finished unchanged at $1472.00 an ounce overnight, having tested, and failed ahead of the technical resistance level at $1480.00, earlier in the session. Gold’s rally is, of course, being driven by the souring of trade sentiment across the globe — the continuation of the rally, and its ability to extend, being almost entirely contingent on continued negative headlines.
Nevertheless, gold is forming a series of higher lows daily, and the ensuing wedge pattern does imply a technical breakout is not far away. Which direction that will be is somewhat up in the air though. A break of $1480.00 could see a sharp reaction to $1500.00 an ounce. Conversely, a move back below $1465.00 an ounce likely signals that the rally of recent times has now run its course.