China Invites The US For Tea | Daily Market Commentary with Jeffrey Halley
The Wall Street Journal is reporting that China has invited Washington’s top trade negotiators for another round of talks ahead of the Thanksgiving holiday. With progress on a “phase-one” deal, as everyone seems to be calling it now, looking more like a stuffed turkey each day, the story, if correct, will provide some much-needed relief ahead of the weekend.
Asian equities caught a dose of the trade flu at the start of the week and appear to be recovering today. Wall Street stubbornly stuck to the narrative that an interim deal would save the world and refused to budge from record highs. They started giving some ground mid-week but remain less than one per cent of the record highs.
The world will breathe a collective sigh of relief if the WSJ’s story is correct, but from my point of view, it isn’t particularly good news. If the US has to send its top negotiators back to Beijing at short notice to kickstart the talks, this is not good news; it is bad news. Surely all the upbeat rhetoric from the Hill over the last three weeks, about a deal being a few “details” away, was, therefore, just hot air? The next time someone in Washington says “just a few more details remain,” investors should probably ingest a pinch of salt and then hit the sell button.
The state of the trade talks is not where the market has been lead to believe it was by the narrative from Washington DC it would seem. (The Chinese Ministry of Commerce, if you recall, was far more circumspect last weekend) Thankfully, China appears to be blaming Congress, and not President Trump and his coterie, for the Hong Kong Law. After some initial grumbling, China prefers to concentrate on the more significant issues at hand.
Energy markets ingested a hefty dose of delusion overnight as well. Oil rose another two per cent for gains of around five per cent over the last two day; impressive, to say the least. Nothing has changed on the global macro front to justify such a rebound if anything the WSJ story implies they are actually worse than we’ve been led to believe.
The justification appears to be that OPEC+ will leave its production cut quotas unchanged at the OPEC+ meeting in December. Reuters has reported as much overnight which spurred the latest rally. The obvious point missed here, is that OPEC+ was going to leave the production cuts unchanged. Look at the price of oil; America is pumping over 12 million barrels a day, and even with Venezuela and Iran off the market, black gold is still falling. With a slowing global economy removing the production cuts would invite even more downside misery in prices, but does it justify a five per cent rebound? I don’t think so.
As the markets get more “trade-fatigued,” the more we start to see this sort of FOMO style, 5-minute macro sort of price actions. Stale positioning leads to wild intra-day swings on misdirected narratives. In this case, the world is positioned long to the gunnels, on a trade-deal directed recovery story. Bitter experience suggests these stories have a Tolstoy-like ending, (see Anna Karenina), then a Disney-like one. Caution is warranted ahead.
In true Friday-like fashion, the data calendar for Asia and Europe are gloriously empty ahead of the weekend. The flip side is that intra-day moves will be entirely rumour and headline-driven.
Asia stocks have bought into the possibility of more senior face to face trade talks in Beijing next week, with Asia and Pacific indices all broadly higher, defying Wall Streets gentle retreat. That said, Asia has been circumspect all week and have mostly corrected lower for much of it, even as Wall Street refused to accept reality until Wednesday.
The Nikkei 225 and STI are higher by 0.60% with the Kospi and Hang Seng up by 0.30%. The ASX 200 is higher by 0.65%. Mainland China sees the Shanghai Composite up by 0.75%.
Headline bombs aside, Asia should maintain its bu7llish bias throughout the remainder of the day. Europe may have a more difficult time buying into the euphoria unless we see something concrete from Washington DC or Beijing.
Global currency markets continue to remain rangebound, refusing to buy into the tail twisting volatile we have seen on both equities and oil. US treasury yields were mostly unchanged, and the dollar index was barely moved, up 0.08% to 98.00.
Asia FX traders look to have had enough for the week, with regional currencies unmoved by the trade rumours with the US/CNH falling just 40 points to 7.0290.
Oil’s great comeback continued overnight, powered higher by a Reuters story suggesting OPEC+ will not roll back production cuts in December. (please see thoughts above) Brent crude rose 1.95% to $63.60 a barrel, and WTI rose 2.20% to $58.30 a barrel.
With combined two-day gains of over 5.0% on both contracts, oil’s comeback has been breath-taking. Its foundations, however, are built on weak quality concrete. OPEC+ was never going to roll back its production cuts next month, that would be a non-sensical course of action. The level of tail-chasing FOMO trading in oil markets has reached an Ebola-like feverish pitch and caution is warranted at these levels.
The trade-talk hopes reported by the WSJ will probably keep the bullish price action alive through Asia at least, but in a world of easy come, easy go, that sentiment could just as quickly evaporate ahead of the weekend.
As surely as the sun rises, improving trade sentiment sent gold 0.50% lower overnight to close at $1464.00 an ounce. It emphasises yet again that a position in gold is a position on trade sentiment, US treasury yields, the dollar, US equities et al., and not on gold itself.
Hence strong technical resistance remains in place at $1480.00 with the yellow metal lacking the momentum to attempt it seriously. Support sits at $1460.00 and then $1445.00 an ounce.