Sign O’ The Times | Daily Market Commentary with Jeffrey Halley
One of Princes’ darkest songs but one of my favourites may have been running through China Vice Premier Liu He’s mind last night, as he signed the long-awaited phase-one trade deal on behalf of China, with the United States. The details, of course, are now widely disseminated and on the face of it, appear to be a one-nil win for the Americans. Apart from having to basically buy everything that America grows, makes or digs out of the ground, China has had to make some serious concessions on opening its financial markets to American companies and IP protection.
Adding insult to injury, the tariffs on Chinese goods will remain to ensure compliance and that the “phase-two” talks commence at pace and a meaningful outcome appears from them. Standing next to President Trump at the signing ceremony, he looked like a man thinking “this President and his idea of fun, is being part of a gang called the Republicans, high on trade and totin’ a machine gun.”
Financial markets reactions to the signing were more one of relief than exuberance. Equity markets grudgingly carving out new highs in Wall Street, with Asian stocks also cautiously higher today.
Perhaps that was because of another sign o’ the times. The world’s collective financial market, analyst and press corps all lining up to say why the newly inked trade deal won’t work, along with hand wringing about the tariffs remaining and the phase-two talks. I prefer to take a more positive viewpoint, even at the cost of reduced readership that comes with positivity versus gloom, but makes better news. To paraphrase Prince, “Financial markets ain’t happy unless a trade-deal truly dies. Oh why? Sign o’ the times.”
My take on proceedings is a simple one. China isn’t stupid; they don’t “play it by ear” and hope it all works out, as per the European Union since the GFC, for example. They knew what they were signing with all the conditions contained there-off. Yes, buying the required volumes of energy and agricultural products will be challenging. Quid pro quo they have signed with no intention of ever complying, or they have a plan to achieve the targets and conditions. The latter, I believe, is much more likely than the former.
In other happy news, Japan’s Machinery Orders staged an impressive 5.3% increase YoY, well above the -5.4% drop that had been expected. Australian Home Loans also rose by a more than expected 1.80%. They are adding to the picture that the Asia Pacific region has put the worst of 2019 behind it for now. Indonesia’s Deputy Central Bank Governor said that Rupiah strength was due to improving fundamentals. If the Rupiah appreciates, then the world can’t be in that bad of a place right now.
US Retail Sales are released this evening with the street expecting a small but steady increase of 0.30%. A print at 0.10% or below would probably be enough though, to stop the equity rally for this week. Asia’s highlight comes tomorrow morning with the release of official GDP numbers and Retail Sales. The headline GDP is unlikely to deviate from the governments 6.0% target with retail sales likely the more closely watched data, with an expected rise of 7.80%. A weak reading would probably put some downward pressure on Asian markets, albeit temporarily.
After a quiet start following the trade deal signing, Asian equities have picked up pace throughout the day. The Straits Times and Kospi have risen 0.60%, with the Nikkei 225 0.15% higher and Australia’s All Ordinaries has risen 0.60%.
China’s and related markets have shown a less positive response, reflecting perhaps the details of the trade agreement itself. The Shanghai Composite is lower by 0.10%, the Hang Seng is up 0.10%, and Taiwan has fallen 0.20%.
Asia’s price action reflects a mixture of relief and nervousness about the trade road ahead. However, nothing has fundamentally changed with regards to the Q1 outlook. Interest rates are low to zero, and the world’s savings glut still needs a roof over its head. Thus, any sell-offs, for now, will continue to be limited in scope in both price and time.
Currencies markets have shrugged off any trade agreement concerns and appear to be on hold ahead of US data this evening. Both regional Asian and major currencies have had a quiet day in Asia, being almost unchanged versus the US dollar.
Oil fell overnight before both Brent and WTI recovered most of their losses as China, and the US put pen to paper. Much higher than expected distillate inventories in the US overshadowing a fall in actual crude inventories.
Oil his risen slightly over the Asia session as markets calculate just how much US crude China will have to buy to meet its trade agreement target. The answers vary, but the pattern is clear; China will have to buy an awful lot of US crude in 2020/21, record amounts in fact. That has supported Brent crude, which has risen 0.15% to $64.55 a barrel in Asia, while WTI has climbed by 0.20% to $58.35 a barrel.
The US and China aside, the supply/demand picture globally for oil suggests that although both contracts look near-equilibrium for now, OPEC+ will have to extend and possibly increase its production cuts as 2020 progresses.
Gold had a quiet overnight session and is almost unchanged today in Asia, rising three dollars to $1551.00 an ounce. With resistance at $1562.00 an ounce and support at $1535.00 an ounce, gold looks set for an extended period of consolidation over the next few days between the two levels.
With the global hunt for yield rally set to continue, my bias is for gold to lose its shine and eventually test the downside region.