Xi-Trump’s “Dinner Date of the Decade ” Ended with a “Handshakeplus.” | OANDA Weekly Market Commentary with Stephen Innes
The markets were preparing for a day of binary market reaction upheaval as a trade war, geopolitical powder keg, and even oil markets hedges could have been forced to unravel.
So, with the immense weight of the global supply chain dynamic network on their shoulder, a tariff detente has emerged after a highly anticipated dinner. Both Presidents’ XI and Trump have agreed to put on hold the menacing tariff increases expected to get imposed January 1, marking a significant de-escalation in trade tensions between the world’s two biggest economies. Thankfully, for risk sentiment, the “dinner date of the decade” ended with a sense of harmony rather than trade war discord.
The Whitehouse has subsequently stated that within the context of a 90-day window from December 1 “China will agree to purchase a not yet agreed upon, but very substantial, amount of agricultural, energy, industrial, and other product from the United States. China has agreed to start purchasing agricultural products from our farmers immediately.” Alas, the truce is favourable but only in the short duration as the markets straw polls post G-20 are factoring in a 60% chance that trade war escalates and higher tariffs are potentially applied.
And despite the favourable overtones, the 90-day moratorium is just that, a 90-day window that is likely to be dotted by many deadfalls given the Presidents propensity to run hot or cold on China trade policy.
Still, it will be interesting to see how the broader markets interpret these latest trade events after trudging through an extended period of arduous de-risking/ re-risking that was driving trading desks batty. But the question remains, was there enough meat in this the dinner bone to go full bore ” risk on” into the holiday season?
What triggered the détente?
President Trump is increasingly sensitive to signs of economic/ financial stress as confirmed by his scathing attacks on the Fed where he suggested that that current Fed policy is a much bigger problem than China. Ok, a severe case of hyperbole but given that the President uses US stock indexes as his key rating barometer so when US stocks markets started to outpace those declines in China in October, the US administration was becoming as eager as China to set a resolution roadmap in place. In market parlance, the US offer was getting close to hitting the China bid, whose bid rose substantially in the days heading into the summit.
It’s going to be a long and winding road filled with number craters as both parties move to figure out the structural changes concerning technology transfer. Not to mention the daunting task of reversing the theft of intellectual property rights. I genuinely believe intellectual property rights is the next major trade battleground that could make the current tit for tat trade war escalation look like a board game of axis and allies. So indeed, there’s still a technology midfield to navigate
Surprisingly, at least to me, there was no mention of currency policy, although the net outcome should see the USDCNH kneejerk lower below 6.90 despite the ceasefire predicated on a smaller China trade surplus. So, these markets assumption may put to rest some of the more hawkish US policy implication around the RMB complex. But also helping matters, Yuan sentiment dramatically improved as a substantial element of trade war risk premium has been absolved given the Pboc determination to keep the Yuan stable ahead of Xi/Trump dinner.
Asia market near-term impact
The conclusion of the Xi-Trump summit ended at the higher end of expectations. So Any easing of tensions on trade will reverse some USD haven hedges, and we should expect the dollar to soften more so against high beta currencies along with providing a fillip to riskier assets including Asian emerging-market currencies and stocks.
Besides the expected knee-jerk lower in USDCNH to just below 6.90 the time of writing( just nearing 5:00 AM in Singapore), there should be a decent follow through in equity markets which could help boost Yuan sentiment
Growth vs Carry
But ultimately the KRW markets should look attractive given it has the highest sensitivity to the S&P of all global indices. Also, growth FX (KRW, TWD, THB, SGD) should perform better than the carry FX (INR, IDR, PHP), due to concerns that we will see a sell-off on UST’s on some haven unwinds. However, the ASEAN FX carry should still get some support from the Feds dovish pivot which could diminish some of the negativity from narrowing of UST curve differentials.
Malaysian capital markets should be supported by improved risk sentiment however local bond markets will have to deal with increased concerns about the US treasury sell-off. While the trade war detente should be good for commodity markets, in the absence of any formal or informal announcement about an OPEC+ supply cut, the Ringgit could be held hostage until the OPEC summit in Vienna which will ultimately decide the near-term fate for oil prices. However, the US-China trade war ceasefire will have positive fare reaching consequences for commodity markets beyond soybeans which could help bolster oil prices in general.
But the reality is, given the great ideological divide between the bastion of free markets capitalism and the champion of state-driven capitalism is still an immense work in progress but the weekend developments have increased three folds the scope for a broader de-escalation in trade matters. All in all, a much better outcome than expected in my view. Arguably not the optimum result a permanent truce but one which certainly ticks more boxes than just a middle of the road scenario. But overall this should not be a definitive enough signal for investors to chase a risk rally into year-end
With all the noise in the markets, it’s easy to get disoriented but for me, given that crude oil prices are a reliable barometer for the health of the global economy and since it’s conceivable oil could trade in the ’40s the precipitous decline could negatively impact investor expectations across a wide berth of asset classes. It’s a huge week not only for oil markets but capital markets in general. Post G-20 sentiment is a bit more positive than expected but still very much work on progress, so perhaps the most crucial event in December next to the Brexit vote could very well be the OPEC summit.
Russia and Saudi Arabia agreed to extend into 2019 their agreement to manage the oil market, known as OPEC+, although Moscow and Riyadh have yet to decide on any fresh output cuts. While nothing concrete has emerged, this does clear one significant barrier on the road to a possible OPEC + production cut. However, the most significant obstacle of them all, President Trump lies in waiting.
Most traders suspect a cut in the neighbourhood of 1 million barrels per day which is arguably priced in. It will probably take a much deeper cut to jolt the market into a short covering rally. Otherwise, the market falls prey to the prevailing bearish sentiment that will continue to drive prices lower on the premise the reduction might not be sufficient enough to draw down surplus supplies
On Friday oil markets struggled for traction despite OPEC committee recommending a 1.3 million barrels per day production cut. But the market was probably a tad top heavy as long liquidation of the expiring Brent January contract offset OPEC deeper supply cut rumours
WTI, for the most part, continued to consolidate but traded with a heavy tone after the DOE reported a US monthly production record which brings my attention to a-bubblin’ crude, Oil that is. Black gold. Texas tea*. (*Beverly hillbillies song for those that are old enough to remember)
US oil production has maintained its meteoric rise, underscoring nervousness about excess supply that has tanked oil markets. US oil producers pumped an eye-watering 11.475m barrels per day and were 1.98m b/d higher than in September 2017
While not a new story it does underscore what we know, but one thing that is certain, the booming shale industry will be of significant interest to OPEC and allied producer when they meet this week. Hence the rumours flying on Friday that OPEC and friends will agree on 1.3 million barrel per day cut from October levels.
But smiling eyes from the Permian basin will be pleased with the trade war cease-fire as US energy product exports are set to rise, even if it’s a minor reprieve, as Beijing was a major importer of refined US products up until September when China reduced those imports to a drip.
Expect the usual duelling narrative to temper expectations. On the one hand, the USD is weaker, but equity markets are expected to bounce on a more favourable outcome from the G-20 Xi-Trump summit. But with the reweigh monetary policy risks in a more dovish light, Gold should be supported as ultimately a lower US interest rate glide path should be harmful to the USD over time as Gold, for the most part, remains very much a dollar-driven storyline these days.
Given the expected haven unwind coupled with G-10 markets correlated sensitivities to the RMB complex the USD fell moderately at the Wellington/Sydney open.
USD: Factoring out he expected haven unwind on a more tranquil than expected Xi-Trump meeting the question for the USD is where do we go from here?
The importance of just about every tier of US economic data has taken on a substantial influence thanks to the Fed’s calculated dovish shift from calendar guidance to data dependency. So, without what was thought to be the new norm of quarterly rate hikes to tether itself too, the USD now becomes hypersensitive to both external and domestic economic data releases.
But it’s external data that could come to the fore over recent signs that the global economic recovery is sputtering and could give cause for global central banks to adjust key monetary policy setting lower. Mainly if we get a nasty Brexit or even a sustained slowdown in China.
Ultimately, we could see the USD maintain its mantle as king of the hill
EUR: The Euro is trading a bit higher this morning but I suspect the markets will continue to struggle to get above 1.1400 where we were pre weaker EU PMI’s with Italy/contagion, German politics and weak data all providing additional headwinds. But now Paris is burning as France fuel tax has triggered a wave of anti- Macron protester to take to the street causing absolute chaos as a Populist revolt ensnares the French capital suggesting yet another political hot spot to navigate for European risk markets.
JPY: Risk on and the anticipated sell-off in UST’s ( higher US yields ) has seen USDJPY open higher this morning, but momentum is being held back by last weeks dovish Fed pivot
AUD: With the Australian Dollar high correlation to China risk the 90-day moratorium on new tariffs will play favourably into high beat correlated currencies like the A$ as some proxy China hedges unwind. But this is not so much of an Australia storyline as it is a reprieve in China risk, but none the less it removes one of the risk anvils off the Australian dollars back.
China and US policy put?
In China, there are increasing signs of policy easing across various aspects, and since there is always an outsized focus on China, so the fallout from any of the key economic data events this month could see an acceleration or at least guidance of further easing in coming weeks and months. (notably a corporate tax cut and possibly a VAT tax cut, alongside other measures). In the US, the Fed’s calculated dovish shift from calendar-based guidance to data and dependency, and while they have opened the door to a pause, they are still non-committal. But overall this does not depart from my consistent view that we should see a December US rate hike followed up by March and June 2109, before the Feds give rise to ” pause for cause” in September 2019. None the less I’m incredibly dubious of a lasting US-China détente and based on the view of that both US and China have the technology minefield to navigate, we probably have not seen the peak in overall trade tensions.
Stephen Innes is the Head of Trading, at OANDA Asia Pacific.
Innes has a deep-seated knowledge of the G10 and Asian currencies and is regularly called upon by leading TV, radio and print publications to offer his informed views on the financial markets. He offers specific expertise in trading spot and forward FX, currency and interest rate futures, money market derivatives and precious metals.
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