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China And US Reset Phasers To Stun
China and the US reset their phasers to stun on Friday, announcing more details of their “phaser-one” bilateral trade agreement. Concrete progress at last at de-escalating their trade-war that has dogged both countries, and indeed the world, for the previous two years.
In broad terms, the US has cancelled the next round of tariffs on Chinese imports that were due yesterday. It reduced tariffs from 15% to 7.5% on another $120 billion of goods but keeps 25% tariffs on $250 billion of Chinese imports. China, for its part, has apparently committed to purchases of $200 billion of American goods over the next two years. Of, that some $80-$100 billion will be agricultural goods with the remainder split between manufactured products and energy. I will immediately ban forced technology transfers by American companies as a condition of market entry to China, and tighten intellectual property protection.
Overall, the agreement, assuming its passes mostly unchanged, looks like a fair one for both sides. It allows the leaders of both countries to maintain their dignity. The more robust talks are to come in 2020, but that is a story for another day. It is a big win for President Trump amongst some important rural and manufacturing constituencies with an election year ahead. Some doubt has been expressed about how China will import that much food in dollar terms. Soya beans, for example, are mostly used for pig feed. China’s African swine flu epidemic has wiped out half of those. China will also have to tread a fine line with other export partners, who will be the first to cry WTO-wolf if China is appearing to favour the US over them.
Coming hard on the heels of an agreement in the US Congress to pass the successor to NAFTA, the USMCA, it capped a productive week on trade. It is, therefore, no surprise that equities are at or near record highs globally with most major and EM currencies rallying against the greenback last week.
Other weekend news shows that trade tensions are still alive and well, however. China has threatened to retaliate against Germany if it excludes Huawei Technologies as a vendor to supply 5G wireless telecommunications equipment. With Germany’s vital manufacturing sector suffering more than most in the global economic slowdown and trade-war crossfire, the threat will send shivers through the corridors of power in Berlin.
Germany’s position is a much weaker one than America’s, mostly because its export sector powers the economy and not the German consumer. Germany has been warned ad nauseam about this fragility before. It may be about to receive some harder-love from China to drive that home. The best that Germany can hope for is a show of EU unity behind them. The Euro is likely to start the week on the back foot because of it.
After the plethora of good news on trade, a resounding Conservative victory in the UK, one would have expected North America to push stocks and commodities vigorously onto greater heights. Instead, markets finished with more a whimper than a yell. Sterling, in particular, gave back some of its gains, ending one per cent on the day. I am not reading too much into Wall Street’s Friday price action. Markets were clearly heavily positioned for the outcomes that occurred. Much to the surprise of everybody, they all did! Banking some well-earned profits at the week’s end and the year’s end, was the order of the day after a tumultuous week.
Regional Asia is likely to have more juice still to come in the global recovery trade, after the announcement of the interim-trade agreement. Most countries in the Asia-Pacific region have a high beta to China, and the deal will overcome many of the dark economic clouds, into the year-end at least. Even if Asia follows the profit-taking mood of Wall Street today, the lull is likely to be temporary. Singapore, South Korea and Malaysia come to mind as potential immediate beneficiaries. Agricultural exporters such as Australian and New Zealand may feel more cautious though.
China’s Fixed Fixed Investment, Retail Sales and most importantly, Industrial Production data, all due at 1000 SGT, will be today’s highlights in Asia. It would be a good day to release weak data. Below-average prints are likely to be quickly forgotten, as markets contemplate an apparent brave new world on trade.
Interspliced with the China data is a round of PMI announcements today. The Commonwealth Bank Flash PMI has been released and has once again disappointed as Australia’s domestic economy remained mired in the gloom. Japan Jibun PMI is released at 0830 SGT, but the most closely watched will be Germany’s Markit Manufacturing PMI at 1630 SGT. Markets are looking for a gentle recovery to 44.5.
Unsurprisingly, it was a choppy session for equities on Friday. Wall Street’s leading indices initially roared higher as the phase-one trade deal was announced, but softer than expected US Retail Sales and profit-taking eroded most of those gains. The S&P 500 was flat, the Nasdaq rose 0.20%, and the Dow Jones finished 0.04% lower.
Regional Asian markets, having enjoyed a durable finish to last week, are likely to take a more optimistic view to proceedings, and continue moving higher today. The trade war has weighed heavily on the region with much of its economy closely tied to China. With the interim trade agreement removing some uncertainty, underperformers such as Singapore and South Korea, look well-placed to reap the benefits of any peace dividends.
Australia to should enjoy a positive start to the day, but both it and New Zealand may find the bullish tone muted with the ASX 100 and NZX 50 already at near-record highs. Both are major agricultural exporters to China and may suffer a “crowding-out effect” from the Mainland as they ramp up purchases from the US instead.
Protests returned to Hong Kong yesterday, as its beleaguered CEO, attends a performance evaluation with her bosses in Beijing. The scale of demonstrations, however, appears to have abated for now. Combined with the interim trade agreement, Hong Kong’s bombed-out shares will likely be at the top of many investors Christmas wish lists this week.
The dollar index fell 0.23% on Friday, led by gains in the GBP. The dollar, generally, spent the day on the back foot as the initial rise in US bond yields unwound. With more concrete details of the interim trade-deal released from both sides, the dollar struggled versus EM.
The EUR/USD rallied to 1.1200 on Friday, boosted by the strong Conservative election win. However, the rally quickly faded as GBP to gave up some of its gains, falling back to close almost flat at 1.1120. The single currency will struggle to recapture those heights this week, especially as China hinted at retaliation against Germany if Huawei gets placed on a 5G exclusion list. The 1.1200 region was probably the December high, albeit briefly, as attention will now turn to EU data and the impending trade talks with Britain.
GBP/USD raced from 1.3175 to a high of around 1.3510 in Friday as the election results pointed to a landslide victory, and Brexit certainty, for the Conservatives. Once the results were in though, Sterling could not hold all of its gains. It fell to close at 1.3340, a respectable 1.20% gain for the day that belied a tumultuous session. The fall in Sterling I put down entirely to profit-taking and lower liquidity, with the street having been locked and loaded for this trade for the past two weeks. Like Euro, with all the news baked in, and the end of the year near, 1.3500 may represent the month’s high.
Off-shore Yuan (USD/CNH) has endured a rollercoaster ride over the last two trading sessions. It rallied on rumours of a trade deal on Thursday, with USD/CNH falling from 7.0250 to 6.9250, only to climb back to 7.0025 on Friday as details were officially announced. Fast money flows and positioning having passed, USD/CNH is now at what I consider to be a relatively market neutral rate of 7.0000. Ranging between 6.9500 to 7.0500 may well be USD/CNH’s fate this week as the dust settles and books are closed.
The interim trade agreement seemed mostly priced in on oil markets on Friday, given the rallies on both Brent and WTI in the proceeding weeks. Both contracts ended the week with modest gains. Brent crude rose 0.90% to $64.90 a barrel, having traded at $65.70 earlier in the session. WTI broke the $60.00 barrier, rising to $60.45 intraday, but could not hold those gains. It fell back on weeks end profit-taking to record a 1.0% gain, closing at $59.75 a barrel.
The failure of Brent to breach the $66.00 level, or WTI to hold above the $60.00 level, will disappoint some. It is important to note, though, that oil has been rallying strongly since early October. We now have both the OPEC+ cuts and the US-China interim trade deal mostly concluded.
The relative strength indexes on both contracts remain elevated, but not overbought, suggesting that new bullish momentum is sustainable, should it arrive. The backwardation in both futures curves will also continue to be supportive of prices, supporting dips. Oil will probably consolidate its multi-week gains this week, but, baring any growth shocks, its overall rally is not yet over.
We should probably start calling gold the forgotten war commodity, as it continues to get only walk-on parts in the global markets as other asset classes take the lead roles. Gold climbed a non-descript 0.44% to $1474.00 an ounce on Friday, lifted by a weaker dollar and lower US Treasury yields.
Gold may come under some gentle selling pressure in Asia as weekend risk hedges are closed out. Overall, gold remains mired in its two-month $1450.00 to $1485.00 range and with most of the tier-1 event risk now out of the way, and the year-end beckoning, a break-out of either level is unlikely anytime soon — famous last words.