Stephen Innes
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The latest activity, employment, and growth data out of China, Australia, and Japan are suggesting the tariff knock-on effect is worse than expected as economic conditions refuse to adjust to trend. And despite the deluge of central bank easing, business investment is not responding as expected.

So, when Thursday’s miscellany of US data failed to inspire, traders further reduced short bond markets bets sending the critical US 10-year Treasury yield tumbling to 1.80 %, taking its declines to over 10 basis points this week as traders pared-back reflationary bets. Indeed, it’s stairs up for US yields and the express elevator down on the noxious combination of tariff rollback uncertainly and weaker macro data.

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More back and forth over the status of ‘Phase One,’ with the Financial Times reporting that the US and China are struggling to wrap up the talks US and China struggle to finalize ‘phase one’ trade deal

There are some recriminations, with the US claiming that China is delaying the deal, which would seem to play into the view that President Trump is under pressure, having effectively announced a deal a couple of weeks ago. These are complex, long-term issues, so it should be no surprise that Phase One is hard to close. The big question should be about what comes next. How long will Phase Two take?

Trade talk uncertainty is headline risk, whereas weak data is a macro risk. The worse than expected economic numbers are providing a stark reminder just how dire global economic conditions are and how necessary a rollback in a significant chunk of US tariffs are needed to adjust the listing ship.

Not to mention that the Chinese economy needs a policy jolt. Growth has fizzled over recent quarters, and, broadly, we are back down to 2015 cyclical lows, if not below.

Here’s the thing, as bad as the latest run of backward-looking data is, still we’re likely only a positive trade talk development headlines away from sending the market skywards again. And perhaps the worse than expected evidence has added just enough premium to that potentially massive tariff rollback payout significantly enough to offset the lower probability of that dividend-paying out after President Trumps NY speech. One would have to think that worsening economic data would motivate both the US and China to get back to the negotiation table and not only agree to a tariff rollback but that critical enforcement mechanism.

One look at the frothy US equity market suggests investors are hanging on and even adding to that tariff rollback optimism trade.

Honestly, for investors’ well-being, lets hope trade talks all go according to the script. Otherwise, if US-China trade negotiations turn south and there is no détente, bond term premium retraces the .45 % improvement of the past couple of months while equity market will likely collapse.

The flipside is also notable. If a trade negotiation is reached, there is likely upside to the .4-.6 % range, which could take us beyond 2.10% 10-year UST yield, but it will require a definite phase 2 roadmap to get us there. At current levels, the risks – both to the upside and downside – seem to reasonably well priced at current levels.

Hong Kong

Hong Kong descent into mobocracy has taken a significant turn for the worse as populism paralysis ensnared the city this week. And well beyond the financial market upheaval and capital flights that play a distant second and third fiddle to human welfare concerns. The US senate is quickly setting up the passage of the Hong Kong Democracy bill by placing the city’s special trading status with the U.S. under annual review. In the past, the US and China have compartmentalized political issues away from tariff talks, like what has been done with Huawei, although the Hong Kong issues are exponentially more significant than Huawei. But it’s unclear e if this will be the case on the Hong Kong mega issue.

Given that China has said they will retaliate to any US interference, I wonder just how forcefull that retaliation will be when they are clearly losing this battle in the global court of public opinion. I’m not sure China wants to improve President Trump’s approval rating anytime soon.


Oil markets

Oil prices gave up some hard-earned gains after US Crude stocks rose 2.2Mb, bearish vs. consensus for a 1.6Mb Whatever momentum was gained this week from OPEC jawboning and when putting it within in the context of a seemingly never-ending run of US inventory builds. Bullish for oil OPEC ambitions are still running into decent supply glut offers, keeping the bulk of price action confined to the WTI mid-level zone between USD 55.75 – 57.75 per barrel as we patiently await the next trade talk headline.

The EIA publishes its November Drilling productivity report next week (18 November). The report will provide the market with excellent growth assumptions in the short term. Drilling and completion activity, as well as rig productivity forecasts, will be of interest as the industry resorts to DUC drawdowns to support short-term growth as rig counts fall.

Gold markets

Gold has made of blow-off bottom in recent days, first triggered by trade talk uncertainty, then supported by a run of virulent macro global data and framed by influential Fed Williams saying US monetary policy is trying to keep the economy in a good place. “Keep” is the key here as it suggests the Fed is not straying too far from the rate cut lever. If the US economy needs additional stimulus, then there is policy space.

While gold remains an excellent defensive strategy against trade tensions, resurfacing, and intensifying. But in the absence of a definitive shift lower in Fed policy, rallies above $1480, which is needed to confirm a buying trend has re-emerged, might be hard-pressed in the absence of a dovish Fed.

On a positive note, some considerable long positioning has been squared up in the past two weeks, emboldening buyers as the threat of a long position squeeze has lessened. Still, in the event of a positive trade headline, that we may need to assume coming, critical support is expected to come in at $1445 from a technical perspective.

Currency markets

Japanese Yen

With US bond yields falling and the negative shift in trade talk headline risk, key 108.50 gave way triggering retail stop-loss orders. But with positioning looking much cleaner at current levels, a USD bid has started to re-emerge as traders may begin viewing the US exceptionalism index (QQQ vs. EEM), which might start to look attractive to the USDJPY bulls.

Malaysian Ringgit

The ringgit is trading weaker weighted down by equity market outflows, weak economic data out of China, and uncertainly over trade talks. Traders will now look to Malaysia GDP print for monetary policy clues, but with the market singular focused on the trade talks, the GDP print may need to blow out the expectation to get a significant rise from the ringgit bulls.

This article was written by Stephen Innes, Asia Pacific Market Strategist at AxiTrader

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