As The Trade Talk Pendulum Swings

One of our banks reckons all trade headlines should be taken with a grain of salt; I’m thinking a barrel. 

In the latest rumor mill-churn, Chinese headlines suggest the mood in Beijing was “pessimistic” regarding the trade deal as Trump is supposedly not in favor of any tariff rollbacks. It appears that

Beijing is very much bothered as China thought both sides had agreed to do so in principle. With the constant stream of trade talk confusion, it makes one wonder if anyone is even remotely on the same page.

Equity markets and other riskier assets were stifled overnight as a cloud of pessimism rolled in again. While stocks churned their way to nowhere, equity markets remain very resilient as the buoyant beat goes on. And while the tone was a little softer, overall risk behaved quite asymmetrically.

Trust remains a considerable problem, and there is still little clarity on how that trust gap might be bridged, especially given China has made it abundantly clear that removing existing additional tariffs is a precondition for reaching a deal.

But on the back of the constant zig-zags in the US-Sino trade headlines over the past two weeks, I guess it’s safe to assume a positive trade headline will be next up on the news feed agenda?

Oil Markets

From trade talk optimism, to trade talk pessimism, so the pendulum swings.

Oil prices slipped after despair set in as the prospects for a resolution to the U.S.-China trade war took a turn for the worse.

To suggest the oil market is concerned about the US-China trade talks could be the understatement of the decade as it has been the primary catalyst steering the ship for the past year. But for the oil markets, especially, a trade deal without a tariff rollback is like a ship without a rudder.

The market reaction may have gone a bit too far, especially considering last week, where the markets didn’t seem to care about President Trump’s comments on trade while chalking his rhetoric up to posturing.

Currency Markets

The Yuan

The Yuan traders continue to wear trade talk emotions on their sleeves as there was another long Yuan position squeeze overnight in relatively thin market conditions driven by adverse trade talk headline risk. The USDCNH briefly traded above 7.03 before cooler heads prevailed.

The Euro

The Euro has fallen slightly on the trade talk pessimism but remains bid on the back of the rotation into Europe’s value stocks despite the broad market going nowhere.

But also, the Euro remains a much cheaper and less risky proxy to the Brexit deal. As GBP continues to power ahead after the latest opinion polls showed the Tory lead remaining to widen, and the odds on them securing a majority have also narrowed, so the Euro remains bid.

Gold

Gold continues to track US-Sino trade developments as in the absence of fresh catalyst traders are merely reacting to the latest trade headline. And while Gold continues to be a critical defensive strategy against escalating US-China trade friction, without a dovish impulse from the Fed or a significant equity market sell-off, price action might be capped in the near term.

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