Olive branches and Goodwill Gestures

After two days with activity focussed in fixed income, there was a significant pivot on Wednesday. US treasuries were little changed, but US equities surged with S&P500 up 0.7%, and most bourses stronger through Europe as well which is set up for a positive day in Asia.
Stephen Innes
Olive branches and goodwill gestures

Indeed, there’s some enchanting and extremely fortified alchemy at work as global equity markets remain supported not only by central bank easing but also the latest olive branch gestures from China that suggest a willingness to end or at least de-escalate the US-China trade hostilities.

Indeed, China’s olive branches have been so convincing that US President Trump has announced he will delay the tariff increase of  30% on $ 250 billion of China to Oct 15 offering a significant goodwill gesture that he too is willing to negotiate to put an end to this trade war spat.

Are both side ready to deal? The economic data shift says yes.

The U.S. side of the fence

There is one very good reason we should pay close attention to trade calming this time around as in the wake of the dismal manufacturing ISM reading in the U.S. this week, the economic cost of a trade war in U.S. voters eyes is rising quickly as the global manufacturing meltdown is now leaching into the U.S. manufacturing sector. Indeed, the weak manufacturing industry is not an ideal scenario for a run-up into the election year as the U.S. manufacturing sector is absolutely the chunk of the economy the President most wants to safeguard

The Chinese side of the fence

China trade data unambiguously confirms that softer global demand and U.S. tariffs continued to weigh on China’s export growth while accelerating drop in imports reflects flagging domestic demand.

Concerns of a more protracted trade war have already sapped business confidence in China. Regardless of which way you want to slice and dice the data at the end of the day it comes out bad, while the latest Chinese inflation data was the worst possible outcome and a policymaker’s nightmare.

Oil Markets

Oil came under intense pressure on a report that President Trump was mulling easing sanctions on Iran – something Bolton pushed back on. WTI has now given back all the gains from earlier in the week on the story that Prince Abdulaziz bin Salman will assume the top spot in the Saudi Oil complex.

However, temporarily plugging the oil market leak, the EIA inventory draw came out in line with API report. Crude stocks fell 6.9Mb, bullish vs consensus for a 2.7Mb draw and the 5-year average of -0.3Mb, and roughly in line with the 7.2Mb decline reported by the API yesterday.

Fundamental drivers all moved in a bullish direction with imports down and exports and refinery inputs up. With this week’s decline inventories have dropped below the 5y average. Historical inventory patterns suggest that stocks should begin to hit seasonal bottom sometime in the next 2-3 weeks.

There are three good reasons prices should remain supported specifically OPEC compliance, inventory draw and a possible trade war detente; however, there are between 500,000 – 700,000 reasons which suggest otherwise. Specifically, the approximate number of Iranian barrels that would flood the markets if US sanctions are lifted. Still, the closer we move to a trade war detent the higher oil prices will react.

We know the President wants Gasoline prices lower especially ahead of a what to be a hotly contested 2020 election. So, what better holiday Gift could the President offer up the US electorate than lower gasoline prices at the Pump.

Among the many gasoline-related conspiracy theories that flood the airwaves, there is the one that says national elections cause gasoline prices to fall. Prices do indeed tend to decline in the run-up to Election Day.

Gold Markets

Gold reversed early losses on expectations of monetary easing; as traders now look to ECB meeting for direction.

The uptick comes even though the equity market gains a strong dollar and an easing off-trade and geopolitical risk, factors which are all universally considered negative signals for Gold.

Fundamentally, expectations of further monetary easing by some of the major central banks provided background support for Gold.

Indeed, Gold markets were actively robust despite surging US equity markets primarily due to expectation of fresh monetary stimulus from the European Central Bank ( ECB).

Despite Golds 4.5 % correction lower from the highs, flows are still balanced if not better bid in the OTC today. Indeed, it appears wealth management types continue to have an insatiable demand for Gold on dips Intermarket reports suggest wealth XAU demand remains unabated, dwarfing the OTC macro position reduction.

The markets have pivoted to better sellers on the day, however, as the calming trade war effect of China’s latest olive branches and this morning US goodwill gesture is pointing to a decrease in trade war hostilities

Currency Markets

The amount of information leakage ahead of Thursday’s European Central Bank( ECB) meeting has been unusually thick, but the markets remain undecided if the ECB lays it on equally thick. However, the problem the ECB faces is if they make a deep dive below the Zero Lower Bound triggering a significant Euro sell-off, the US Treasury will object forcefully to any material depreciation. Are the ECB ready to take that gamble?

USDCNH dropped nearly 200 pips in thin markets on the Trump news as the Yuan traders are viewing this US goodwill gesture in a very trade war positive light.

The breach of 7.10, which gave way like a hot knife through butter and could be considered robust “risk-on” signal as the offshore spot had tremendous support at that level from reported real demand and from a technical backdrop perspective.

Moreover, regional currency markets will be in a happy place this morning as well as regional policymakers as a stronger Yuan offers local central banks more policy wiggle room to lower interest rates.

Bonds

Sentiment can shift on a dime as we’ve borne witness this week. In the last few months, the idea of aggressive easing at the zero lower bound was celebrated by many bond investors, where the Apex of rate cut mania was the Reserve Bank of New Zealand 50b rate cut. Suddenly it seems central banks are getting a touch of the cold feet, as indicated by the Bank of Canada when last week they threw ice water on the prospect of aggressive rate cuts. Perhaps in the central banker’s eyes, the actual data doesn’t seem to warrant such as response. So far, the idea of buying dips in fixed income thought to be a winning strategy has suddenly evaporated. It will be interesting to see how these central bank policy decisions play out.

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

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