Perception, Perspective, And Reality

US stocks fell from their highs and for a short time, turned negative before rebounding into the close after mid-session concerns about the trade deal resurfaced. In today’s rumor mill, Beijing apparently flinched at agreeing to specific US farm purchases. But it’s more about China getting locked into a numerical commitment as opposed to balking at the deal, so the headline was quickly reversed. Putting an absolute number on any type of trade deal may open them up to enforcement mechanism reprisal, so this is something that needs to get ironed out and certainly not a bridge too far. 

But hope and expectations continue to roll on as the fund managers appear happy to put money to work. The fear of FOMO as equity markets grind higher into year-end continues to resonate despite the headline bluster. This view was reinforced in the latest BAML fund manager survey, which suggested, contrary to other reports, that cash levels were now the lowest in six years as managers rushed to put money into the markets.

The prospect of a US-China trade deal remains the main factor sustaining the rally. Still, investors are forced to keep pace with the rapid shifts in the US-China Phase One deal. Attempting to make sense of the many comments – official and press ‘sources’ – on whether a rollback was now genuinely on the table, ultimately, they will remain hostage to these trade developments.

Investors will realize a potentially massive payout to tariff rollback Phase One deal. But, in the wake of the President’s NY speech, the market has started to price in a slightly lower probability of that dividend-paying out if the US administration holds out against provisional negotiations in this extremely high stakes game of risk.

Federal Reserve Chair Jerome Powell’s comments to Congress offered little new to suggest the Fed is anything but on pause mode, saying the central bank’s current policy is appropriate if the economy stays on track. There seems to be a common theme developing among the majority of the FOMC, where they view rates neutral to slightly accommodative and continue to question whether further cuts would encourage business spending in the face of trade war uncertainty.

Hard to argue that view as according to Refinitiv, US companies’ capital expenditure remained depressed in Q3. Judging by an analysis of 80% of S&P500 companies that have released earnings capex grew 3.2% in line with the previous quarter. Last quarter was the lowest growth rate in two years and well below the double-digit boom in the first year of the Trump administration. That figure is unlikely to improve with indications from earnings that it will slip to 1.8% in Q4.

And if you compound that with the $ 7 billion in import taxes US business was forced to pay out in September, a lot is riding on a phase one tariff rollback. So, unless the President is receiving different intelligence than the rest of us, it would make sense that he would not want this trade war malaise interfering with his election 2020 political ambitions.

Oil markets

Oil advanced for the first time in three days after a report that OPEC saw a potential reduction in supply from outside of the group and was then further boosted after a surprise US inventory draw 500,000 barrels for the week ending November 7. While the API draw is a pleasant surprise for oil sentiment, but this week’s inventory data might play second or third fiddle as price movements are largely following sentiment on the outlook for the OPEC+ agreement and US-China trade. And in the absence of good news on trade talks, the negative price skew may remain in check.

Gold markets

Despite the gold markets’ top side ambition being watered down by the lack of a Fed rate cut impulse, apparently for some, old habits die hard.

A moderate rise in risk-off sentiment boosted gold as a lack of good news on trade talks with China, coupled with HK unrest, pulled gold back above $1460.

Indeed, gold appears to have made a blow-off bottom, although sharp rallies from here might be hard to achieve in the absence of a clear catalyst.

While gold remains an excellent defensive strategy against trade tensions, resurfacing, and intensifying. The US yield curve is no longer inverted, and equities are firm. In addition, Fed Chairman Jerome Powell said the Fed sees a “sustained expansion” ahead for the US as the most likely course. So, unless you think the Fed is bluffing, these are not exactly all aboard the gold rally bus signals.

Currency markets

The circus of the US-China drama will continue to drive Yen and Yuan sentiment. And with the US CPI rising in line with expectations at 0.2%mom, there was nothing there to shift the dial on the Fed’s inflation expectation. So, unless the US October retail sales collapse on Friday, look for the low volatility conditions to continue, which should remain supportive of the USD carry.

Asia currency sentiment is getting driven on the back of trade talks headlines. In terms of trading strategies dare I say go with the headline flow given the market had basically thrown fundamentals out the window many moons ago.

The shift in geopolitical focus on trade wars is changing the FX trading landscape. With so much seemingly riding on the resolution of different geopolitical deals, currency markets are now moving less to the beat of interest rate differentials and more about pricing geopolitical binary risks efficiently, so it’s all about RORO (risk-on risk-off) these days as geopolitical expectations drive the bus.

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