Return of Trade War Neutrality

China and the US have agreed to an outline of a ‘Phase One’ deal, in which China will buy more agricultural products and the US will indefinitely delay the increase in tariff rates.
Stephen Innes

Global equities rallied again, and treasuries sold-off Friday, aided mainly by an agreement on US-China trade the US president has described as a “very substantial phase-one deal”. The S&P500 closed +1.1%, with European equities stronger as well. US 10-year treasury yields lifted 6bps to 1.73%. Oil was up 2.2% amid reports of a possible missile attack on an Iranian oil tanker off the Saudi coast. Gold fell 1.2 %.

  • The ‘deal’ represents the most material breakthrough since the trade war started, but it neither rolls back existing tariffs nor reverses the damaging spillover of tensions into technology areas.
  • The RMB may strengthen further, especially if the fixings are lowered this week.

However, US equity market sold off into the close; traders view the deal in a tentative light as a tariff detent falls well short of bridging the critical trust gap which is an implicit removal of a significant chunk of existing tariff while the lack of specificity and even the fact this baby stepped agreement could take weeks to iron out, quickly cooled trader optimism.

But their remains this gnawing fear that phase one could end up being little more than the same old lather rinse and repeat trade detente followed by trade escalation, so indeed the next 48-72 trading hours are critical given memories of how quickly the post-G-20 trade calm evaporated.

This morning President Trump tweeted My deal with China is that they will IMMEDIATELY start buying very large quantities of our Agricultural Product, not wait until the agreement is signed over the next 3 or 4 weeks. THEY HAVE ALREADY STARTED! Likewise, financial services and other deal aspects start preparing. I agreed not to increase Tariffs from 25% to 30% on October 15th. They will remain at 25%. The relationship with China is very good. We will finish out the large Phase One part of the deal, then head directly into Phase Two. The Phase One Deal can be finalised & signed soon! –

However, the market is treading gingery at the open awaiting more specificity on the trade talks, as local currency traders sit patiently for the release of today’s USDCNY reference rate ( Yuan fixings) and whether it will be much lower than the 7.07 level it has been stabilised at over the past month or so

Relief and disappointment

It could be a day of mixed emotions as investors express a combination of relief and disappointment Relief because the next round of tariffs for October and December will be delayed indefinitely as a good-will gesture in exchange for further talks with China who have committed to buy more US farm goods. But disappointment by the baby stepped nature of the negotiations, as both sides kicked the can on the essential issues that have not been resolved. As such. the phased-in deal process, albeit more harmonious will be staged in through late 2019 early 2020, however, the most immediate tariff escalation concerns have been removed

Oil markets

Oil prices spiked higher Friday amid renewed concern about global oil supply after the explosion of an Iranian oil tanker in the Red Sea, and optimism over an amicable end to the trade talks.

Progress around the next phases of the trade negotiations is probably the most significant near-term factor for oil sentiment as harmonious negotiation leading to a definite conclusion could go a long way to alleviating global demand concerns.

But for immediate concerns trader will likely continue to monitor post-trade talk headlines to gauge the balance of this newfound level of trade war neutrality before taking on more risk.

Gold markets

Gold has been outperforming against JPY and CHF despite the market going “risk-on” mode amid bullish equity market outcome from the US-China trade negotiations suggesting the downcast economic data out of Europe and US may imply a lower interest rate scenario extends longer. And especially in Europe were more banks look to pass on negative interest rates to deposit customers which could be a boon for gold demand.

Still, with much of the global interest rates scenario factored into the gold forward curve, gold investors are in search of that next major catalyst that could take gold over the $ 1550 top.

As such, focus this week will be on the plethora of Fed speak and critical US manufacturing and consumption data, which could provide more clues about this months Fed policy meetings.

Currency markets

G-10

US-China trade talks led to a risk-on bias & selling of Yen and CHF while large buyers of Asia EM FX, particularly CNH and KRW emerged. And EUR cross buying pushed EURUSD through 1.1000, triggering a short-covering rally.

After constructive US-China and Ireland-UK talks, safe-haven currencies have been under pressure. Risk-sensitive euro crosses have performed the best, supported by EURUSD breaking back above the psychological 1.10 handle.

Asia FX

While the outcome from the latest US-China talks may still be mildly positive for the RMB in the near-term, even with hedge funds and asset managers who were thought to have pilled into the so-called “Yuan accord” trade. Also, there could also be a short-term positive reaction by other Asian currencies that are sensitive to RMB movements the KRW, TWD, MYR and the SGD. However much of the near-term market response depends on the Pboc reference rate this week, precisely how far the fixings are pegged below USDCNY 7.07

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

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