Tariff Man Returns With A Vengeance

The S&P500 is down around .75 % heading into the close and US 10-year yields off 11bps to 1.71%. European and Asian equities fell too.
Stephen Innes

With only a light data flow, negative trade headlines hugely impacted sentiment for the worse. Media reports suggesting Trump saw “no deadline” on concluding a trade deal with China, stating that “in some ways, I like the idea of waiting until after the election.” Separately, the US President also expressed concern about France’s digital-services tax signed into law on July 24 and is now proposing up to 100% on $2.4bn of French imports in response. While in the broader trade war context, it’s is a small amount, the underlying message is apparent; global trade tensions remain unresolved.

But the biggest headline bomb was a Fox news report suggesting the US is still going ahead with the Dec. 15 tariffs, which, if officially confirmed, could be the ultimate poison pill for US-China trade talks.

And who would have thought the NATO summit would be the big risk event of the week. But offer up President Trump a soapbox to stand on, especially in a global forum, and he will do his best to steal the stage.

This latest run of trade headlines should be a stark reminder that the US administration foreign policy is American first, and nothing else matters. And perhaps President Trump is weaponizing tariffs as a not so subtle reminder to NATO of his foreign policy stance.

Perhaps encouraged by the fact that a recent Washington Post analysis confirmed the Dems are losing the impeachment argument in crucial swing states, and regional battleground polls are showing a more negative reaction to the proceedings. The President appears to be using this as leverage against China by implying that the deal will be worse post-election 2020 than the current one on the table.

And given the spectacular run on the US equity markets this year, it may offer up the US administration some wiggle room to apply maximum pressure on China with too much negative feedback from his backers. If this is the case, it’s an insensitive and reckless strategy that could ultimately backfire

But the fact that the President has threatened trade levies across three continents in the span of 24 hours, not only suggests “Tariff Man” is back, but he’s returned with a vengeance.

And while investors have become more desensitized to trade headlines of late but given the extent to which trade optimism was running towards the top end, the latest trade headlines are extremely bitter pills for the market to swallow.

At least we know where the money if flowing today after the last 48 hours of asset reallocation ambiguity. Treasuries rallied sharply on Tuesday with bond market price action suggesting the street was priced for a trade deal. A delayed US-China trade deal elevates the chances exponentially for the Fed policy action sooner than later.

The market got ahead of itself again, pricing in a credible roadmap for de-escalation and tariff roll back when, in fact, nothing was there. Still, we never seem to learn for the experience from over the past 18 months littered with trade negotiation stops and starts while hitting numerous roadblocks.  

Oil markets

Despite all the negative trade headlines and risk asset carnage heading into an OPEC meeting, price levels are as significant as anything else.

Resistance 57.25 – 57.75 -58

Support      56-55.75-55.50

With overnight price action gravitating to the lower end of the perceived “OPEC straddle, ” not only will extending the current production cuts be on the table. But with the US administration weaponizing tariffs again and probably triggering more demand devastation, the likelihood of deeper cuts increased significantly overnight.

One thing that was clear through the entire pre-OPEC meeting narrative is the OPEC is unwaveringly focused on maintaining flow on oil prices and will most probably deliver a constructive outcome.

And why we continue to see Oil prices bid on the dip scraping the barrel over the past 24 hours 

Oil markets were not overly enamored after Preliminary data from Russia’s Energy Ministry shows average November production of 11.24mb/d or around 54kb/d above the agreed OPEC+ quota. Non-compliance by Russia is very bad optics ahead of a tricky OPEC meeting but has a limited impact on the global supply/demand balance. With that in mind, stricter compliance will be a prominent feature of this week’s meeting, and the market will undoubtedly respond positively to stronger language on that resolve.

There have been conflicting reports in the press about the appetite for deeper cuts within OPEC, and about whether additional cuts will even be formally discussed.

Gold markets

Gold looks set for a sharp end to the year with US equities precariously perched near all times highs amid a possible tri continental trade war escalation which posses clear and present danger to the global risk market.

Resistance $ 1480-1490-1500

Support     $1470-1460-1450

Also, don’t discount gold seasonality, which is typically most pronounced in January.

Gold still offers up the cheapest hedge against a significant drop in equity markets, and it makes sense given the Fed’s responsive nature to toggle the rate cut lever.

If more policy easing and dollar weakness unfold, global investors in 2020 may look back to current prices at $1470 with a sense of nostalgic longing.

Currency markets

The Yuan

USDCNH remained better bid compared to other ASEAN currencies because it has the most to lose on the imposing of Dec 15 US tariffs

Resistance 7.08-7.10-7.125

Support     7.05-7.025-7.0

The current run of negative trade headlines has triggered a cut and run on some of the Yuan bullish bets. And we could see a further extension of the sell-off if the December tariff is not deferred as around current levels, the market is thought to have priced in peak tariffs optimistically.

Australian dollar

The Australian dollar is trading firmer on the back of a less pessimistic RBA and a substantial Q3 Current Account, which is offering up some cushion against the diminishing optimism around trade.

Resistance .6870-80   200 DMA .6919

Support      .6840-6820-6800

The Ringgit

Local traders are trying not to get swept up in the trade headlines while attempting to remain desensitized to the return of ” Tariff Man.” The markets may remain in wait and see mode.

No USD safe-haven bid

I guess the big question is where the USD’s safe-haven bid is. US equity markets got hammered most significant drawdown in nearly two months, and Asia FX also appears reasonably contained. This begs the question of why the dollar is not seeing a stronger safe-haven bid.

Possible reasons

The market is still long dollars, so appetite is not that great.

Long term funds are the overweight US and underweight global equities, so with a worldwide bottoming in the data unfolding and US economic exceptionalism waning, more flows could find their way into foreign markets.

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

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