Traders Managing Exposures Ahead of The G20 Summit

That dynamic is in play right now, and it is why we should follow and react to price moves above all else.

Take, for example, the barrage of headlines that are brewing in the lead-up to the G20 meeting, which plays out this Friday and Saturday. With the real focus falls on the Xi-Trump meeting, which looks to be taking place at 12:30 AEST on Saturday. Small focus also falls on the Putin-Trump meeting, which takes place at 3 pm (AEST).

Expectations for progress set sufficiently low enough

Over the past 15 hours or so we’ve heard from US Treasury secretary, Steven Mnuchin, suggesting (and referring to a US/China trade deal) “we were about 90% of the way there” and “that’s there’s a path to complete this”. There was some buying of equities and risk on the back of these headlines, although, the market didn’t get overly excited as it was seen in the past tense, and recall, Mnuchin said they were 90% there in April shortly before Trump slapped fresh tariffs on China on 5 May.

Hu Xijin, the now widely-followed editor of the China Global Times (state-owned), then responded to Mnuchin’s comments on Twitter, detailing “no Chinese official now speaks with such optimism. With dozens of hours left before Xi-Trump summit, Chinese state media has been keeping criticizing the US harshly, a situation that never happened in the previous China-US summits.” This doesn’t sound like China are coming to the party with ideas of making a deal.

We also heard from Trump, himself, stating that “my Plan B is that if we don’t make a deal, I will tariff and maybe not at 25%, but maybe at 10%, but I will tariff the rest of the $600 billion that we’re talking about”. “My attitude is I’m very happy either way”. This is expectation management 101 and the bar for a clear resolution at this G20 Summit is now set accordingly.

The bottom line is the market has been hit by a barrage of noise that gives us less clarity than before.

Indecision seen in market moves

With such conflicting headlines it’s no real surprise to see US equity indices doing very little, and if we look at the S&P500 (US500) through the cash session, the tape showed a slow bleed lower. If it weren’t for a 2.7% rally in crude, driven by a monster 12.7m barrel draw in the weekly DoE inventory report, which was over a two standard deviation event from the five-year average, then US equity indices would have been far lower on the session. I touch on the set-up (see below) in WTI crude in ‘chart of the day’, as we have hit the double-bottom target and horizontal resistance, so it would not surprise to see consolidation here.

We’ve seen reasonable selling in the US bond market overnight, but let’s not forget the world is very long bonds, and after James Bullard comments yesterday (which I covered in yesterday’s note), there is a slight paring back of expectations for a 50bp cut in the July FOMC meeting. And this remains a huge question for markets – will we see a 50bp or 25bp cut from the Fed in July FOMC meeting?

USDJPY has pushed into 107.70 following the move in US Treasury yields, but it feels like traders are lining up to sell rallies in this pair, although a look across the Asian markets we can see far more optimistic moves, which I will touch on in my daily trading wrap (video).

Keeping the USD firmly on the radar

It’s the USD; specifically, that is of interest as we head into and post the G20 Summit, as it feels as though the market is looking for a sustained move lower.

Trump seemingly agrees, having again disclosed that the USD is too strong and that the EUR is too weak, and while I’ve not really heard any scuttlebutt for any bilateral or multilateral agreement to weaken the USD, the outcome of the Summit could influence expectations for a 50bp cut from the Fed. We know the Fed are looking at what is said or not said, and while the most likely situation is we simply hear a lot of bravadoes that the two sides plan to work closely together and agree to find a solution that is amicable, we still need to consider if the event poses a gapping risk for markets. Could we hear something that gives us genuine encouragement and we see price open significantly from Fridays close?

It certainly feels as though the probability is we will see traders manage exposures, refraining from adding too much additional risk just in case.

So, if the G20 proves to be a non-event, aside from broad financial conditions and inflation expectations, these data points should go some way to answering the 25/50bp debate:

• US ISM manufacturing – 2 July

• US Services ISM 4 July

• US non-farm payrolls – 5 July

• US CPI – 11 July

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Chris Weston, Head of Research at Pepperstone (Read Our Review)