With corporate America already straining under the weight of a collapse in demand, it seems unlikely that US-China tensions will escalate from threats to higher tariffs in the near term – even if the run-in to the US Presidential election has China in the crosshairs. If the market were morphing into full-blown trade war mode, the SPX would not be eyeing 2900, nor would Brent be trading +$30 in this market climate.
The Yuan Watch
With all eyes on USDCNH fix, the PBoC went a long way to extinguishing one major trade war hotspot by setting the Yuan reference rate on a more risk-friendly level. USDCNH dropped about 200 pips on the stable fix, a recovery in risk sentiment ensued and there was no follow-through on US President Trump's threat to China.
The return of onshore China investors after US-China tensions over recent days failed to elicit fireworks in USDCNH and China equities. USDCNY was fixed only 0.17% higher at 7.0690, with USDCNH attempting to bridge the gap and selling off towards 7.10.
Whether any of this matters very much depends on how tensions escalate and drive CNH weakness and spill over into China-sensitive currencies like AUD, KRW and TWD. Ultimately it boils down to whether tariffs get reinstated and, at this time, trade and tariffs remain in the highly doubtful category.
From an oil market risk perspective, we’ve seen China retaliate in the past by quashing US oil imports at a drop of a dime and this could partially explain today's Asia oil markets mini sell down.
But the reality probably lies somewhere between the too quick too fast narrative and the nascent trade war risk.
Indeed, oil markets have come a long way over the past 72 hours after traders lapped up the view that the oil complex is rebalancing quicker than expected. On the supply side, yes, but I’m certainly not throwing caution to the wind by going max-margin long on oil after hitting +30 Brent, which was my July recovery target. Sure, the world is reopening but that doesn’t mean there’s an immediate snap back in global oil demand, although products should get a kick start with consumers eager to get back in their cars.
Bottoming US interest rates and low volatility suggest investors believe low-interest rates are here to stay and aren’t moving higher time soon. It's the global economic dependency on the cheap dollar (interest rate wise) at the start and throughout the crisis which is keeping the US dollar in demand. When global growth and risk sentiment are weak, the USD dollar by default is strong.
It was reasonably quiet in currency land in Asia, with traders still unsure what to do with the Euro. I think lawyer, but since I flunked my LSAT, I’m not even sure what the German high court ECB ruling means, so am waiting for London to come in for direction before hitting the Euro with the ugly stick.
Still, the USD can selectively sell-off if investors differentiate those economies returning to social business as usual sooner. The focus is on how quickly countries can return to closer social interaction beyond just firing up manufacturing facilities. After all, the service sector has a much higher weight in the global economy, and without end-consumer demand manufacturing orders will dry up pretty quickly. Australia, South Korea and China have substantial service sectors that could see those currencies flourish before the eventual brick and mortar rebound; now we’re getting creative in a way to justify my bearish USD view.
Pre London-Open View
Nothing beyond the obvious is stirring sentiment today beyond a concern that while the world might be past the peak of the coronavirus, the sizzling equity gains since the lows are not reflective of the extent to which the economy faces more fundamental longer-term changes.
Still, it remains to be seen if this trade war complexity mushrooms into something more risk menacing as time goes by.
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