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Markets Morning - Hope of reduced trade tensions between the US and China buoy risk

Market Analysis /
Greg McKenna / 20 Aug 2018

Welcome to my daily Markets Musings.

You’ll see things are different from now on. That’s because the full note was approaching 2,000 words some days and I’m breaking it up into a number of reports on the Axi Blog each day now.

That way traders can subscribe to the Axi Blog easily and then cherry pick the yarns and markets of interest 

Feedback always welcome

Greg

 

Market Summary (Monday August 20 7.30am)

President Trump is winning again.

That’s the takeaway he’s likely to get from news that China’s resolve may be cracking and the trade delegation being sent to Washington is not as low level as many thought. It is, the Wall Street Journal, Bloomy and other reported Friday, an advance party for a Trump/Xi summit later this year and the hope of trade tensions being settled by November.

Last week’s data on retail sales, investment, and industrial production and the associated collapse in the Yuan through 6.90 in USDCNY terms as it raced toward 7.0 may have been a lightbulb moment for Beijing. We’ll see, but the rally in risk assets continued as a result of the news breaking on Friday.

Most of the ebullience was felt in assets like the Aussie dollar and copper, but stocks in the US certainly closed higher also. The question for the week ahead is whether the S&P 500 can take out the recent high at 2,864 and then have a run at the record high.

We’ll see I guess. But on Friday the S&P 500 was 0.33% higher to close the week at 2,850.The Dow was 0.43% higher and the Nasdaq rose just 0.04% - keep your eye on this one – with the 100 inex finishing the week at 7,377.

Europe will likely open higher for the week given it missed out on the US rally with the FTSE flat, the DAX off 0.22%, and the CAC down 0.1%.

But, the positivity, the rally in risk assets, and the sentiment shift in markets helped SPI traders add 28 points to Friday’s already solid close on the ASX at 6,339. This is a genuine technical breakout folks. The ASX could run if a bid comes back into the miners. It hasn’t happened yet though, not on Friday night anyway with Metals and Mining stocks finishing the week at the lowest ratio relative to the overall MSCI world market since June last year. Value anyone????

On forex markets the USD reversal continued under the heavy weight of positioning and data flow. The DXY, which touched 97 last week ended Friday at 96.13. The Euro which bounced from around 1.13 intra week closed at 1.1437 while the pound climbed back to 1.2750. USDJPY is mixed however because of the USD swoon and sits at 110.49.

Of the commodity bloc as noted above the Aussie fairly roared with a 0.8% gain to close the week at 0.7316. It might be time for a run if the tensions between Beijing and Washington are seen to be lifting. Or at least if traders think that way. Of course this is against a backdrop of overall USD strength in the medium term. The Kiwi was almost equally as solid with a 0.76% rally to 0.6636 while USDCAD respected that downtrend line again and is at 1.3055.

On commodities the USD move has lifted some of the weight off gold which is at $1184 while the copper price rose close to 2% in HGc3 terms but was up just 0.36% in HGc1 terms to $2.62. Oil was higher on the day Friday but slipped on the week. WTI ended at $65.91 while Brent was at $71.83 with gains of 0.7% and 0.6% respectively.

Bitcoin is around $6,400 for a more than 3% gain as it holds important support below $6,000 while US treasuries were largely unchanged with the 2’s at 2.62% and the 10’s at 2.87%.The curve is 25 points.

It’s quiet on the dat front today, indeed this week save for the minutes of the RBA, ECB, and FOMC meetings. The flash PMI’s later this week might be of interest as well. ON the day though it’s German PPI and a speech from Atlanta Fed President Bostic which are the highlights. We haven’t heard from the Fed in a while. That might be interesting.

Have a great day. 

Macro Stuff that affects everyone and everything – either today or eventually

International

  • Here’s the news that could really get things moving this week in markets. Risk sentiment turned last week when on Thursday the PBOC resisted the Yuan’s weakness with a firmer fix and then – almost simultaneously – announced that a trade delegation would be heading to Washington to kick-start talks. The Aussie was higher, copper climbed off the mat,  the USD fell, the Yuan was stronger, and global stock markets rallied even if Chinese ones didn’t.
  • Anyway, fast forward 30 or so hours and in New York trade Friday news built that perhaps this wasn’t the low level delegation folks were painting it as but rather a precursor to another Trump/Xi summit later this year. And then the Wall Street Journal released a piece titled “US, China plat roadmap to resolve trade dispute by November”. The Journal said, “The planning represents an effort on both sides to keep a deepening trade dispute—which already has involved tariffs on billions of dollars of goods and could target hundreds of billions of dollars more—from torpedoing the U.S.-China relationship and shaking global markets”.
Click on me, I'll expand
Click on me, I'll expand
  • It hasn’t exactly ignited a big rally in US stocks. But if we can see new highs it might be 2,900 folks are talking about and maybe even higher. 2,863 is the level in futures CFD terms. Certainly President Trump reckons things are looking great in the US, he Tweeted over the weekend “the Economy is stronger and better than ever before. Importantly, there remains tremendous potential - it will only get better with time!”
  • And the President also tweeted that he had allowed the White House Counsel to chat with the Mueller inquiry, after the NY Time broke a story over the weekend.
  • Can someone get Turkish President on the phone and ask him does he want Istanbul to become Caracas? I’m serious. Conventional wisdom is he and his finance minister will fold and Turkey will call in the IMF. But given this is political I wonder if Erdogan will actually ask for help until its too late. Anyway the USDTRY finished the week at 6.01 so we’ll see.
  • And just quickly on Venezuela, Bloomy reports shops closed Saturday in anticipation of the government’s new measures. Here’s an excerpt on the carnage Maduro has wrought, “The government will enact a massive currency devaluation and an increase in taxes, and will raise gasoline prices. A new version of the bolivar will trade roughly in line with where the black market was, and the government will raise the minimum wage more than 3,000 percent -- a level that still only equates to $30 a month. Tying Venezuela’s currency to the value of its cryptocurrency, known as the Petro, effectively amounts to a 95 percent devaluation compared with last week’s central bank foreign exchange auction results”. There, but for the grace…and all that I say.
  • And while I’m on regimes that are on the edge, how about Iran. Zerohedge reports one of the nation’s top generals post a picture on Instagram of himself in front of the WhiteHouse with the US flag falling and the building aflame. Two things, seriously? And, hey Facebook is that within the rules??? Anyway the Iran-US tussle continues.
  • It’s Monday so it’s time to update the Citibank Economic Surprise league tables. Of note is the improvement of Europe (less negative) versus the dip in the US (more negative) and the fact the two regions CESI scores are equal. That kind of supports the Euro bounce back. Though Fed minutes this week are likely to reinforce the tightening bias.
Click on me, I'll expand
Click on me, I'll expand

Have a great day's trading.

Greg McKenna

Chief Market Strategist

gregmckenna.com.au

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