US equities were weaker for most of Thursday, slowly recovering later in the session into a flat close. Trade negotiations continue to dominate sentiment; however, the risk seems to be in a much better place this morning after yesterday morning’s Liu He headlines saying that he was "cautiously optimistic" about Phase One talks. Vice-Premier He was also reported overnight to have invited the US to a new round of face-to-face talks in a phone call late last week and was hoping to meet before Thanksgiving.
If face-to-face discussions are going to happen, it may be overly optimistic at this point to think they could happen before Thanksgiving, if at all. The US has indicated that they were reluctant to engage in face-to-face talks unless China made it clear that it would make commitments on structural issues. At the same time, Liu He's "cautiously optimistic" comments did come despite the Hong Kong bill narrative. So, to some degree, it also indicates that China may be willing to compartmentalize this contentious bill away from the broader trade negotiations.
But this tangled web of trade talk confusion has investors sitting in that all too familiar predicament of trade war limbo.
So, where exactly does trade war limbo sit?
The first date for face to face is presumably December 15, which brings this discussion right down the wire before the US imposes a new set of tariffs.
A lot of happy holidays are riding on Phase One and visions of sugar plum fairies dancing in investors' heads might come down to this important date. It's incredible that with months of preparation to put together a credible road map to guide the markets into a sunny spot, everything always seems to come down to the wire.
If both sides can schedule a sit-down, the market will view this as extremely positive on two fronts:
It does sound positive on the surface, but equity markets remain cautious given the numerous stops and starts – not to mention dead ends these trade discussions have met with.
As we approach December, if face to face talks haven't been scheduled, one would need to assume that Phase One talks have gone off the rails and tariffs would likely be put in place come December 15.
Surely both sides aren't going to walk us down the garden path only to take us down the rabbit hole again with Trump and Xi. In the meantime it’s back to rolling thumbs, waiting for the elusive Phase One deal to evolve while playing headline dodgeball.
US-China trade talks and the upcoming OPEC meeting are the critical variables for oil in the near term. The impressive trough-to-peak bounce yesterday was helped by comments from Chinese Vice Premier Liu He, who said he was "cautiously optimistic" about reaching an initial trade deal with the US, despite expectations that US President Trump will sign a bill supporting protestors in Hong Kong.
The fact Vice Premier He did extend an olive branch on trade talks despite the contentious escalation unfolding around the HK bill suggests that, on some level, China may be willing to compartmentalize it away from the broader trade negotiations.
Adding to the gains, Reuters reported OPEC+ is likely to extend its production agreement through June 2020. While this is the market’s base case scenario, it’s stricter compliance of the existing deal that is thought to be a central talking point in the upcoming meeting.
Currently, Nigeria (+300 kb/d) and Iraq (+160 kb/d) are producing above their quota even after reductions in October, so it will not be unreasonable for members to bring both into line. Reducing global supplies by 500 kb/d would go a long way to balancing out the worldwide supply and demand equation.
And, of course, this week's EIA US inventory data resonated bullishly.
But the press has begun to focus on unrest in Iraq that, if it continues, there could be a bit of a supply tail risk wagging. Protests in Iran are getting airtime which, although unlikely to impact production that has already collapsed as a result of US sanctions, does bring attention to the waves of populism and political tensions in the region. At a minimum, it should put more eyes on the geopolitical risk index.
Price action has been sideways for the past 24 hours; 1.1050 has been holding but the air is still getting thin above 1.1080. The Forex market's general take is that the FOMC minutes were on the dovish side and, combined with this week's coat-tailing of GBP Brexit poll price action, the market appears comfortable to bid the Euro on dips.
But it's hard to ignore the fact that US equities have started to beat the world indices again – and substantially – which brings the US exceptionalism (QQQ/EEM ratio vs. the DXY) back into play and may suggest it’s time again to look at the bullish USD side of the equation.
But with eyes looking for a base in the Eurozone PMIs and what is expected to be a well-received speech by Christine Legarde later tonight, it’s perhaps best to leave those USD bullish ambitions until next week – at least against the Euro anyway.
The Malaysia Ringgit
Pessimism over the Phase One trade deal has triggered an unwind of bullish ASEAN currency bets, but I think there's a bit more than meets the eye to this position unwinding. The Ringgit was getting driven more on trade talk optimism rather than economic realities or equity inflows, so the market was growing ripe for a reversal on the first signs of reversal. Confidence on the US-China trade deal was papering over the cracks of gloomy regional economic data, especially from China.
The walkback on trade deal confidence may have turned currency focus back to the economic realities, and without domestic growth trade deal optimism alone is not enough to carry the day. While short term price action will like trade biased to trade war euphoria for the longer-term views, it's back to the basics around the economic data.
For gold markets, the message is in the bond market bottle.
The gold market has lost a lot of appeal of late as US-China headlines fail to elicit much response from the listed volatility markets and are getting little support from the US equity markets which remain firm.
January implied Treasury volatility is trading where it was on Monday, despite the HK bill fiasco and traders’ "on again, off again" love affair with trade talks. Despite all these worries, fixed income doesn't seem to be able to hold onto its gains. Yes, yields have slinked lower in the past few session, but yesterday’s reversal only shows that, in the current state of play, bond traders would prefer to fade rallies for the time being. This tendency would help explain why stocks aren't suffering, gold remains mired bearishly in a range and why everyone is so relaxed about things.
The algorithm factor
Algorithms are making things tedious for investors these days.
Something I've been harping on about all week: the headline bonanza is reaching maximum tolerability with the endless cycle of lather, rinse, repeat as claims that a deal will be achieved is then met with denials.
By looking at the crazy volume spikes in futures over the last few weeks, it's clear the algorithms never sleep. Welcome to the modern world of trading, where you need to know little more than how to connect a news reading algorithm auto-clicker up to a trading API GUI on the fastest internet connection available.
Mind you, this isn't new as I've had a form of a scheduled events algorithm running for the better part of a decade. Still, the speed of execution and detailed headline content snoopers from the big shops is unparalleled these days, making most of these headline moves untradeable for your average Joe. It might be exciting for the algorithm's developer, but it’s tedious for investors.
Read more articles from Stephen Innes: https://www.axitrader.com/int/market-news-blog/stephen-innes.
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