Weak economic data and rising political tensions between the US and China have led to a soft start to the week in equity markets and a moderately firmer tone for the US dollar.
But it could be little more than a shift away from Trump's chest-beating US economic exceptionalism to a more hawkish stance on China, which is likely to be a centerpiece of US President Trump's election campaign.
Trade war escalation remains unlikely near term
To what extent escalation in US-China tensions matters for investors depends on whether investors expect US import tariffs on a broader range of goods or a mark upon existing ones. But with corporate America already in the throes of an economic collapse in demand, it seems unlikely that US-China tensions will escalate from threats to higher tariffs in the near term.
The US media is pointing to the growing possibility that China will be the focal point of the 2020 election campaign.
Polls conducted by President Trump's campaign suggest that China will be an ongoing issue, according to Republican sources cited by Politico. The Democrats are examining a harder line on China to boost their chances. Either way, China will be in the US spotlight and not in a pleasant way.
But if you didn't sell in May and go away, what did you learn today? The coronavirus blame-game and a looming US Presidential election are a toxic recipe for US-China relations. Politics, Trade, Technology and Capital markets are the critical fissure points again
The subtle rise in trade war rhetoric shook out some US dollar short in Asia, and most currencies in the Asia FX basket veered lower in concert with the broader USD move.
South Korea reported zero new locally-transmitted coronavirus cases for the third time in five days. The reappearance of North Korean leader Kim Jong-un heads off the possibility of a potentially destabilizing leadership change in the region. South Korea's April manufacturing PMI, at 41.6 from 44.2 in March, outperformed.
As far as the CNH goes, markets have reached a particularly excellent inflection point as it relates to the virus narrative and trade ward. But it’s certainly not in China's interests to encourage currency weakness as that would inflame Trump's election grandstanding into political imbroglio.
The 7.15 USDCNH level has been a sharp inflection point for local Yuan traders and the PBoC in the past, so eyes and ears were trained on the critical pivot level today. It held, suggesting there’s good supply on offers and indicates traders are respecting that line in the sand today.
After the move, lower at the open in heightened trade war rhetoric, oil prices are picking up momentum given that crucial supply and demand fundamentals are showing signs of betterment.
With the market re-balancing now in motion, traders will also commence positioning for a multi-staged tightening cycle; this will bee led first by retail and industrial consumption and, at a later point, aviation fuel demand as travel restrictions will likely be at the tail end of the reopening process.
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Soaring US yields trigger the wrecking ball effect as yields become a source of volatility for risk, rather than a source of support