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London Open: Investors attempt to decipher trade spats while absorbing less than stellar export data

Market Analysis / 7 Min Read
Stephen Innes / 21 May 2020

The April FOMC minutes reinforced the Committee's view that a slow economic recovery will encourage disinflationary pressures and inhibit recovery in inflation. This dynamic leaves monetary policy accommodative for the foreseeable future and puts more pressure on fiscal accommodation.

Risk is not firing on all cylinders this morning as Asian investors are trying to make heads or tails of the recent China trade spats with the US and Australia while simultaneously taking a few chips off the table on less than stellar Korea 20-day export data read in the event the NPC disappoints on the stimulus front.

China's 'Two Sessions' is the annual gathering of thousands of delegates and policymakers and one of the most important political events in the country. Things kick off today with the Chinese People's Political Consultative Conference (CPPCC), with the National People's Congress (NPC) starting tomorrow. The NPC is considered the more important of the two meetings, where targets for GDP, CPI and the fiscal deficit will be announced.

This event is garnering the lion's share of attention but it’s worth remembering that most of the monetary policy and measures the market is concerned about don’t have to be decided or announced during the Two Sessions. Still, the market remains positioned for a significant policy monetary and fiscal response from Chinese leaders.

Korean 20-day exports fell 20.3% in May, after a 26.9% in a drop in April. There’s no consensus for this data release given the broad estimates going in. Still, you could make a case for disappointment – a more modest improvement than might have been expected in the context of growing optimism around economies opening up around the world in recent weeks. But with retail demand likely taking the long road back to recovery, exports should gradually improve in the summer months. So we return full circle to the argument post-China retail sales; after all, it's one thing getting factories up and running, it's quite another getting consumer demand going amid weakening labor markets.

On the ‘Barley, what's next?’ front

We all got our mitts full of COVID, that’s for sure. But just as lockdowns are starting to ease, tensions between the US and China look set to spoil whatever little was going to be left of a summer reprieve.

It would be ill-advised to dismiss this as mostly hot air: even limited action, especially in this extremely brittle market climate, would disrupt trade and investment further. As with the tariff spat last year, the economic impact is not just confined to the two combatants: smaller economies across Asia are often equally, if not more, exposed. It’s certainly not what the global economy needs now

Currency Markets

With risk sentiment broadly supported, NZD looks attractive on dips provided opinion holds true.

The markets remain biased towards buying AUDUSD on dips given current dynamics.

The Euro remains on the front foot as risk-positive USD weakness combined with optimism about a Franco-German EU recovery fund proposal adds to the support.

China has changed its inspection procedures for iron imports under new rules that could block Australia's most famous export amid rising trade tensions between the two countries, AFR reports.

President Trump has been quick off the block this morning suggesting China is on a massive disinformation campaign; he reiterated China could have stopped coronavirus but did not – it’s almost as if he's' trying to goad China into a retaliation during one of China’s most important political and policy events of the year. In any case it’s sending risk assets into a tizzy this morning.

The coronavirus pandemic has led to a worsening of US-China relations, to the point where the US has openly blamed China for the epidemic. A recent Pew survey conducted in March found that most Americans view China unfavorably, and China hawks in the US government are pushing for more financial sanctions and tech restrictions. The White House has reportedly ordered the federal pension to halt investments in Chinese equities. The US has also tightened export controls to China and announced much more stringent additional restrictions on China's Huawei.

The markets may be pricing in far too much complacency as the US-China 'phase one' trade deal could be at risk, as the pandemic and resulting acute economic downturn have made China's trade commitment to the US much more challenging to fulfill.

And why the market was so unresponsive to the initial Aus-China trade headline is bewildering as fiscal and monetary policy cannot paper over that trade war chasm. And these things tend to escalate before usually getting walked back.

May 18 7:30 AM NY : *CHINA COMMERCE MINISTRY SAYS WILL LEVY ANTI-SUBSIDY DUTIES ON BARLEY IMPORTS FROM AUSTRALIA FROM MAY 19.

The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.

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