Week Ahead: G20 Progress on Trade and Oil Gives Lights a Fire Under Markets

Market Analysis /
03 Dec 2018

After weeks of build up the weekend finally saw the G20 meeting in Buenos Aires, and as far as the markets are considered it delivered. The deals, or half deals that came out of the weekend between the US and China, and Russia and Saudi Arabia look set to dominate the week's agenda. 

 

USD

The Chinese government are set to “reduce and remove” the 40% tariffs it placed on US auto imports, this is according to Donald Trump, and is one part of the negotiations laid out after a two-and-a-half-hour meeting between the US president and Chinese premier Xi Jinping. The talks at the G20 summit in Buenos Aires were highly anticipated after months of tit for tat measures introduced by both governments. During the talks both China and the US agreed to a 90-day cease fire to the trade war that has seen the dollar soar and global stock markets suffer.

There is no doubt that this will be the dominating force behind this week’s markets, but there is some skepticism about the 90-day truce. The fear is that after the 90-day period we could return to the same position, with tariffs re-imposed if a deal is not agreed in this time period. Some tariffs could even be increased from 10% to 25%. The news of a partial deal has led to US dollar falling with the main affect was felt across the stock market.

This week is an important week for economic data as we get closer to the December Federal Reserve rate setting meeting. Last week Fed Chair Jay Powell spoke of the data and warned of falling asset prices, worrying markets that the rate hike expected on Dec 19th may be at risk. The US dollar will be at risk to big swings as the important data is released this week, culminating in the US jobs report on Friday.

 

EUR

The negativity of the Eurozone third quarter growth numbers still reverberates around those with Euro positions, and yet again it’s political uncertainty that causes the concerns. However, those worries have been pushed to the back at start of this week as the single currency fell against the dollar after the weekends G20 summit saw the US and China call a truce to the trade war.

Political results in Spain have caused a downside spike to the Euro at the start of the week. The young far right Vox party won seats in Andalucia, Spain’s most populous region, as the rise of populism grows in Spain, with fears of yet another country looking at ways to ease financial pressures putting the European Central Bank and European Commission under extra pressure.

This move in Spain comes as this week sees the Italian parliament start to vote on the governments contested 2019 budget, with politicians in Italy confident they can get a deal with the EC. Last week saw a softening in rhetoric by both the EU, but most notably the Italian coalition government that had previously been digging their heels in and refusing to budge.

 

GBP

Brexit, Brexit and more Brexit will be the Sterling narrative this week as the all-important debate over the Draft EU withdrawal deal is debated in parliament for 5 straight days before the Meaningful Vote on Tuesday 11th December. It’s hard to overstate the importance of next week’s vote to Sterling with either result likely to cause either huge gains or huge falls against its major counterparts. Th result could also have wide reaching political ramifications, as a loss for the Prime Minister could well leave her position untenable, and could lead to either a leadership challenge or in the extreme case a general election.

Expectations now are that the deal will not be voted through parliament, bringing progress made on Brexit back to square one. EU officials have said that the deal on the table is the only deal available, meaning that a vote to reject this deal by UK lawmakers could open the possibility of a No Deal Brexit. The worst possible scenario for the Pound.

 

CAD

Oil prices are the driving force for the Loonie at the start of the week, with that theme likely to continue throughout. WTI oil prices spiked after Russian and Saudi officials met at the G20 and agreed in principle to cut output in a bid to stop the slide in the price. The surge has helped the Loonie to push higher against the greenback and with the OPEC meeting in Vienna this week, a further agreement could push the Canadian dollar higher still.

Domestically it’s a busy week as we see the December rate decision from the Bank of Canada, however expectations are for no change in policy with any statement showing little change to the last communique. It will be oil that is the focus for the BoC here as investors will want to see how governor Poloz will treat the recent energy price shocks. This week remains local vs global for CAD with oil and global trade pulling one way, and the central bank pulling in the other.

 

AUD

Positive US-China trade talks at the G20, an agreement on a 90 day truce, and the potential Russia-Saudi oil output agreement have all led to upside for the Australian dollar, most notably against its US counterpart. It will be the US based news flow that drive the Aussie this week.

The fear will be if the prospect of a deal between China and the US being struck in the 90-day truce period falls. This would lead to a reversal of early week gains and lead us back to square one in the trade war saga. With the US likely escalating tariff implementation as punishment for no deal being agreed.

 

NZD

 The New Zealand dollar is in the same boat as many other US dominated currencies this week as it remains at the mercy of news flow surrounding the G20 and the US-China trade talks that are set.

President Trump and his Chinese counterpart Xi Jinping reached a ceasefire weekend over the weekend under which the US will hold off imposing further tariffs on the US and in return China would buy a substantial amount of US goods.

That truce will remain valid for three months, during which both sides will negotiate a permanent trade deal.  The risk on nature of markets after the weekends developments in Argentina on trade and oil prices mean commodity based currencies such as the Kiwi have had a lift early in the week and will look to push on from here after months of US dollar dominance.

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