Risk assets skewed lower, and US equities fell back a little on Monday after China signalled it wants more discussion to iron out details of any partial deal before signing it, including the removal of added tariffs planned for December.
Beyond chiselling out those details, doubts continue to swirl whether China and the U.S. can reach a full trade agreement to end the trade spat. Investors were reluctant to jump on the rally bus while enthusiasm about the potential for a significant U.S.-China trade breakthrough waned.
But this goes well beyond a tariff detente as trade friction has also spread to technology and financial sectors in the past few months. Suggesting, the U.S. administrations attitude towards China does not appear to have improved significantly.
Given the recent economic war escalations, it continues to suggest we remain in a fragile state of “phase one” trade war neutrality unsure if it may last or even what sweeteners and apparatus have been constructed to ensure both parties compliance.
While bullish momentum has faded somewhat, risk steadied overnight when Treasury Secretary Mnuchin said U.S. and China reached “fundamental agreement” on several trade issues last week and a tweet from the Global Times’ editor-in-chief sketched a more cheerful outlook.
Oil dropped the most in two weeks amid concern that the recent U.S.-China trade talks won’t lead to a deal reinforcing the fact that the outcome of the agreement is probably the most significant near-term factor for oil sentiment.
Indeed, a friendly conclusion of trade talks, even a phase one deal, would go a long way to alleviating those gnawing emotional concerns about global demand as traders continue to wear demand sensitivities on their sleeve.
But oil prices stabilised after calming trade talk comments from Treasury Secretary Mnuchin
While oil traders are all too knowing that chasing headline risk is fraught with peril. But demand erosion from the trade war is such an overwhelming pervasive bearish skew; it will be impossible for traders to ignore the ebb and flows from headline risk.
Gold is trading firmer this morning but off overnight highs. Headline risk will continue to dominate, but at the end of the day, what matters most for gold in lower interest rates. And through all this tangled web of headline and phased in confusion, there is one essential narrative that seems to be getting lost.
There is a difference between detente and a deal. A detente means things don’t get worse, but it doesn’t suggest that global economic conditions get better at once. So, with the latest run of weaker financial data implying that central banks may keep interest rates lower for longer, gold could remain supported short term.
And despite hopes building on a trade truce and a Brexit breakthrough, defensive positioning remains high. And predictably so as if trade talks are struggling at this soft-pedalled level, discussions are unlikely to get more comfortable when the complicated intellectual property and technology transfer issues get tabled.
But over the near term, gold could face significant fundamental headwinds in the form of higher US yields and improved equity market risk sentiment especially as we move through to phase 2 and 3 of the US-China trade deal. And if a comprehensive trade deal is inked in November, then the extremely extended long gold positions might be prone to a significant correction lower.
International markets analysis and insights from Stephen Innes, Asia Pacific Market Strategist at AxiTrader.