Nothing has really changed in the Fed’s liquidity operations through its T-bill purchases, and that continues to support risk. However, in the absence of the highly anticipated improvement in US manufacturing, and a market that was long of risk and incredibly short volatility – the fact, then, that Trump seemingly got out of the wrong side of the bed on Monday and decided to take on Argentina, Brazil, France ($2.4b in tariffs on champagne, cheese, handbags), Germany (Trump – “Germany must boost NATO spending or risk trade action”) and got stuck into China, we’ve seen financial market volatility edge higher.
The China news flow, as always, will garner the headlines, and the market is simply interested in whether tariffs will or will not kick in on the 15 December. It’s that simple, and after Wilbur Ross’s comments yesterday, it has made the weekend of 15th a binary event. So, comments from Trump that he may wait until after the 2020 election before making a deal, while headlines on Fox Business that “US still going forward with 15 December tariffs”, have seen an uptick portfolio hedging, and a reversal to the FOMO year-end trade, with profitable longs locking in gains and potentially calling it a day for 2019.
Brinkmanship or the real deal?
As said yesterday, it’s hard to know what to make of this, as Trump could be adding two-way risk to the market, thus lowering expectations into the 15th deadline, with a tactical view to hit the market with a fairly market-friendly, quasi-agreement, that sees the 15% tariffs (on $160b of Chinese exports) pushed out into 2020 and a commitment to resume talks around Chinese NY. Or he could just let the tariffs kick-in, and we will no doubt hear the word “recession” used more liberally, and see the market start to price in Fed cuts – which to be fair is something we’re already seeing, with US rates market pricing in an additional 10bp of cuts by end-2020. We now see 35bp of cuts priced through this time, so moving on from ‘insurance’ cuts to something that resembles concern.
So, should we see tariffs kicking in then I’d expect at least two, perhaps even closer to three cuts priced in through 2020.
After recent excitement of a prolonged sell-off in the bond market, the bid today in US Treasury’s has been solid. US 5-year Treasury’s are lower by a punchy 10bp, with 10s -11bp (1.71%), and the curve has flattened accordingly. Gold has worked well in this environment gaining 1% to $1478, with sellers into the 20 November high of 1479.39 (and top of the consolidation range), just shy of the 50- and 100-day MA. A break here and gold looks interesting into year-end.
In FX, GBP has worked well, gaining 0.4% against the USD, and threatening to push through the top of the recent trading range of 1.3000 – happy to go along for the ride on a break, even though I want to limit GBP exposures over the election itself. Aside from GBP flow, it’s all safe-haven buying with CHF and JPY finding some form, notably against the NOK and ZAR.
USDCNH driving the show again
USDCNH has pushed up 0.4% into a high of 7.0870, with the CNH the usual go-to proxy of trade, with the other being soybeans, which has not moved today. The selling in the CNH has curbed the AUDUSD progress, which was threatening a move into 69c, with the pair faded from the session high of 0.6862, and the idea that the RBA’s new found belief that some of the global risks have ‘lessened’ may prove to be a touch premature. While there is obviously much time to go, the February RBA meeting is a currently live one, and after the antics in the US trading session, we should see the Aussie rates market pricing a February cut above 60% today. Selling rallies in AUDNZD seems to be the play here.
We get Aussie Q3 GDP at 11:30 aedt (consensus 0.5% QoQ, 1.7% YoY), but I’d be surprised if this was a volatility event, so would have no real concern with holding AUD exposures over this risk.
Back in equity land, the S&P 500 finds itself -0.7%, with the NASDAQ -0.90%, although both are well off their lows, while small caps have outperformed with the Russell -0.4%. By way of leads, S&P 500 futures are 1.0% lower from the ASX 200 cash close, while Aussie SPI futures are 0.9% lower over the same time, so no surprises where our opening calls reside. China A50 futures are 0.65% lower overnight, so China may outperform, but we expect HK and Japan to open lower by just over 1% at this stage.
Aside from Aussie GDP, the focus falls on US ADP payrolls (135k jobs created), US services ISM (02:00 aedt – consensus at 54.5), and the Bank of Canada rate decision (no economists are calling a change).
Published by Chris Weston, Head of Research, Pepperstone