Markets in Asia have entered a holding pattern ahead of an expected signing by the U.S. and China of their Phase-1 trade pact later today. The morning has not been without drama, however. The U.S. Government surprising Wall Street by stating that all tariffs will remain in place by both sides after the signing. U.S. Treasury Secretary Steve Mnuchin stated that the tariffs would remain in place until a Phase-2 agreement is agreed.
Financial markets had assumed, that at least a partial rollback would be announced on tariffs, as part of the trade pact signing. Having got themselves all pact and ready to go, Wall Street, faced with a flight delay, quickly set about locking in some profits, with equities edging lower and U.S. treasury yields easing.
President Trump, with one eye on the November election, clearly intends to make sure that momentum on trade negotiations doesn’t stall after today’s signing. In fact, the U.S. President has shown his street fighter credentials in abundance, with the U.S. joining Japan and the EU to propose a rule change at the World Trade Organisation (WTO). The proposed amendment is taking direct aim at China’s state-sponsored capitalism regime.
Opening a second front on China in the trade war, along with keeping tariffs in place to ensure compliance, is somewhat of a strategic masterstroke. It is good news for the EU and Japan as well; a united front with the U.S., exponentially increases the likelihood of movement from China than either could have achieved singly. Or that’s the theory. China, for its part, is having a bad day at the office.
With so much cash having flowed into the post-trade-deal global recovery trade over the last month, investors are likely to have itchy trigger fingers on the sell button.
Developments this morning will not derail the trade signing, or indeed an expected recovery by regional Asia in Q1. They should, however, remind investors, that markets can go up and down. That light at the end of the tunnel could be a train coming the other way.
How China will react to being strong-armed into Phase-2 negotiations by the U.S., and a second front being opened via the WTO, I shall not try to guess. With Chinese New Year upon us though, any response is unlikely until after the holiday. China will likely bite it’s lip, smile and sign for now. That should mean the FOMO, buy everything trade, will march on after today’s signing is concluded. It should remind readers, however, that although nationalist/populist tensions have ebbed, for now, they have merely pact for a short vacation.
Indonesia posted much-improved Balance of Trade data this morning, indicating that South East Asia’s recovery remains on track in Q1. The Balance of Trade was flat against an expected $0.5 Billion fall. Exports rose into positive territory by 1.28% and most pleasingly, imports recovered from their 6.3% fall in November to be flat for December. Implying that domestic demand is slowly but surely improving.
Equities
Wall Street gave up its intra-day gains overnight as the news that U.S. tariffs would remain in place past today trade-deal signing, hit the wires. Wall Street’s leading indices finishing almost flat. The sell-down however, looked more corrective and profit-raking driven, rather than a change in sentiment.
Asian stock markets have eased across the region, as the tariff non-adjustment to pressure China into rapid phase-2 talks caused unease. The Nikkei 225 has fallen 0.55%, China’s CSI 300 by 0.70% and the Shanghai Composite by 0.65% as has the Hang Seng. Singapore’s Straits Times is lower by 0.40% with Kuala Lumpur and Jakarta both lower by 0.30%.
With such substantial gains posted in Asia in 2020 thus far, it wouldn’t have taken much to upset the applecart. Like Wall Street though, there is a certain orderliness to the falls today and certainly no sign of panic. If a potential war in the Middle East couldn’t unsettle markets, then some surprise details from the trade agreement certainly won’t.
We expect confidence will return quickly, providing the trade pact is signed without incident.
Currencies
Trade nerves saw the Chinese Yuan drop against the dollar, making it the primary mover in an otherwise calm FX market overnight. Offshore Yuan has now fallen by 300 points to the dollar in the past 24-hours, trading at 6.8960 at midday. The non-rollback of tariffs by either side is not likely enough to unwind the Yuan’s recent strong rally, but it may be enough to cap gains for now. 6.8600 may well be the high for CNY now with the USD/CNY likely to stabilise in a 6.9000/6.9500 range as currency markets book profits.
The tariff concerns have seen the U.S. dollar carve out small gains against regional Asian currencies this morning, with position reduction foremost after substantial EM gains over the past month. Again there appears to be no panic amongst participants, with currency markets content to slumber until the pen is put to paper later today.
Oil
Both Brent and WTI’s recent post-geopolitical corrections lower, appear to have found a floor overnight. Brent crude rose 0.70% to $64.70 a barrel and WTI rose 0.60% to $58.50 a barrel. Forecasts that U.S. shale production would rise to over $13 million barrels a day in 2020 failed to dent either contract. Having weathered the post-Iran storm, both contracts appear to be much closer to equilibrium at these levels.
Oil has eased slightly in Asia following the Mnuchin comments on U.S. tariffs. Brent crude has fallen 0.05% to $64.60 a barrel, and WTI has reduced by 0.15% to $58.30 a barrel. Much like currency markets, oil appears content to slumber ahead of the trade agreement signing.
Gold
Gold was almost unchanged overnight but has risen modestly on the faint breezes of concern emanating from Washington DC. Gold has risen 0.20% to $1550.00 an ounce in Asia.
Support lies at $1535.00 an ounce with resistance at $1562.00 an ounce. With the world’s eyes elsewhere, gold seems likely to trade between those two levels for the remainder of the week, trade surprises excepted.
My bias continues to be towards the downside assuming the global recovery trade reasserts itself again tomorrow, and haven assets become less appealing.