US and China seek asymmetric enforcers

Prepared by Jeff Halley Senior Market Analyst

US and China seek asymmetric enforcers

The Dove-fest unleashed by global central banks in January and February seems to have done its job for now. March prints on service and manufacturing PMIs across the globe have shown a (mostly) upside surprise implying that the dark clouds of late 2018 could be lifting. We’re not just talking China here, of course, the trend appears to be global, with countries as far apart as Brazil and Singapore posting expansionary PMI data.

So is this a false dawn or the start of a new harvest of “green shoots” for the global economy? It’s probably too soon to say if the rush will fade, but what is for sure, it needs a US-China trade deal to make it happen. Any sceptics to this viewpoint could look to the North American session today. The Financial Times (FT) reported from Washington DC that a trade deal was close. It immediately saw poor US ADP Employment data forgotten, Wall Street rallying back slightly into the green and the US 10-year yield climb back above 2.50%. Even the German 10-year Bund regained the 0% handle. The world is a strange place when the markets let out a sigh of relief at 0% government yields.

The devil is in the detail of course, and the FT reports the final 10% involves China signing off on an asymmetric enforcement regime. Basically, if China is perceived by the US as having broken the terms of the trade deal, the US can re-impose tariffs immediately until China fully complies. China though is not allowed to impose counter-tariffs or take the US to the World Trade Organisation. This will be a bitter pill to swallow. If anything it highlights the tough stance the US is taking with China, not seeking easy wins but a fundamental reset in how China does business with the world. Green shoots and all, China will likely have to juice and swallow most of it.

Of course, financial markets are the ultimate experts in not letting the details get in the way of a good story and the positive vibes from the trade talks and PMI prints should see Asia off to a good start with a light data calendar.

FX
The US dollar gave back its gains of the early session as a risk-on outlook story saw a rotation out of US Treasuries and the dollar. The Dollar Index fell slightly by 0. 28% to 97.09 with the euro, yen and sterling all gainers.

However, volatility remained dire overall with FX markets continuing the belligerent wait-and-see mindset that has characterised 2019. Nevertheless, regional currencies should get off to a bright start in Asian trading on trade hopes.

Equities
Wall Street finished the day slightly higher with the Nasdaq rising 0.6%, and the Dow Jones and S&P up approximately 0.2%. Respectable but not stunning. Poor US ISM and ADP Employment data had seen Wall Street sink into the red earlier in the session.

Global growth hopes from the trade talks gave Wall Street a late fillip and the same theme should apply to Asian stock markets today. It’s likely regional equities will proceed straight to go this morning and enjoy positive starts.

Oil
Last night’s US Crude Inventory data surprised with an unexpected build-up of 7.2 million barrels versus an expected drawdown of -425,000 barrels. The data should have been enough to hold the recent crude rally below the waterline with traders experiencing a sinking not loving feeling. Instead, both Brent and WTI closed unchanged at USD70.00 and USD68.20 dollars a barrel respectively.

The global growth US-China story is, of course, the reason with oil particularly exuberant in recent times on the prospects of a global recovery. The bull run has left both Brent and WTI dangerously overbought on their Relative Strength Indicators. The technical picture suggests that the longer oil stays so overbought on a daily basis, the uglier the correction down will be for both contracts. Traders should exercise caution at these levels.

Gold
Gold had a quiet session and seems to have really fallen off the trading radar of late. The yellow metal closed unchanged at USD1,290.00 an ounce balanced between a weaker dollar and hot money rotating into more risk-seeking assets.

Gold though remains safely above its crucial 1275.00/1280.00 support region even if the eyes of the world are turned elsewhere.

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