By Jeffrey Halley, Senior Market Analyst, Asia Pacific
A phone call between US and Chinese officials resulted in the announcement that half the new US tariffs on Chinese goods – some USD150 billion – would be delayed until 15 December, thereby making the President the Grinch who only partially stole Christmas. Much more importantly though, US and Chinese officials have scheduled further calls in two weeks, giving the street hope that the trade talks may be on the road to a nascent recovery.
This news comes in the nick of time with safe-haven flows into government bonds pushing yields down to GFC levels, equities wobbling and trade bellwether Singapore, slashing its GDP forecast to between zero and 1% yesterday.
With the US and China re-establishing themselves as the big dogs of the global economy and everyone else as simple a spectator (sorry EU), the reaction on global markets was predictable. Equities and oil soared, bonds sold off aggressively, the US dollar rallied against the Swiss franc (CHF) and Japanese yen (JPY), and Bitcoin fell by 5%. Notably, however, gold only gave up some of its gains, falling from USD1,520.00 to USD1,502.00 an ounce. Given the stampede out of defensive positioning we saw everywhere else, this performance is doubly impressive and suggests that calmer heads will need a lot more evidence that a collision between the two supertankers of the world economy will be avoided – sound advice in my opinion.
Lost in the tariff tenderness of Trump noise, another set of excellent data emerged from the UK. Wage growth hit an 11-year high overnight, belying the doomsayers of Brexit, and today’s inflation data will show inflation is cruising along at a respectable and very manageable 2%. The Gnomes of Brussels and Frankfurt can only dream about this particular data combination, as they look across the English Channel enviously. The noise about a mass exodus of jobs from the City has long since died too. All in all, although a hard Brexit seems more likely, it would be foolish to say Her Majesty’s Union is doomed and the reality could be quite the opposite. That said, the spectre of a hard Brexit will likely keep the British pound (GBP) anchored at its present lows.
In Asia, today’s highlight will undoubtedly be Chinese industrial production and retail sales. You won’t hear this from China, but they will owe President Trump a big thank you if the data misses to the downside. His overnight efforts to save Christmas should overcome any negative blowback from negative prints. Indeed, if the data comes in as expected or better – 6.30% for industrial production and 9.80% for retail sales – it could add more fuel to the recovery fire price reactions we saw in markets overnight.
Currencies
US bond yields rose aggressively overnight with the 30-year price falling a whopping 16/32nd. Higher yields saw a stampede into US dollars, with the greenback rising more than 1% against the yen and Swiss franc notable moves. The greenback fell against Asian currencies whose countries, of course, stand to be significant beneficiaries of a potential thaw between China and America. Overall the US dollar index rose a very respectable 0.45% to 97.82 in overnight trading.
Asia should expect more of the same in today’s session with the US continuing to outperform its G7 counterparts while remaining under pressure against Asian regional currencies and the Australian and New Zealand dollars, which are a high beta to China.
Equities
North American markets soared overnight, with the Nasdaq jumping 2.20% (driven by Apple), the S&P 500 rising 1.50%, and the Dow Jones up 1.50%.
The Nikkei 225 has risen 1.0% the ASX 0.42% in early trading, and this sentiment will likely continue across regional bourses as they open. The ongoing protests in Hong Kong may temper gains there, as the threat of direct Chinese intervention lingers. Overall though, local stock markets can look forward to a positive session with sentiment possibly carrying through to the remainder of the week.
Oil
The tempering of a potential tariff war had a predictable effect on beleaguered oil markets as traders seized upon any hint of a global recovery to send black gold prices rocketing higher. Brent Crude rose an incredible 4.60% to USD61.25 a barrel and WTI rose an impressive 3.60% to USD57.00 a barrel.
With such outsized gains overnight, the cynic in me would suggest caution against further exuberance during the Asia session. The moves, however, do highlight just how keen investors are to play the recovery trade, even one as limited in scope and nebulous in detail as the events overnight. More likely, Asia will consolidate the overnight gains with rallies limited by short-term profit-taking.
Gold
As the safe-haven of man since the time we first walked upright, I would have expected the gold market to take a more circumspect view of the events overnight. This appears to have been the case, with the yellow metal refusing to play ball and falling by only USD20.00 per ounce – that’s a 0.60% drop to USD1,502.00 an ounce.
The refusal of gold to rollover implies that calmer heads do not think one phone call and a Trump Tweet are game-changers in the bigger picture. It’s hard to disagree with them.
The fact that gold held the USD1,500.00 an ounce level should be viewed in a positive light from both physical demand and technical trading perspectives. Gold will likely continue its consolidation in Asia today. Should things go south again on the trade-war front, gold traders could be well placed to make further possible gains.
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