More trade talk optimism
The top trade negotiators from China and the U.S., in a phone call on November 26, reached consensus on solving issues. They agreed to maintain contact on remaining matters in phase 1 of a possible deal, Xinhua reports.
Surely both sides aren't going to walk us down the garden path only to take us down the rabbit hole again with Trump and Xi.
Paying the turn
Market participants were tripping head over heels at the opportunity to lock in end-of-year funding at Monday's Federal Reserve repurchase-agreement operation, the first to be conducted with a 2020 maturity, which resulted in USD 49B in bids, double what was on offer.
China doom and gloom
While attention has been singularly focused U.S.-China trade deal, this article in the Global Times - "China needs to prepare for zero interest rates" seems to have gone entirely unnoticed. It is based on a report by the Beijing based think tank Anbound. The piece highlights the ongoing demand for liquidity, foreign capital inflows, and a slowing real economy, which "all make the country seemingly approaching a zero rates monetary condition." It also underlines the scale of the country's debt and financing issues.
Amazingly, the market continues to turn a blind eye to the dreary state of the Chinese economy. Thus, at the current level of PboC policy drip-feeding, a significant growth rebound is doubtful even with a tariff rollback.
Oil primer
Oil prices tend to be strongly correlated to trade news flows. This explains the link between trade risks and oil prices. While optimism over completing phase one of a U.S.-Sino trade deal supported oil prices, real physical trade flows are weak, and therefore oil prices are falling to surge higher.
Optimism over a trade deal remains supportive for prices. Without a significant rollback in tariffs providing a considerable boost to physical trade flows, oil market bullish ambitions remain dull.
Hence the reason why a rollback in existing tariffs is critical for the oil market performance in 2020. After all, the loss of trade momentum has been widespread and not limited to China and the U.S.
Ultimately, however, traders are positioning for a likely knee-jerk bounce because of the deal, which by the looks of things could come sooner rather than later.
Asia Open note
Chasing that payout on the other side of the trade talk rainbow
A stellar start to the week as the S&P 500 closed in record territory on Monday as trade negotiations have again underpinned sentiment. In the latest apparent sign that an agreement is drawing closer, China promised stronger protection for intellectual property rights.
And for the time being, fast money and volatility seekers have had their fill of chasing Bitcoin lower and booked some profits overnight.
Market demand powered U.S. stocks to record highs at the start of a holiday-shortened week, which is a hugely bullish signal as U.S. Thanksgiving week is typically associated with paring down of risk not taking on more. Investors dove headfirst into technology stocks after China said it would raise penalties on violations of intellectual property rights to address one of the major sticking points in trade talks with the U.S. But the writing was on the wall last week when China's Vice Premier Liu He extended an olive branch on trade talks despite the U.S. Senate passing a bill on Hong Kong.
Investors saw this as a bullish inference, contrary to adverse media reports as U.S. equity ETFs had their biggest buy day in 2 months on Friday. So, investors are back on the equity rally wagon as they are now faced with a potentially higher payout to Phase One than initially thought, and the probabilities of that deal coming to fruition have improved significantly in the last week.
Event risks still loom large, and December tends to generate outsized returns – upside or down. So, it appears traders are nowhere near throwing in the towel and continue to go back to the well chasing that considerable payout on the other side of the trade talk rainbow.
Oil markets
Not a great deal of price movement overnight, suggesting that peak Phase one optimism is getting baked into oil markets, where traders appear to be hashing out a price equilibrium between the current price goal post. However, in the absence of a definite trade deal timeline or a proposed tariff rollbacks, prices may remain supported but not necessarily surge higher.
Brent remains off Friday's highs but still comfortably above crucial $63 per barrel level, primarily on the back of trade talk optimism. Oil traders remain hopeful a trade deal will get signed. Still, the lack of clarity around the tariff rollbacks, which is the key to economic growth and bullish for oil, continues to somewhat cloud sentiment.
However, the broader macro data remains supportive for oil. Baker Hughes's data, released on Friday, showed the U.S. rig count down for the 5th consecutive week and, and the IEA and OPEC have both cut U.S. production forecasts, with the IEA acknowledging additional downside risk to its estimates.
Gold markets
Trade deal optimism continues taking its toll on gold markets, which could be prone to further declines as sureness builds up to the actual trade talk event horizon. Gold is trading on the back foot, dropping to 2-week lows as surging global equities has dulled golds luster as demand for the yellow metal remains vapid.
The Global Times cited experts close to the talks as saying that a phase one agreement was very close. As we suggested yesterday, the break was at $1460. The Global Times headline proved to be the primary source for much of gold's undoing overnight.
German business confidence also rose for the third straight month, according to the Ifo Institute, while opinion polls in the UK showing the Conservatives in the lead over Labour ahead of the general election on 12 December. Both facts have also contributed to evaporating risk-off sentiment.
Gold does remain supported ahead Jerome Powell's upcoming speech as bond yields have dipped thinking that the Fed chair may hint at economic concerns around the fall in global trade. But with bond markets trading at half tank volume levels this week, perhaps it is not wise to read too much into that activity in this holiday-shortened week.
Currency markets
Despite the trade talk optimism, the ringgitcontinues to languish as local equity outlaws are seemingly bucking the positive moves in other regional burses.
The lack of a viable NDF market makes it challenging for foreign investors to hedge year-end currency exposure, and they may feel more comfortable buying other regional assets where year-end currency risk is more accessible to manage.
But besides the uninspiring moves on the ringgit, it was very depressing for local investors that the KLCI was unable to regain the 1600 level as risk looked very favorable to start the week. And while there is an opportunity to position for a cyclical upswing in the global economy, but the key uncertainties remain the timing of that happening and of course, the trade deal getting inked.
But on the political front, the succession of power remains one of the most significant issues and keeps investors guarded while talking on safer bets. Especially given the latest by-election result where Malaysia's Mahathir suffered the fourth election defeat for the ruling party. So political uncertainly into year-end keeps investors nervous while taking on less risky regional bets.
Bitcoin
In a clear case of bear market fatigue, BTC may have found a temporary bottom near $6,500. The technical picture, which seems to be the primary catalyst for most coin moves, was hinting at seller exhaustion after fast money and volatility seekers ran roughshod over crypto market yesterday.
But for the bears, $6500 is now set up to be a middle level to toss darts at which, if broken, could open a deep dive lower.