My creative issues about what to write today were solved instantly a short time ago. On Fox News, White House Trade Advisor, Peter Navarro, stated that President Trump has decided to terminate the US-China trade deal, due to dishonesty by China over the COVID-19 virus.
The plot gets thicker from here. The Fox News website has Navarro as saying intelligence officials were increasingly confident that the virus has originated in a Wuhan laboratory. Furthermore, China signed a trade deal on January 15th in Washington, but only released the virus information after their aircraft took off. Other wires such a Reuters, have taken a more diplomatic tone, omitting the part about the Wuhan laboratory.
The plot has thickened as Mr Navarro has now been mentioned in the Wall Street Journal and Bloomberg as saying his comments were misinterpreted. As a rugby player, and of substantial stature, one of the hardest things to do in the game is get up off the ground and quickly backtrack into the defensive line. I want to play rugby with Peter Navarro.
As I write, President Trump has said that the US-China trade deal remains intact and hopes that China will live up to its terms. More interesting will be whether Mr Navarro’s job will remain intact.
The bout of headlines gave financial markets a scare, with US index futures and Asian stocks gapping lower, with fast money buying US dollars. Those moves have been almost wholly unwound now, with Asia practically back to its pre-comment starting points. Indeed, Asia had a business-as-usual look to it this morning following a positive US session. That being said, ignore the bad news regarding COVID-19 – of which there was plenty – and buy everything on global recovery hopes.
There are glimmers of hope on that front to be fair though. Today sees a swath of manufacturing and services PMI’s released across the globe. The prints so far this morning from Australia and Japan give a reason for some cheer. Australian Manufacturing PMI climbed back to an almost expansionary 49.20, while Services PMI jumped to an expansionary 53.20. Japan’s Manufacturing PMI was a still subdued 37.80, but Services PMI jumped to 42.30, from 26.50 in May.
We expect to see similar trends across Europe and the US later today, with perhaps not the exuberance of the Australian data. That would be in line with the gradual reopening of developed economies around the world. It should be enough to ensure that the global recovery trade continues along its merry way today, supported by negative real yields and unlimited central bank money around the world.
If this morning highlights anything, it is the event risk posed by a populist US Administration.
Equities recover losses quickly as US/China trade “clarified”
Asia equities markets were, for the most part, are trading in positive territory this morning after a positive US session. The Navarro induced “trade-tantrum” has been reversed as quickly as it arrived, with regional markets now mostly back in the green, aided by President Trump reasserting the US-Chine trade deal remains intact.
The Nikkei 225 has risen 1.10% with the Kospi up 0.60%. China’s Shanghai Composite and CSI 300 are suffering some aftershocks, only 0.05% higher. However, Hong Kong has shrugged off the headline dramas and worries over security laws to be 1.0% higher thus far. Australian markets are flat as well, as a China proxy, as is the Singapore Straits Times ahead of likely negative inflation data.
We would expect bullish expectations to be tempered after the short “trade-tantrum” this morning. A bit of two-way trading risk keeping everybody honest. However, the overall positive tone will keep Asian equities supported in the near-term, and that should flow into a positive start for European stocks.
Currency markets return to selling dollars
This morning, the short-term Navarro blip aside, currency markets got back to work rotating out of US dollars overnight, with the major’s notable outperformers. the EUR/USD climbed 0.75% to 1.1260, the GBP/USD rose 1.0% to 1.2470, and the AUD/USD rose 1.10% to 0.6910.
After a spike by the US dollar on the Navarro comments, the “clarifications” have seen the US dollar rally quickly unwind, with the US dollar now slightly lower on the day. That is consistent with the “risk-on” sentiment in financial markets today. We expect that tone to be maintained into Europe, boosted by improving European PMI’s.
Oil powers higher on global recovery trade-winds
With the short end of the Brent curve remaining tight, and the market in full COVID-19 denial-mode overnight, oil enjoyed another positive New York session. Brent crude rose 2.10% to $43.10 a barrel, and WTI rose 2.15% to $40.50 a barrel. After a Navarro hiccup lower in Asia earlier, both contracts are unchanged now for the session.
WTI’s close at its $40.50 daily resistance will keep hopes alive of the rally continuing. Another daily close at these levels or higher implies that a test of its next target at $44.00 a barrel is imminent. That is supported by a plummeting Baker Hughes rig count over the weekend. One note of caution highlighted by this morning’s shenanigans from Washington DC, is that event risk has not gone away. COVID-19 is rapidly spreading across Latin America and South Asia, as well as the Southern United States. That could yet knock oil of its perch, but not happen today.
Brent crude has benefited by the backwardation of the near-term physical curve in recent days. However, it still cannot trade a daily close above its nearby resistance at $43.50 a barrel. That will allow it to close the chart-gap and advance to the $45.00 a barrel region. Until this occurs, a degree of caution if warranted at these price levels, despite the overwhelmingly short-term bullish sentiment in the market. The same risk factors outlined on WTI, apply equally to Brent.
Gold continues to probe the topside of its monthly range
The return of the global recovery trade, with higher equities and a lower dollar, did nothing to curb the enthusiasm of gold traders yesterday. Gold climbed to an intra-day high of $1763.00 an ounce – just shy of its $1765.00 multi-month resistance – before fading slightly, finishing up 0.60% at $1754.00 an ounce. Gold prices are unchanged in Asia.
Gold appears to finally be receiving some strong tailwinds from the US bond market, where the realisation is spreading that real interest rates are negative across the curve, especially at the shorter end. However, we have been before, with bulls severely disappointed as gold retreated from this resistance zone. Until we have a daily close above $1765.00, caution is warranted, and a bull-trap is possible. Thereafter the road clears to $1800.00 an ounce, which, if anything, is an even more formidable barrier.