Miles and Miles...
According to US Secretary of Commerce Wilbur Ross, the US and China are still “miles and miles from getting a resolution”. Trade officials from both nations will look to bridge the gap when talks resume this Wednesday in Washington as the weight of the trade spat is clearly being felt on both sides.
The Chinese economy is slowing down, and the government is looking to spur growth. The problem: the economy is already fueled with debt, and the risks of aggressive stimulation are far too great. A top analyst at Fitch has stated that an aggressive credit injection could lead to China losing their A+ credit rating, and could also reignite property speculation. This leaves Chinese officials in a tough spot. Either they go forward with aggressive stimulation (which would put a dagger in the economy in the long run), or they provide a moderate stimulation (which it is unlikely to do enough to turn the economy around on its own). The key ingredient is a trade deal with the US, and both sides know it.
The US strategy is to let their economy outlast China’s to force their hand in a deal. On first glance the US looks to have the upper hand, as the economy still appears to be relatively strong. However, that is not the case. Cracks have been showing since the end of 2018 and the uncertainties from the trade war have markets jittery. Even with 5 straight weeks of gains on US equities, sentiment can easily change on a dime if it feels like a trade deal isn’t coming. If stocks slip again, at some point the US economy will go down with it. And with elections coming up in 2020, you have to think Trump is going to do whatever it takes to keep stocks above water.
So what does this all mean? It means someone has to blink soon. It might be Trump. It might be Xi. Either way, some sort of deal can’t be “miles and miles” away. Both sides will play the waiting game a little longer, but it would be hard to imagine there is not some kind of agreement in place by the March 1 deadline. A patchwork, face-saving deal for both sides seems to be the likely scenario at this point, and they will likely try to float positive rhetoric out to keep the markets calm. But the longer it drags on, and as other global uncertainties are added to the mix, the more likely that the market is the one that blinks (again).
Fed to Pause QT?
While expected to maintain a dovish stance, markets will be looking for direction on the Fed’s quantitative tightening program. There is speculation that Powell and Co. will reduce the scale of QT, which, if confirmed, is likely to weigh on the struggling US Dollar. But with markets pricing in a dovish hold and possible QT pause, there is some upside risk that cannot be overlooked. With the lack of data out since the government shutdown (as well as other global uncertainties—see above), the Fed might decide to delay their QT decision and keep their options open. This could provide a short-term boost to USD to close out the week, depending on what headlines come out of Washington and the UK. With the Dollar Index rangebound and hovering around its 100DMA heading into a busy week, expect elevated volatility for the dollar in the coming days.
Plan B
Despite Theresa May facing multiple defeats on her initial Brexit pitch to parliament, the Pound has stayed on the rails and has now taken a bullish outlook in the near term. This is largely because the market has all but priced out a hard Brexit, and May’s so called Plan B looks to have support by the DUP. If it passes the vote on Tuesday, then expect GBP to take off like a rocket. For Pound buyers, hedging against upside should at least be entertained on the chance that the UK parliament actually puts this deal through. If it does pass, a 3-4% spike in GBP/USD is not out of the question by week’s end. Even if the vote fails, markets appear confident that UK and EU would look to extend the deadline past March to avoid a painful hard Brexit and keep the Pound afloat for the remainder of the week.
Oil Sanctions to Hurt Maduro, not Oil
The Venezuelan crisis has reached a new level with Juan Guaido now recognized as interim president by the US, Canada, and many other countries. US is also considering more sanctions on Venezuelan exports, with oil at the top of that list. Venezuela is an exporter of heavy sour crude, and sanctions would be a significant blow to the Mauduro regime. As for the effect on oil prices, that remains to be seen. Initially the reaction might be a spike in oil as speculators trade the headline, but in the medium-long run it is hard to see it having much impact on global supply. Venezuelan oil exports only make up around 1% of world supply, so it’s unlikely to be the catalyst for oil’s next long run on it’s own. In fact, a potential pop in oil from a sanctions news could present selling opportunities on Oil, CAD, AUD, and NZD.