Trade optimism resonates but could the size of the tariff rollback prove to be the fly in the ointment?
Trade optimism continues to run large. Since December tends to generate outsized returns. both good and bad – traders and investors are nowhere near throwing in the towel and continue to go back to the well, chasing the considerable stock markets payout that sits on the other side of the trade talk rainbow. But on the other side of that rainbow sits the bumpy road to a trade deal that could offer up a bearish delight.
The Xinhua headlines (China reached consensus on phase one), are now confirmed by China's Commerce Ministry but were not a surprise as state-controlled tabloid Global Times had reported similar content earlier. USD/CNH still dropped about 100 pips but has since recovered gap losses. But it looks like new longs could fall prey to liquidation as trade talk euphoria builds, and of course, MSCI inflows continue to weigh on spot.
Here is the neat thing, negotiators are apparently discussing tariff rollbacks, but here is bad news: China differs from the US on how much tariffs should be cut, state-run tabloid Global Times says. Still, the fact both sides are in the tariff rollback phase of discussion is bullish none the less as it would assume many compromises and concessions have been made to get to this stage. But can they seal the deal if tariff rollbacks remain the major stumbling block?
Alibaba
Alibaba (NYSE:BABA) remains the talk of the town after going off at a sizeable premium. Secondary offerings tend to be more of an art than science, but what is not open to debate is the premium paid above the NY close as local investors eagerly embrace a stock they know well and the online retailer that most of us in Asia regularly use. I currently have four items in the order bank. Probably a share that should be in everyone's portfolio
US equities
Even though investors remain overweight US equities relative to the rest of the world in numerical terms when comparing to the peak of late September 2018, this positioning is neither exceptional nor remarkable. It suggests there is more headroom before this market runs out of gas.
China syndicate
Gold
China has syndicated another multi-tranche deal, this time in USD after EUR a few weeks ago. Which, of course, throws some ice water that China is doggedly determined to reduce its reliance on US capital markets. Of course, that was another one of those odd de-dollarization arguments after all who cares where you borrow from as long as its the cheapest in terms of actual interest rates and currency risk. If the weaker dollar plays out as scripted in 2020, China will be happy campers on this deal.
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. However, the latest Global Times article suggests which China differs from the US on how much tariffs should be cut, could offer gold a temporary lifeline.
Gold prices tend to be inversely related to positive trade flows, which explains the almost binary linkage between trade risk and gold prices. But where that breaks down is that physical trade flows continue to run weak. So without a significant rollback in tariffs to drive actual global trade and boost global growth, central banks could remain dovish, which is gold supportive.
On the flip side
If the market remains optimistic about a phase one trade agreement, gold could fall further. It is now zeroing in on a recent low of USD1,445/oz. A strong USD and lack of financial market upheaval could not only rob gold of oxygen to push higher but could cut off the air supply entirely and send gold tumbling lower near term.
Oil
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.