G-20
After the markets were stuck in trade war limbo for the better part of two months, investors will breathe a massive but exhausted sigh of relief that both the U.S.-China opted to push the reset button and restart trade negotiation after the two presidents' meeting this weekend at the G-20 summit in Osaka. And much to the market relief, further tariffs on the additional USD300bn U.S. imports from China will be delayed while talks are ongoing.
According to the SCMP (29 June 2019), the two sides discussed China would buy more agricultural products from the U.S. immediately. President Trump said, 'Huawei issue is very complicated,' and 'we are leaving Huawei towards the end' but that he' likes (U.S.) companies selling things and 'so if it is not a national security issue, we are allowing (U.S. companies) to sell'.
The markets G-20 base case scenario was doubtlessly validated on Saturday as the U.S. will hold off raising tariffs while negotiations to end the trade war between the two countries continue. This will likely come as a relief to markets and should anchor sentiment in the short term.
But there remain several issues and none more significant than China's demand for the U.S. to remove current tariffs and the enforcement mechanism, which in my view is “The Bridge too Far."
G-20 Surprise??
U.S. administration has watered down their stance toward Huawei—how much remains uncertain but that should be enough to green light risk assets at the open. If you follow my blog, you know that I had positioned Huawei along with currency concession at the epicenter of my views, and while I had expected some give and take on the Huawei issues but allowing the U.S. manufactures to resupply Huawei is a surprise and an enormous boost to global tech sector sentiment. So, while U.S. chip makers will be partying it up today, let's hope they are not in for a post-G-20 hangover if President Trump takes off his G-20 Mr Rainmaker mask and throws a “Waffle-Weave" cloth on some of these water down trade concessions.
Oil Markets
Oil prices should surge on Monday as traders feast on a double-barreled dose of bullish news from the G-20 after Russian President Putin told reporters a "We will extend this deal, Russia and Saudi Arabia. For how long? We will think about that. For six or nine months. It is possible that it could be up to nine months,".
With a 6-month Saudi-Russia supply deal done and 9 months on the table, it should unwind G-20 and OPEC meeting tail risk premiums especially the later as OPEC+ uncertainty was building Friday when there was energetic chatter making the rounds suggesting that the Russian oil companies were aggressively lobbying in opposition to the extension.
With OPEC meeting risk mostly in the rear-view mirror and even if Russian participation is mostly symbolic given that its OPEC supply cuts are doing most of the heavy lifting, but from a sentiment perspective, it's colossal none the less
With the G-20 double whammy of positivity’s to feast on, Oil bulls should run wild in the pits on Monday while riding the momentum of rising geopolitical tensions, and a tightening market amidst evidence that U.S. oil inventories are falling.
What can push oil prices higher besides the distinct worst-case scenarios in Iran?
With the existing U.S. tariffs still in place, I expect Beijing will likely step up monetary policy easing to offset the economic drag which should be good for commodity prices and a massive boost to global risk sentiment.
Putin Factor
Indeed, G-20 was the perfect platform for President Putin to mix oil and politics, and when it comes to dealing with OPEC, he's arguably one of the most experienced and enigmatic negotiators on the world stage. So, I guess the next question, but less critical for oil prices, is what Saudi strings did he pull to keep Russian oil baron happy? I can only speculate along the lines of increased FDI into the Russian oil industry.
Gold Markets
On Friday Gold's correlation to the U.S. dollar gave way to shifting investor sentiment regarding the outcome of G-20 with the post-Asia sell off directly attributed to improving sense on how Trump-Xi trade talk would progress. In other words, Gold prices are tethered to the hip of equity markets and risk sentiment.
So, with risk green lighted at Monday open and a likely recalibration lower of July Fed rate cut expectation Gold should move lower but could remain supported above $1375 as although there was a breakthrough in negotiations around Huawei, I'm very cautious as to whether the broader investment community will view G-20 as an absolute success.
But if main street starts stampeding into risk on Monday, it will undercut gold prices, and with net long builds in the COMEX, it could trigger a deeper correction than we had anticipated,
Also, I think this week's U.S. ISM data will be significant to the market July Fed "rate cut fever" ambitions, even more so after U.S. consumer prices as measured by the Personal Consumption Expenditures index rose 0.2% on Friday.
But one the thing that is for sure, Gold investors won't be so quick to back up the truck on Monday likely deferring to a wait and see approach while gauging the veracity of an expected clear-out of long Gold positions that are expected to unfold.
Forex Markets
“Yuan Yuatch"
Delaying tariffs and hitting the trade talk reset button means we will stay below 7 for the time being, which is directly in line with the market’s consensus. If discussions remain amicable, we would expect the USDCNH to gradually move towards 6.75 and possibly to 6.60 if a trade agreement is reached.
For immediate concerns, I would expect the U.S.D to weaken against the RMB, and ASEAN currency, which is consistent with the trade war relief long USD unwind that enveloped sentiment of the past few weeks. But I expect the U.S.D sell-off versus ASEAN currencies to accelerate, especially with the markets tacking towards an aggressive Fed easing bias.
The biggest fear I have about going all in on the Long CNH trade is the range of issues that need to be ironed out and since delaying tariff is only a reprieve, if tensions suddenly escalate again, we could have an intense move higher in USDCNH.
But with that said I’m off the stairway to 7(USDCNH) bandwagon as I do believe the U.S. administration is embarking on a weaker U.S.D policy while the dovish Fed should continue to dent U.S. dollar demand
Also, with ongoing trade discussions, I think China's counter-cyclical FX policy will become more biased towards a stronger Yuan. After the U.S. administration raised tariffs on U.S.D200bn of goods to 25%, the market was convinced USDCNH would knock on 7 U.S.DCNH doors, but the Pboc drew a definitive line in the sand and kept USDCNY fixing below 6.90, well below our modeled expectation and the clearest signal to get out of long U.S.D positions.
I think the Yuan fix is of no lesser importance after both sides agreed to hit the trade talk reset button, so we remain on *Yuan Yuatch."