I did ponder yesterday, whether President Trump’s trade comments Tuesday on a trade agreement not arriving until after next years Presidential election, were referring to the interim US-China trade agreement, or the trade Nirvana-like, comprehensive one. He appears to have been referring to the latter, as persons, “close to the talks,” said overnight, that talks on an interim trade agreement with China, were on the home straight.
And just like that, financial markets were back on the gossip treadmill, with equities and energy rallying, treasury yields rising, and the dollar regaining some of its losses against haven currencies. With North America back in its global recovery FOMO trade comfort zone, Asia is also snuggling back under its security blanket with Asia-Pacific stock markets all higher this morning after a tough few days. With December the 15th’s tariff-geddon looming, one hopes that optimism is not misplaced. I remain concerned that not a single concrete detail has yet been revealed. The security blanket of an interim trade agreement still has the potential to smother, and not sooth. Still, markets will welcome the return to their sentiment-driven happy place.
Another intriguing development has occurred down-under this morning. The Reserve Bank of New Zealand (RBNZ) has ordered the countries bank’s, most Australian owned, to increase their capital holdings to a whopping 18%, from 10.5% as the minimum presently. The announcement, though, was expected, and the banking system will have several years to comply. Initial estimates suggest that home loan rates will have to rise by between 40-60 basis points to accommodate the increased capital requirements.
So has the RBNZ accidentally tightened monetary policy in New Zealand? With competition white-hot in the mortgage market, perhaps not. It does imply though, that the RBNZ may cut rates again, already at record lows, sooner rather than later to offset any accidental tightening. Across the Tasman Sea, the Reserve Bank of Australia (RBA) is probably watching developments quite carefully, as its efforts to reflate the economy are instead, fuelling a massive burst of house price increases.
Over in the lucky country, the trade surplus for October has fallen this morning to a 10-month low of AUD 4.50 billion. Worryingly for Australia, the slump was led by the things that make Australia rich. Exports of metal ores and minerals (-11.0%), metals (-14.0%) and mineral fuels (-8.0%) led the slump, implying that global economic activity, remains on the back foot behind the scenes. It will no doubt add to the clamour for further RBA easing sooner rather than later, with Australian investors already taking lessons on how to spell QE. (the author is a Kiwi)
This afternoon, the Reserve Bank of India (RBI) announces its interest rate decision at 1415 SGT. A further cut is almost inevitable from 5.15% to 4.90% as India grapples with slowing growth, a meltdown in the non-bank financial sector, and high levels of non-performing loans on bank balance sheets. The number of dark clouds on the horizon for India continues to gather pace and a failure to cut today will likely see the Rupee and India equities come under pressure.
German Factory Orders and US Initial Jobless Claims will provide data highlights this evening. Tomorrows US Non-Farm Payrolls is expected to print around 180,000. Interestingly, hardly any of these tier-one data releases have warranted a mention across the world this week, drowned in the noise of trade tensions. Once again proving that the trajectory of US-China trade relations continues to the only macro-economic game in town for 2019.
Equities
Wall Street reversed its three-day sell-off overnight on renewed US-China trade hopes as investors piled back into the global recovery trade. The S&P 500 climbed 0.63%, the Nasdaq rose 0.54%, and the Dow Jones rose 0.53%.
Asia has wasted no time in passing go either with Asia-Pacific stock markets all climbing this morning as well. The Nikkei 225 is 0.70% higher; the Kospi is up 0.76%. In China, the Shanghai Composite and CSI 300 are both up 0.35%, with Hong Kong’s Hang Seng climbing 0.65%. Down-under, the Australian
All Ords has risen 1.0%, and the NZX 50 has risen 0.70%.
The collective sigh of relief by global markets that trade negotiations are still on track is palpable. We would expect Asia to remain positive unless we get some trade-related headline bomb. That sentiment should also flow into European stocks this afternoon.
Currencies
The US dollar reclaimed some of its previous day’s losses, most notably against haven currencies such as JPY and CHF, as trade relief reversed some of the defensive rotation. The USD/JPY rose 0.20% to 108.50, and the USD/CHF rose o.20% to 0.9880. The dollar index actually fell overnight because of a strong GBP performance, falling 0.12% to 97.62.
The British Pound was the star of the night, however, breaking out of its two-month 1.2800/1.3000 range to climb 0.90% to 1.3100. The 110-point rally was spurred by an increasing likelihood that the Conservatives will win an outright majority in next weeks UK election, bringing certainty to the Brexit process.
The 1.3000 level now becomes technical support with resistance at 1.3200 and 1.3400. The former level is achievable ahead of the election, although 1.3400 may be a bridge too far until the result is confirmed.
In Asia, the dollar is gently weaker against most Asian regional currencies as investors recapture the bullish mode of an interim trade agreement, with its positive implications for regional growth. The rally in Asia currencies will remain cautious though as Asia has proved to be more sanguine on trade hopes than North America, preferring to wait for concrete details.
Oil
Oil rocketed higher overnight, propelled by several favourable factors. US EIA Crude Inventories fell by a much higher than expected 4.856 million barrels, as officials in Washington said that interim trade negotiations remain on track. Further support came from OPEC, with speculation that Saudi Arabia wants to increase the OPEC+ cuts to 1.6 million barrels a day.
Brent crude rose 3.25% to $63.80 a barrel, and WTO rose 3.68% to $58.30 a barrel. The impressive gains leave both contracts just shy of significant daily technical resistance at $64.50 and $58.30, respectively.
All eyes will be on the OPEC+ meeting that starts in Vienna today. OPEC has surprised us before, and there does seem to be increasing momentum amongst OPEC and the broader grouping for more significant cuts. It is probably no coincidence that Saudi Aramco’s IPO share price is also fixed today in Riyadh with the Saudi’s keen for a win on that front after a very troubled gestation.
Brent crude has fallen slightly to $63.70 a barrel, and WTI has dropped to $58.15 a barrel in Asia. Some profit-taking was seen late in the New York session, pushing both contracts of their highs, and that appears to be continuing in Asia this morning. Given the scale of the rallies overnight, this is not at all surprising with traders booking profits and reducing exposures ahead of the OPEC+ meeting kick-off in Vienna this afternoon.
Gold
Gold traded as high as $1484.00 an ounce overnight, before the positive comments on trade saw it retreat, ending the day 0.16% lower at $1474.75. As ever these days, gold moved inversely to the US dollar and US treasuries which both rose on the comment. Overall, however, gold held up remarkably well as investors flocked back to the global recovery trade elsewhere.
Gold’s gritty refusal to give back its gains likely reflects some residual doubts on trade after the scare President Trump gave the markets earlier in the week. Gold has support at $1465.00 an ounce with resistance now at $1485.00 an ounce.
Gold has climbed slightly to $1475.50 this morning but is lacking momentum in Asia to move one way or the other sharply.
