Beautiful minds and the sword of Trump-ocles
The markets were down but not out overnight as President Trump stabilised them somewhat by saying he had received a “beautiful letter” from Chinese President Xi Jinping urging them to work together. It was well timed, of course, arriving by the diplomatic carrier pigeon as the trade talks got underway in Washington DC. One struggles though, to see how either of these two presidents will ever manage to really share the toys and play nicely on the global stage.
The Sword of Trump-ocles hangs over the global markets with tariffs increases commencing at 00:01 EDT as the clock rolls over into Saturday. It leaves both negotiating teams precious little time to come up with something that satisfies both sides. The markets themselves appear to have settled into a cautious wait-and-see mode, but the peace is fragile, and it won’t take much today to panic investors into heading for the exit door en masse.
The Reserve Bank of Australia Statement on Monetary Policy and Singapore and Malaysia retail sales should have been the regions data highlights today. Unfortunately, they will be subsumed and forgotten as investors man the trade-war battlements, hoping dawn is coming. Apart from China itself, high beta markets such as Australia, Taiwan and South Korea are among the most vulnerable to a breakdown in negotiations. Japan has been benefiting from safe-haven flows as Japanese investors repatriate and wait for the dust to settle.
Currencies
The dollar gently eased against its G10 counterparts overnight but continued to march higher against emerging market currencies. Given the exposure to a global slowdown in trade by emerging markets generally, this shouldn’t be a surprise. The dollar and the US10-year bond should remain the destination of choice for global investors seeking safe harbour as the tariff deadline nears. Expect any dips in the greenback to be met with buyers. This is also a theme that will continue through 2019 as the high-yielding developed market carry trades of choice.
The Japanese yen (JPY) is also a major beneficiary of safe-haven inflows and rallied further against the dollar overnight, with USD/JPY falling to 109.80. A trade-talk breakdown should see the yen continue to rally, most notably against regional currencies such as the Korean won (KRW), Australian dollar AUD) and Chinese offshore renminbi (CNH).
Equities
Wall Street followed Asia and Europe lower overnight but managed to pare its losses after President Trump’s “beautiful letter”. The S&P 500 fell 0.30%, the Nasdaq was down 0.41%, and the Dow Jones dropped 0.54%. Not a bad performance overall, given the rout in China this week.
We expect Asian equities to open nervously lower following Wall Street’s cautious lead. Regional markets have always been vulnerable to a drop in global trade in their role as the workshop of the world. Today they will be especially so and any reactions to trade headlines – either positive or negative – should see outsized, rapid moves either way.
Oil
Oil continues to doggedly hold on to some of its hard-won gains of the last month, but a trade talk failure would be the straw that breaks the camel’s back, for obvious reasons. Faced with the sword of Trump-ocles hanging above, the black gold put on a brave face, but eased lower. Brent Crude fell 0.36% to USD70.10 a barrel, while WTI fell 0.90% to USD61.60 a barrel.
Trading in Asia will be muted as energy markets adopt a wait-and-hide attitude. Like equities, oil will see outsized price reactions – up or down – to trade talk headlines, both good and bad. It’s a cliché, I know, but particularly today, traders need to be as nimble as trade negotiators.
Gold
Gold carved out a 0.22% gain to USD1,284.00 overnight in another underwhelming performance by the supposedly safe-haven port of choice. Risk-aversion into Big Friday, and ahead of the weekend, should be supportive of gold today in Asia.
However, its inability to rally, as the dollar and US yields eased slightly overnight, increases concern about its medium-term price action. Gold may be vulnerable to positive headlines coming from Washington if they spur traders to rotate out of safe havens.
