The Trade “War and Peace” Edition

Treasure Secretary Steve Mnuchin ‘We were about 90% of the way’ on China trade deal and there’s a ‘path to complete this’ While President Trump wars of a “Plan -B” and not the Ed Wood variety, but rather that China could face billion in tariffs if trade positives don’t come out of Osaka.

The market is unreactive to these types of headlines given that Trump has continued to adopt a ‘good cop/bad cop’ strategy, with Treasury Secretary Steven Mnuchin. Instead, market participants are content to wait for Saturday meeting to unfold where the proof will be in the pudding or perhaps dinner. Unlike the Buenos Aires dinner and tango show, a harmonious photo op could go a long way to soothing investors’ concerns at the market open on Monday.

The element of doubt?

Expectations are shallow that a trade deal will happen this weekend and it seems the best that can be hoped for is that both sides will agree to keep talking. But indeed, the prospects for a deal, maybe not this weekend but eventually, are much better when they were in late April when low-level negotiators probably ruffled Trump and Xi’s feather taking talks to significant league levels without their involvement. Now with two months to prepare and resolve points of disagreement, logic suggests this weened this should go well.

We should probably though logic to the wind when dealing with this unpredictable US administration as when it has come to US trade policy it’s bee only been erratic, but it’s the forward-looking randomness that speaks volumes about the US administration bizarreness.

From the trader’s chair into the weekend

It’s more likely than not the much-ballyhooed G-20 meeting ends up as a non-event. A decision to keep negotiating would mean little to my long-term view other than to slow the eventuality of a US-China cold war. China will continue to reduce its dependency on the US consumer and capital markets over the years to come. But as far as this weekend is concerned if there any risk premium left in the market after Mnuchin 90-10 remarks I would be selling it as if there is “the elephant in the room” this weekend in Osaka, it’s a baby one at best.

Markets

I don’t think there should be any debate about the Fed dovish pivot despite James Bullard tempering the markets overzealousness about the scale of the Fed easing while simultaneously slightly deflating equity market party balloons; the feds will remain reactive to market conditions for the remainder of the year. So, and while the markets could be responsive to incoming data, the July signalling is definite.

The Feds have had nearly 20 chances to walk down markets July expectation. (pre-post-FOMC,) Historically if they felt the messaging was wrong. Especially the market’s reaction to the post FOMC Statement, they would ratchet up Fed speak to align market expectations better. But all Bullard and Powell have done is walked back a 50 bps to 25 bps for July, which was the outlier anyway in most rate cut scenarios. Which then begs the question why would the FOMC want to set the market up for a drubbing.? The market has it right, and the Fed will be there to ride to the rescue.

Oil Markets

The eye-catching draws that showed up on in the API report were confirmed by the more conclusive EIA data overnight. Front-month WTI rallied over 1% in reaction to the enormous drop in weekly EIA US crude oil inventories, notching a near 3.5 % bounce on the day. In fact, since tanking to $50.60 on June 5, the contract has rallied just over 18%!!

But back to back weekly inventory draws which went beyond the markets wildest expectations, should put to rest lingering doubts about the broader health of the economy, as this data does suggest a boisterous start to the driving season.

But peeling the onion back on the EIA report, not only did the US ring up the most significant inventory decline since September 2016, but record exports led it. This data also diminishes demand-side concerns from a global perspective. So, based on this data, we could be in for a protracted run of inventory draws which could be incredibly bullish for the second half of the year.

And sure, we did think the fire at the PES facility last week has an impact, but we are talking about some staggering drops, the export and gasoline data speaks volumes alone.

Gold Markets

Exciting dynamics in yesterday gold market flush which was reportedly triggered by fast money accounts who surmised the speculative length was long enough that the markets were prone to a correction. But a funny thing happened on the way to $1400 as that the long-term strategic buyer remained firm and according to my intel even yesterday’s meltdown produced a day of net buying, suggesting demand remains stable. And while I don’t see a great risk-reward ahead of G-20 to go all in but given the tail risk uncertainties the market is not adequately positioned for, it makes sense to have some Gold in the portfolio but do y leave some room of the floor to add more bullion below $1400. We don’t have a definitive take profit exhaustion target, but my quants and I fully agree it lies somewhere between 1450 and 1475, with the truth probably lies somewhere in the middle.

Currency Market

Euro
Chairman Powell and St Louis Fed President Bullard followed up with comments that tempered the market’s enthusiasm to sell Dollar but with the ECB unlikely to follow through with QE, suggests the Fed out doves the ECB over the short term. And while I want to go long EURUSD, I’m holding off until the end of the week, and if we close above the 200 dma, I think it’s a clear signal we push higher. Looking to buy on Monday if that is the case with a stop below. EURUSD 1.1300

GBP
I think we continue to trade whipsaw headline madness but do expect the market to look for opportunities to hedge for worst-case scenarios which will limit GBP appeal despite the demands weaker USD bias.

NZD
The Kiwi rallied on the “dovish” hold but with the NZD TWI printing higher so unless we get an unlikely favourable outcome from G-20 I think Governor Orr will wax as dove as can be to force the NZD lower as the RNBZ does rely on the Kiwi to do the heavy lifter in time of global economic despair
I’m short on the TWI view, but I got in too early and should have waited until Monday as the support remain thick likely due to optimism over G-20. So, looking to buy on dips and I think that will be the market strategy ahead of G-20.

Asia Currency

I’m primarily focusing on the INR with higher oil prices and increasing trade friction with the US, which will wane on the INR yield appeal.

I don’t have time but will try to include in my views along with CNH -IDR and MYR after the Fix as we remain on “Yuan Yuatch.”

Crypto

I have some nefarious and currency war/Gold related themes that could explain the recent froth, which certainly has gone well beyond the Facebook pump, but I will try to cover in detail later. However, feel free to reach out and tell me to remove my tinfoil hat.

This article was written by Stephen Innes, Managing Partner at Vanguard Markets LLC