Week Ahead: Productive US-China trade talks support risk appetite - for now
Fawad Razaqzada February 15, 2019 10:45 AM
European markets recovered after a weak start and Wall Street rallied sharply after index futures made good their overnight losses. Sentiment turned positive apparently on renewed hopes over a US-China trade deal, as the third round of talks between the two parties since Presidents Trump and Xi agreed on a truce in December 2018, concluded. Asian markets had fallen sharply overnight amid concerns over global growth and reports that US and China were still some way apart on trade negotiations.
However, US Secretary of Treasury Steven Mnuchin tweeted a picture of officials, suggesting there was "productive meetings with China's Vice Premier Liu He," something which President Trump confirmed at his opening remarks in his statement at the White House, when this report was being written. The details of the behind-door meetings have not been released. But as the saying goes, pictures speak louder than words: the snaps of the US and Chinese officials that circulated online appeared to be friendly vibes this time. The two sides will continue talks next week in Washington.
The US government had warned that tariffs on $200 billion worth of Chinese goods could be increased from the current 10% to 25% on March 2, if the sides could not find an agreement by then. But Trump has since indicated that the deadline could be extended if the talks are progressing well, as apparently, they are now.
So, while a deal may not be reached in time for the deadline, the positive vibes coming out of the latest meetings point to an eventual resolution in the trade dispute. The positivity could keep risk-sensitive assets supported for a while yet. However, if and when there is a deal, by then the positivity may have been already priced in. So, equities, commodities and the Aussie could weaken again.
It is not all about trade talks
Of course, nothing has been agreed on and, in any case, it is not all about the US-China trade talks. One of the other sources of uncertainties is the issue of US government shutdown. However, it looks like Trump is going to sign a compromise funding bill to avoid another shutdown. In return, he is expected to declare a national emergency in order to bypass Congress and secure funds needed to build that US-Mexico border wall. This is likely to ire the Democrats who could take legal action against Trump.
But perhaps the bigger issue is concerns over the health of the global economy. We have seen very poor economic data this week from around the world, although there was some positive lending data out of China overnight showing bank loans hit an all-time high in January. This is a clear sign that the various government stimulus measures since the summer are resulting in increased credit flow to the real economy. Might this be too little, too late? If the health of the global economy deteriorates further, then external demand for Chinese goods may be hit, resulting in further slowdown of growth in the world’s second largest economy. That, in turn, could have a trickle-down affect elsewhere.
The economic calendar looks a tad quieter next week in comparison to this week, although this does not necessarily mean less volatility, as Chinese and US official continue their trade negotiations in Washington. There are a few macro pointers to look forward to from Australia and Eurozone, as well as plenty of central bank speeches.
Monday: The first day of the week looks set to be rather quiet session, with US investors out in observance of Presidents' Day. There is no other major scheduled news event expected elsewhere, with Japan’s Core Machinery Orders being the sole exception.
Tuesday: RBA monetary policy meeting minutes; U.K. average earnings index and employment data, and German ZEW Economic Sentiment
We have already heard from Reserve Bank of Australia Governor Phillip Lowe that the probability of a rate cut has increased and that the next move could either be up or down for rates. So, we don’t expect to see any major surprises in the minutes of the RBA’s last meeting.
UK macro data has been mixed over the past few months and the focus will be on wages figures on Tuesday after the latest decline in inflation boosted real earnings. However, as far as the pound is concerned, the UK data will probably not have too much of an impact as the focus remains firmly fixated on Brexit. Expect the existing ranges to hold and any volatility that arises from UK data may only prove to be short-lived.
Although Germany narrowly avoided falling into a technical recession, the latest PMI and other leading economic indicators haven’t been great. The ZEW survey will reveal how the 300 or so surveyed German investors and analysts – who are likely to be more informed about the Eurozone’s largest economy – feel about the 6-month economic outlook. Any noticeable changes in their sentiment can be an early sign of future activity. The last two surveys have beaten expectations, but the -17.5 and -15.0 readings were still below zero. Any reading above 0.0 indicates optimism, below indicates pessimism.
Wednesday: Australia Wage Price Index and FOMC meeting minutes
Australia’s Wage Price Index measures the quarterly change in the price businesses and the government pay for labour, excluding bonuses. It is a leading indicator of economic health and consumer inflation. The last two quarters saw consecutive readings of 0.6% respectively. Did wages accelerate or decelerate in Q4? We think the latter might be the case, owing to the recent weakness in Aussie (and Chinese) data.
The FOMC meeting minutes could potentially move the dollar. However, with the Fed Chair, Jay Powell, already indicating that US interest rates are likely to remain unchanged for a while, and that the next move is dependent on incoming data, this means that the dovishness may already be priced in. However, if the minutes reveal the FOMC was significantly more dovish than what Mr Powell has portrayed, then we could see a more pronounced drop in the dollar.
The Dollar Index has held its own quite well over the past two weeks and is currently positive on the month. Part of the reason why the dollar has remained supported can be explained away by weakness in data and dovish central banks elsewhere, keeping foreign currencies undermined.
Thursday: Australian employment; Eurozone PMIs; ECB meeting minutes and US data dump
Australian employment has beaten expectations over the past three months, but did the trend continue in January? Despite the RBA being rather dovish on interest rates, the Aussie has held its own well thanks to growing risk appetite amid optimism over US-China trade deal. So, if the jobs data were to disappoint expectations, we wouldn’t be surprised to see the AUD’s potential weakness prove to be short-lived. Indeed, a strong beat could help to recoup the previous week’s losses.
The next set of important Eurozone data is released on Thursday: the latest Purchasing Managers’ Index (PMI) numbers should give us an early indication of economic activity – or lack thereof – from the bloc’s key manufacturing and services sectors. Eurozone manufacturing PMI data have disappointed expectations for six consecutive months, with activity nearly grinding to a halt last month (50.5). Although purchasing managers have reported slightly better conditions for the services sector, here activity has also slowed down noticeably and barely grew last month (50.8). Surely if the PMI data continues to deteriorate then this would further reduce the odds for a rate hike in Q3 from the ECB, and the euro could slump as a result – especially if the ECB minutes reveal the central bank was already more dovish than expected at its last meeting.
Meanwhile, Thursday will also see the release of some second-tier Us data, including durable goods orders, Philly Fed Manufacturing Index and Existing Home Sales. US data has started to deteriorate again. Last week saw the ISM services PMI disappoint expectations, while earlier this week the CPI inflation numbers were not too hot either. In mid-week retail sales came in well below expectations with a headline and core prints of -1.2% and -1.8%, respectively. Headline PPI also missed, as too did the weekly jobless claims data. On Friday we found out that industrial output unexpectedly fell by 0.6%, the first drop in eight months. Import prices, capacity utilization rate and UoM inflation expectations all showed weaker prints, too. But there were a couple of better numbers here and there, including UoM’s consumer sentiment and Empire State Manufacturing Index.
Friday: the last day of the week will be dominated by handful of Eurozone data first thing in the day, followed by Canadian retail sales and speeches from several central bank officials.
Among the Eurozone data, will be the final German GDP estimate. Will we see a revision to the flat performance in Q4 as was reported earlier this week? If the data shows a negative revision, then this would tip the German economy into a technical recession. We will also have the closely-followed German Ifo Business Climate index, and the final Eurozone CPI estimate – the latter is unlikely to cause too much volatility, unless there is a surprise revision.
Canadian retail sales will be watched closely after a very disappointing manufacturing sales number this week caused the Loonie to drop. Retail sales have been very disappointing over the past four reporting months, with the latest figure for November showing a 0.9% drop. The December retail sales data is expected to show a flat performance while another drop of 0.5% is expected for core sales.
The week will end with speeches from various central bank officials including ECB’s Draghi as well as Fed’s Williams, Clarida, Bullard and Quarles, all on Friday. A day earlier, BOC’s Poloz and RBA’s Lowe will have delivered their speeches on Thursday.
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