We often see markets get out of sync and focus on domestic factors for short periods, but the situation now sees China in the mix, and a tougher state of play in the China/US negotiations is not conducive for Asian outperformance in either equities or overall economies. That, of course, includes Australia. While some folks may be looking to play tomorrow's Reserve Bank of Australia quarterly update, it will mean very little if we go back to a tit-for-tat tariff exchange between Washington and Beijing.
Overnight, the US formally expressed that it would be raising tariffs on Friday, to which Beijing has calmly asserted that it would respond – as is natural and expected. Even though we know that Chinese trade negotiator Lie He is in the US, we also know that the timeline of the meeting was cut short as he left a day later – doubtlessly to voice his displeasure at Trump’s tweets and the overall tension in the talks.
To top it off, and if last Saturday's missile launches out of North Korea were not enough, this afternoon in Asia saw Seoul reporting that North Korea has fired more projectiles. This initially sent S&P futures from around -0.50% to -1.00% and has taken the VIX north of 20 to around 21.50, an 11% move. For this time of the day in Asia, hours away from US exchanges opening, that's a very big move
Its hard to see a trade deal getting across the line over the next 24-48 hours. While the base case for deal still being struck is on the table, at some point – as we noted earlier this week
– it looks like it could get significantly worse before it gets better. If this comes to pass, the laggards such as the ASX 200, NZDUSD, GBPUSD and EURUSD could see some serious catching up if risk-off sentiment escalates.
One thing is for sure: this market is not pricing a volatile delay the trade talks talks, let alone a complete breakdown. The last thing that everyone is expecting is for China to play hardball at Trump's level.
Even an announcement of an extension to the talks may only spark a short lived rally. If the tariffs were put on pause, however, we could
see a relief run-up before the noise potentially comes back later in the month . ASX 200 Futures at 6,260: charts, technicals and price action
From just a levels basis, if one was short from the 6,260 are, then ideally one would want to entertain the recent multi-year high at 6,382 as a stop; that's a +1.95% move from here.
One would then look to offload in three tranches around 6,200, 6,051 and 6,000, keeping the last one dynamic in case we see an abrupt fall-out lower in global equities. This would give a weighted return of around +2.92%.
That’s a +1.5x skew, assuming equal probabilities, but I feel that there is a much greater probability of a downward move than an upward one. Also 6,000 is not an aggressive level in an overall sense, but it's still -4.3% from 6,260; the Q4'18 peak-to-trough correction in the ASX was over -16%.
The key levels to watch out for are the 100-week moving average at 5,941 as well as the congestion area closer to 6,000 where the 100- and 200-day moving areas converge.
Obviously, the key risks on this bearish view are a remarkable turnaround by the US and China over the next 24-48 hours – tariffs being paused, a super-dovish RBA quarterly update tomorrow, massive Chinese stimulus and a general risk-on push in equities.