Australian markets strategist, Saxo Bank
Summary: If I go, there will be trouble
And if I stay it will be double
Trade sentiment is dominating the narrative and in the near-term markets will remain headline driven.
A roller-coaster of a day for Asian traders and particularly US futures amidst a barrage of chaotic trade headlines. Early in the session a strong risk-off tone ensued as an SCMP report hit the wires citing no progress had been made in deputy level trade talks pouring cold water on any hopes for meaningful progress and an interim deal. Sources also claimed China’s chief trade negotiator, Vice Premier Liu He, would be cutting his trip to Washington short and leaving Thursday after just one day of talks which soured risk sentiment further.
Almost as soon this news was digested US sources claimed trade talks would not be cut short and Liu He would be staying in Washington until Friday and that the SCMP report was not accurate. Then a separate Fox News report stated the talks would be cut short and Liu He would be leaving Washington on Thursday.
These headlines were then followed by reports of a possible currency pact and soon to be approved licenses allowing some US companies to supply goods to Huawei. All whilst equity indices oscillated in keeping with swinging risk sentiment. If anything, a lesson to avoid trading on unsubstantiated headlines.
Talk of a currency pact has once again raised hopes of the potential for a partial deal which has seen US futures recover losses and risk proxy currency, AUD, retrace earlier moves also. However, the tone is still very much one of caution despite the recovery of early losses.
As talks begin the ongoing vacillation of headlines will keep markets on edge and more noisy price action is all but guaranteed. Expect more wild swings across e-minis and AUDJPY. The risk of a breakdown in the trade talks still remains high.
On the Chinese side there appears to be appetite for an interim deal (perhaps because they will never succumb to the more hawkish US demands of a true reset) particularly given negotiators have upheld their travel to Washington against the backdrop of visa bans, blacklisting China’s tech champions and NBA clashes. However, any partial deal is unlikely to bring anything new to table, the concessions floated by China mirror those that were talked about earlier this year. They are minor in the grand scheme of things consisting largely of agricultural purchases and a currency pact. There is also the ongoing issue of rolling back/suspending tariff threats which has long been a key demand from Chinese side, without this the chances of an interim deal are slim.
Negotiations may make progress on these smaller issues but fundamentally the relationship has changed between the US and China. A partial/interim deal, IF it can be reached, will only provide temporary relief from long-term bilateral tensions. That means the interim deal will not be enough to reignite confidence and investment for businesses.
Comprehensive deal remains unlikely
We have always maintained that the tariffs and trade negotiations are just scratching the surface in a far deeper rift which is more akin to Cold War 2.0, and one that cannot be resolved in a “trade-deal”. This is a long-running economic conflict and battle for tech dominance and hegemony. China will continue their strategic push to become technologically advanced as the productivity gains required from advanced tech and AI and the like is required to propel china from middle income to high income country as they rotate from a low-end manufacturing and export driven economy towards domestic consumption and services drivers.