We may be at the point where vague rumors of US-China trade progress will not support equity markets, reports Adam Button.
In the latest U.S.-China trade (tennis) match, markets are off their lows after Chinese officials announced earlier, they were inviting U.S. negotiators for more talks. Markets had dropped to new session lows, the SPDR S&P 500 ETF Trust (SPY) hit 3091 in late Asian trade on mounting threats from Beijing as U.S. Congress sent a bill on Hong Kong human rights to president Trump to sign into law. If/when he does, expect a firm reaction from China.
The British pound (GBP), New Zealand dollar (NZD) and euro (EUR) are leading FX ahead of the U.S. session. US jobless claims, Philly Fed survey, existing home sales and LEI are due next.
Economic news was light Wednesday aside from a Canadian CPI report that was precisely in-line with estimates. Oil rebounded strongly on tighter-than-expected U.S. inventories, thereby helping to provide support to indices. U.S. crude seen capped at $57.95, while the Japanese yen (USDJPY) struggles for fresh momentum at 108.75.80. SPY remains capped at 3091, but a break below there would stabilize at 3079, while upside capped at 3114.
Signs are mounting that President Trump is less inclined to make a deal with China than markets believe. A report saying talks could stretch into 2020 weakened risk trades Wednesday, leading to JPY strength and Aussie dollar (AUD) weakness. The main market mover continues to be the hot-and-cold China-US trade game. Signs have been mounting that trouble is brewing but it's been impossible to fight the recurring positive momentum in markets.
A Reuters report Wednesday finally dented the upbeat armor. It said that talks are getting more complicated and could slide into next year. It sent the S&P 500 lower by more than 1% at one point and USD/JPY quickly fell 30 pips.
The dip buyers bought both, as usual, but later there were more signs of trouble. CNBC reported that the deal was 'in trouble', citing four sources. The sides are failing to find common ground on tariff removal.
Then the President himself said he didn't think China was “stepping up to the level that I want.” He also took on the argument that tariffs are hurting the economy by highlighting the strength in employment and equities.
Finally, the U.S. Senate passed the Hong Kong support bill and President Trump is expected to sign it. The legislation demands sanctions for anyone found to be interfering in the region. It will undoubtedly anger China. The market believes Trump won't risk an equity selloff and economic consequences but his comments today suggest he doesn't think the impact will be overly damaging to his re-election chances.
At this point, it doesn't appear as though President Trump has made up his mind, but the risks of a blowup are higher than markets are implying.
Adam Button is co-owner and managing director of ForexLive.com and a contributor at AshrafLaidi.com. You can see Ashraf’s daily analysis at www.AshrafLaidi.com and sign up for the Premium Insights. Ashraf's Tweet on indices here.
