The European market (Stoxx-600) closed around 361.18, surged by almost +1.1% Monday on US-China trade truce, while Dow jumped amid “risk-on” sentiment and lower USD as commodity and EM currencies soared led by China’s Yuan. The European market was boosted by trade sensitive stocks such as miners, techs, automobiles as-well-as energies on higher oil.
But as the “handshake” temporary trade deal between Trump and Xi on Saturday was highly anticipated, the overall “risk-on” rally was quite limited and there are also various ambiguities between statements from both sides as both are claiming “victories” against each other.
The Stoxx-600 slips from the session high of 364.90 and made a low of 359.56. Another reason behind muted market movement after opening gap up was strengthening of EURUSD, jumped to a high of 1.1380, up by almost +0.55% and slump of US dollar index, also by almost -0.55%, negative for the export savvy European market. Banks and financials helped on higher German Bund yields. China exposed banks such as HSBC zoomed.
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DAX-30 closed around 11465.46, jumped by almost +1.85% and made a session low-high 11457.61-11566.97 in a day of range bound trade after opening gap up around 11539.38; Dax also slips from the day high.
Pivot: 11675 Support: 11575 11350 11050Resistance: 11780 11860 11900 Scenario 1: STRONG ABOVE 11675 Scenario 2: WEAK BELOW 11625-11575 Comment: NEAR TERM RANGE: 10995-11675
EURUSD was trading around 1.1373 in the early EU session Monday, surged by almost +0.50% on a broad weakness in the US dollar after the Trump-Xi “handshake” temporary trade deal. The US-China trade truce has boosted commodity currencies and risk-on trade and USD was under stress. The US dollar index (DXY) plunged by almost -0.55%, while USDCNH tumbled by around -0.85%.
EURUSD is also boosted by a report that Italy’s PM Conte is preparing (reviewing) the 2019 draft budget plan with fiscal deficit projection between 1.9 to 2.0%. Conte also said that his two deputies (the men in actual charge of Italy) Di Maio and Salvini are also ready to accept the new target and he himself will negotiate with the EU on a budget, not finance minister Tria. Earlier Tria has said that he is negotiating with the European Commission to lower the 2019 budget deficit between 2.0-1.9%.
But EURUSD came under stress after Italy’s deputy PM Salvini warned the European Commission cannot ask for a 1.9% budget deficit target amid the never-ending Italia budget drama. Salvini also added that “the EU has a constructive attitude on the budget as a priority on a budget is to do reforms. Italy won't change plan on pensions and we are waiting for Cost-Benefit report on France rail link (an infra project). There will be no penalizations for an early retirement”.
Elsewhere, the EC VP Dombrovskis, who is scheduled to meet Italy’s FM Tria later in the day on Monday, said: “The commission (EC) is an intense contact with Italy and the tone with Italy has changed. But substantial correction needed on Italy budget-- adjustment needed quite substantial on Italy. And the commission is open for dialogue with Italy, while the need to see concrete steps taken by Italy now--waiting for concrete steps from the Italian side. And now it’s up to Italy to come up with adjustments to its 2019 budget plan”.
The Eurogroup head Centeno said: “Italy's 2019 budget will be a topic of debate of Eurozone finance ministers on Monday; we hope a compromise can be found”. The EC’s budget commissioner Moscovici sounds optimistic and said Italy’s budget proposals are going in right direction. Later, after meeting with Dombrovskis, the Italian FM Tria’s office said both of them wanted to find a rapid deal on Italy budget.
Overall, the EC is clearly seeking a much lower level of the Italian budget deficit, but it remains to be seen whether Italy’s deputy PM duo (Salvini and Di Maio) blinks to that extent as they have certain political commitment to fulfill, unlike the PM Conte or the FM Tria, basically non-political technocrat persons.
Apart from Italian budget jitters, EUR is also under pressure on so-called “yellow vests” protests across the Eurozone by anti-establishment, Eurosceptic, nationalist and far-right forces, which started the mass protest in France for higher taxes on energies (oil & gas) in the name of climate protection. On Sunday, there was some shock in Spain as a hard right, anti-immigration, the populist nationalist party (VOX) wins seats in parliament for the first time.
In addition, ongoing Brexit uncertainty, UK/EU political drama is also affecting the EUR as a hard Brexit would be negative for European banks. But a no-Brexit or 2nd Brexit referendum would be positive for the EUR.
EURUSD is currently trading around 1.1349, surged by almost +0.28%.
Pivot: 1.1405 Support: 1.134 1.12995 1.121Resistance: 1.145 1.151 1.157 Scenario 1: STRONG ABOVE 1.14050 Scenario 2: WEAK BELOW 1.3900-1.13800 Comment: NEAR TERM RANGE 1.12100-1.15100
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Dow future is currently trading around 25780, up by around +0.95% (+230) and off the low of session high around 26088.00 (+550 points) as the overall optimism of a temporary “handshake” trade deal between Trump and Xi fades after the US Treasury Secretary Mnuchin sounds cautious about the temporary trade truce and said he is hopeful they can turn Trump-Xi “discussions into real trade agreement” in the next 90-days; otherwise in the absence of any solid progress, Trump won't stand for any stalling from China; i.e. Trump will apply his 25% China tariffs.
Mnuchin said in an interview: "This is the first time that we have a commitment from them that this will be a real agreement. I'm very hopeful we can turn this into a real agreement. They put on the table an offer of over $1.2 trillion in additional commitments. But the details of that still need to be negotiated. This isn't just about buying things. This is about opening markets to U.S. companies and protecting U.S. technology. Those are very important structural issues to the president”.
Mnuchin clarified: “In the 90-day period ahead, Trump will lead the negotiations with assistance from Agriculture and Energy department leaders. The U.S. Trade Representative Robert Lighthizer also will be a principal, as will Commerce Secretary Wilbur Ross”.
As a pointer, earlier the White House economic advisor Navarro, a known China hawk said: “The USTR Lighthizer would take point on the negotiations. Lighthizer is the toughest negotiator we've ever had at the USTR. And he's going to go chapter and verse and get tariffs down, nontariff barriers down, and end all these structural practices that prevent market access”.
The market is somehow confused about contradictory protocols for China trade negotiations between trade moderator Mnuchin and trade hawk Navarro. Trump has to balance these two sides if he wants to reach any meaningful real trade deal with China.
On issues like the flow of fentanyl from China, a synthetic opioid linked to thousands of overdoses in the US, and the North Korea nuclear issue, Mnuchin sounds quite optimistic and said: "There is a very strong commitment between the two presidents to work together to make sure we have a nuclear-free Korean peninsula”.
Finally, Mnuchin warned: "We absolutely need to have something concrete over these 90 days. There was a very significant commitment from both leaders on what needs to be done over the 90 days and instructions to both teams to negotiate and turn this into a real agreement with specific action items, deliverables, and timeframes”.
Thus after the initial euphoria, the market will now focus on the progress of “real deal” rather than “handshake” deal or mere discussions (commitments), which may be quite vague political verbal agreement and not legally binding; it’s like a “Brexit backstops of backstops”.
So far Trump has tweeted 7 tweets on Monday about various aspect of his “handshake” deal with China’s President Xi. Although Trump was quite optimistic about auto export from the US to China, the later has not confirmed about any such promise: “China has agreed to reduce and remove tariffs on cars coming into China from the U.S. Currently the tariff is 40%”.
In any way, automakers and mining stocks rallied after Trump tweeted that China agreed to "reduce and remove" tariffs on imported American-made cars. Copper also jumped to a 1-3/4 month high on improved demand prospects for industrial metals after US-China temporary trade truce.
Trump further said: “My meeting in Argentina with President Xi of China was an extraordinary one. Relations with China have taken a BIG leap forward! Very good things will happen. We are dealing with great strength, but China likewise has much to gain if and when a deal is completed. Level the field!”
Trump is also trying to sell US soybeans stock to China, just coming from the field (fresh harvest). As always, US farmers/rural area is a very important vote box for any political party: “Farmers will be a very BIG and FAST beneficiary of our deal with China. They intend to start purchasing the agricultural product immediately. We make the finest and cleanest product in the World, and that is what China wants. Farmers, I LOVE YOU!”
Trump has a great respect and special relationship with Xi, which he wants to use in geopolitics apart from trade: “President Xi and I have a very strong and personal relationship. He and I are the only two people that can bring about massive and very positive change, on trade and far beyond, between our two great Nations. A solution for North Korea is a great thing for China and ALL!”
Trump went on: “I am certain that, at some time in the future, President Xi and I, together with President Putin of Russia, will start talking about a meaningful halt to what has become a major and uncontrollable Arms Race. The U.S. spent 716 Billion Dollars this year. Crazy!”
“We would save Billions of Dollars if the Democrats would give us the votes to build the Wall. Either way, people will NOT be allowed into our Country illegally! We will close the entire Southern (NYSE:SO) Border if necessary. Also, STOP THE DRUGS!”
Meanwhile, as per a report, Trump has appointed the USTR Lighthizer, a China skeptic, to lead the next round of the US-China talks. The US bond yield curve flattens most (2s5s) since June-2007 and on the verge of an imminent inversion as it fell below 2 bps on fear of a Fed policy mistake amid monetary policy tightening and fading economic hopes (subdued US economic data). As a result, Dow future further slips and made a session low of 25685.00.
Apple (NASDAQ:AAPL)
In stocks, Apple is interesting as it’s one of the most trade sensitive stocks, having significant exposure in China for both sales and supply chain. Apple is up by around +1.80% at 181.90 after a plunge of almost 22% in the last three months with around 18.40% in November alone for subdued demand of iPhone, muted guidance and Trump trade tensions. Apple made a session high of 184.68 amid US-China temporary trade truce optimism but slips to a session low of 181.33 as the optimism fades and the market is preparing for a “real trade negotiation”.
WTI Oil
On Monday, energy stocks gained after oil surged to a 1-week high on US-China trade truce, positive for the global growth and demand for oil. The “black gold” was also boosted as Saudi Arabia and Russia agreed to extend their pact to manage crude output into 2019 after the G20 sideline meeting between Putin and Salman. But Putin said on Saturday he had no concrete figures on possible oil output cuts, though his country would continue with its contribution to reducing global production.
Oil was also boosted after Alberta, Canada's largest crude-producing region, announced a cut (around 8.7%) in the production of crude and bitumen by 325 kbpd from January until excess oil in storage is drawn down (oil pipeline infra bottleneck issues in Canada).
Oil made a high of 53.84, but it slips to a low of 52.04 after a report that Qatar will quit the OPEC pact in 2019. This means that although Qatar will attend in the forthcoming OPEC+ meet on 6-7th Dec, it will not participate in any cuts as its set to quit the OPEC from Jan’19. There is also some uncertainty about the actual quantity of OPEC+ cut, while the market is expecting it around 1.00-1.40 mbpd.
Meanwhile, Iran's OPEC governor said “Qatar's decision to quit OPEC shows the frustration of small producers at the dominant role of a Saudi and Russia-led panel, and any supply cuts should come only from countries that had increased output (to compensate Iran short supply as per Trump’s “request”-like Saudi Arabia)”.
Iran also warned that oil price will drop to $40 unless OPEC+ cuts, but also assured that Iran has no plans to quit OPEC. Iran also pointed out that OPEC+ cut talks are a response to Trump's waivers (for Iran oil).
The US is now the world’s biggest oil producers at around 11.5 mbpd, just ahead of Russia at 11.37 mbpd, while Saudi Arabia is also producing around 11.00 mbpd and these three producers are now controlling almost 1/3rd of the total global production and also the geopolitics (price) of oil.