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Europe Surged On Renewed US-China Trade Truce Optimism And Lower EUR But Off

Published 12/12/2018, 01:18 AM
Updated 09/16/2019, 09:25 AM

The European market (Stoxx-600) closed around 345.10 Tuesday, surged by almost +1.80% on renewed US-China trade truce optimism, but off the earlier high of 346.82 amid the never-ending Brexit saga; Dow also slips from over +350 points to below +100 points on renewed China cold war worries and US political drama.

Energies helped the European market on higher oil amid Libya output drops, but the market was also affected by French political protests (yellow vests) and increasing political populism as France has projected the 2019 budget deficit at +3.5%, stunning the EU policymakers, much to the amusement of the Italian populist leaders.

Germany 30

Germany’s DAX-30 surged by +1.49% on China trade/auto truce optimism and lower EUR, being an export savvy market; DAX-30 closed around 10780.51 after making a session low-high of 10684.62-10884.62 in a day of volatile trading. Earlier Europe/Germany boosted after German December ZEW investor confidence unexpectedly improved.

GBP/USD

As per latest Brexit edition of soap opera, there is an unconfirmed report that the US Tories (Conservatives) have sent the 48 letters needed to trigger a no-confidence vote on Theresa May’s leadership.

But as the British PM is currently out of the country, touring a number of EU states to lobby and gather support for her Brexit re-negotiation bid, the Chairman of the Tory 1922 committee (Graham) may not announce it officially. Meanwhile, another report suggests that Graham is not yet in possession of 48 minimum letters of discontent for the leadership challenge of May.

As of now, it seems that Theresa May is trying hard for a 2nd attempt to sell any modified Brexit plan to the British Parliament on 21st January’2019, but the EU is also quite adamant not to renegotiate the Brexit deal including the issue of an open-ended alleged vague backstops of backstops, which could keep the UK in the EU customs union like a colonial state indefinitely, until and unless the thorny issues of Irish border has been resolved.

The EU President Tusk indicated that while the bloc is “ready to discuss how to facilitate the UK ratification,” officials “will not renegotiate the deal”. Almost all the other EU leaders are talking in the same tune and also “advising” Theresa May to extend the “Article-50” and effectively stay with the EU with some compromises. But although Theresa May is vehemently denying the idea of “no-Brexit” publicly, she may be also planning to do the same on “backstop” fear-mongering.

Theresa May will present the same Brexit deal to the UK Parliament late January to force either to accept it or face a no-deal hard Brexit or a no-Brexit at all. Theresa May “may” also use the UK market (GBP) meltdown as a weapon to sell her Brexit plan to the UK Parliament and the British people.

Amid all these high voltage Brexit drama regarding leadership challenge of Theresa May and UK/EU political turmoil,, GBPUSD broke 1.25 and made a session low of 1.2494 and the overall risk-on mood is on the back foot as a no-deal hard Brexit chaos would be not only negative for the UK/EU, it will be also negative for the US banks & financials.

GBPUSD is currently trading around 1.2519, slumped by almost -0.35%. Earlier GBPUSD recovered from Monday's 1-1/2 year low and was up +0.41% to a high of 1.2639 on optimism about a soft Brexit deal as the UK Prime Minister May is set to tour EU state capitals in an attempt to secure (beg) concessions on a Brexit deal she can sell to the UK Parliament.

US 30

Meanwhile, there was another report that the US will ramp up its condemnation of Chinese IP theft this week, igniting fresh worries of China cold war from a trade war. The report (floating balloon) suggested that the Trump administration condemn China over hacking, economic espionage and actions include sanctions, indictments (as per some US officials).

The report said: “The Trump administration is preparing a series of actions this week to call out Beijing for what it says is China’s continued efforts to steal America’s trade secrets and advanced technologies and compromise sensitive government and corporate computers, according to U.S. officials familiar with the plans. The coordinated multiagency announcement — expected to come as the two countries have reached a momentary detente in their trade war — represents a major broadside against China over its mounting aggression toward the West and its attempts to displace the United States as the world’s leader in technology”.

Thus as earlier apprehended, Trump is not waging a simple trade war with China, but a real cold war to curb China’s growing global superpower ability and to dominate the US monopoly in sophisticated techs. The market is concerned that China will never accept such US domination and the “war of attrition” will go on as usual despite temporary trade truce.

The US market is also under stress on US political drama over US shutdown and Trump’s border wall funding issue as Trump, Democrats clash over the border wall in Oval Office spat. President Trump on Tuesday engaged in an extraordinary televised argument with Democratic congressional leaders over his demand for border-wall funding, threatening a government shutdown if he does not get the money. Trump told House Minority Leader Pelosi and Senate Minority Leader Schumer at the White House: "I will be the one to shut it down and I would be proud to shut down the government for border security”.

In response, Pelosi replied in the dramatic conversation, unexpectedly opened to the media: "You will not win”. Schumer said to Trump toward the end of the nearly 20-minute chaotic televised drama: “Elections have consequences, Mr. President”.

Trump also said probably he will not have an agreement with Democrats on border wall today (Tuesday) and although he does not want to see a government shutdown, the border security is important. Trump also warned that “if the Democrats do not give us the votes to secure our country, the military will build the remaining sections of the wall”.

Thus Trump may allocate additional funds to the US military indirectly for “national security”, which is under his prerogative to build the controversial border wall if he can’t secure the congressional approval. As a pointer, the US lawmakers face a December 21 deadline to avoid a partial government shutdown. Republicans and Democrats have been unable to reconcile their differences over how much money to provide for Trump's border wall. Democrats are offering $1.3B for the Mexican border fencing and barriers, way below of Trump's $5B request.

But earlier, the risk-on sentiment was also buoyed on renewed hopes of US-China trade truce after reports that that US and China trade talks are continuing despite the diplomatic rift over the arrest of the Huawei CFO. According to a statement from China's Ministry of Commerce (MOFCOM), China's Vice Premier Liu, the US Treasury Secretary Mnuchin and the USTR Lighthizer spoke by phone late Monday morning on the timetable and road map of future trade talks.

The MOFCOM said: "Both sides exchanged views on putting into effect the consensus reached by the two countries' leaders at their meeting, and pushing forward the timetable and roadmap for the next stage of economic and trade consultations work”.

The US/EU automakers as-well-as the risk-on trade are also upbeat on a report that China is moving toward cutting tariffs on cars made in the US to 15% from the current 40%. On late Monday, there was also positive China trade news as China is reportedly planning to buy the first batch of US soybean purchases as per Xi-Trump trade talk on 1st Dec.

But the risk-on sentiment could be affected as there is another report that a former Canadian diplomat Michael, a senior advisor for the International Crisis Group, was detained in China. The report suggested that: "It was not immediately clear if the cases were related, but the arrest of Huawei CFO Meng in Vancouver has stoked fears of reprisals against the foreign business community in China”. Meanwhile, Canada said they are “'deeply concerned' about the situation of a detained Canadian citizen in China”.

The Dow future is now trading around 24419, slumped by almost -0.29% (-71) and so far made a session low-high of 24321.00-24822.00 in a rollercoaster day of trading.

GM

Auto stocks were upbeat on Tuesday on reports that China is moving toward cutting tariffs on cars made in the US to 15% from the current 40%. There was a report that China has agreed to reduce the US auto tariffs. The report suggested that China’s top trade negotiators have told their US counterparts that Beijing will lower the tariff on the US auto imports to 15%, down from 40% currently.

As per the report: “Chinese Vice Premier Liu He informed Treasury Secretary Mnuchin and the USTR Lighthizer of the move in a phone call late Monday, but it wasn't clear when the reduction would take effect”. As per the report, a proposal to reduce tariffs on cars made in the US to 15% from the current 40% has been submitted to China's Cabinet to be reviewed in the coming days. This follows after Trump tweeted a few days ago regarding a possible auto tariff reduction and after the Huawei, CFO arrests pressure (?).

Meanwhile, on early Tuesday, Trump tweeted: “Very productive conversations going on with China! Watch for some important announcements!” Most probably Trump has indicated the official announcement of China auto trade truce.

General Motors (NYSE:GM) is currently trading around 34.85, jumped by almost +1.25%, but almost at the session low and also well-off the earlier high of 35.75.

WTI Oil

In commodities, crude oil (WTI) is currently trading around 51.60, jumped by almost +1.18% on global risk-on mood, reports of Libyan output cut and hopes of a gradual cut in Russian as-well-as Saudi output.

As per the report, Russia said on Tuesday it planned to cut oil output by just 50 to 60 kbpd in January, as it gradually builds to an agreed cut of 220 kbpd as per latest OPEC+ agreement. Russia and other non-OPEC producers agreed to cut a combined 400 kbpd at the OPEC+ meeting, but the reality is beginning to sink in. The cuts may only be phased in over time.

Meanwhile, Saudi Arabia to cut oil exports by 1.00 mbpd in January. Saudi Arabia will lower oil exports by 1.00 mbpd beginning in January and exports will drop to 7.3 mbpd, down from 8.3 mbpd in November.

Oil got further boost after another report of a shutdown in production in Libya, where the National Oil Company (NOC) declared force majeure on Monday on exports from the El Sharara oilfield, the country's biggest, which was seized last weekend by a militia group. NOC said the shutdown would result in a production loss of 315 kbpd and an additional loss of 73 kbpd at the El Feel oilfield.

But oil also slips from the session high of 52.41 on stronger US dollar index (DXY) amid European political turmoil and by an EIA report, predicting the 2019 US oil output at 12.06 mbpd, unchanged from their previous forecast. The US is currently producing around 11.00 mbpd. The US, Russia, and Saudi Arabia are now actually controlling the global oil market rather than OPEC+, as together they are producing more than 33 mbpd, almost 1/3rd of the global production.

In the coming days, Trump could double down his anti-Iran rhetorics as per his domestic political compulsions and that could help oil. Saudi may not co-operate Trump this time despite Trump’s “Khashoggi killings Trump Card”.

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