After being stuck in trade war purgatory and starved for positive news of late, any glimmer of optimism or agreement on practically anything on the trade war front is viewed favorably. However, with average investors so emotionally involved in the trade war outcome, is judgment clouded by emotions?
Financial markets are starved for a bit of good news. China said it would hold trade talks by phone in two weeks, and the U.S. is saying it will delay some of the tariffs. These moves have driven a wave of profit-taking across safe-haven assets.
But the tariffs are not being delayed because President Trump has turned into "Mr. Nice Guy." Rather, it’s because big business has told the White House categorically there aren't any alternative supplies.
And while some investors are relishing this news, it’s a clear cut reminder of what happens when the White House starts messing around with global supply chains and suggests a trade policy that is constructed more on what amount of spaghetti sticks to the wall rather than any strategic game plan.
But with the USTR creating a so-called " exempt list" they have signalled that a 10% round of tariffs is going ahead on just about all but $50 billion of items that U.S. big business can't source elsewhere. And as far as the negotiations are concerned, have things become so tense that the September round is now on the telephone, rather than in-person??
Somehow, I don't feel as comfortable as the 2% rally on the S&P.
The risk rally saw the most crowed trades take the biggest hit, long gold and short USD/JPY. But USDJPY ran out of steam towards 107.00 and gold found a solid a base below $1490. After the headline rinse, it's probably time to repeat.
I was going to write about the stellar U.S. CPI prints but looking at the bond curve reactions, markets are telling the Fed that " the data is irrelevant and if you don't cut you are making a huge policy mistake."
Oil Markets
Go with the oil flow.
Brent rallied over 5% on the U.S.-China headline and while the dynamics of the move can be left open to speculation, what is not is that oil sentiment is unmistakably connected at the hip to demand risk and just how quickly it can ameliorate is to the degree there are any signs of progress on U.S.-China trade. On that score, a whole lot of gloominess just got power rinsed from the markets on the USTR headlines.
Gold Markets
Geopolitical and related risks including Hong Kong unrest and the ongoing slide in the Argentine peso kept up a robust safe-haven bid in gold, touching a six year high helped along by falling U.S. bond yields. But then the bulls were dealt a double whammy dose of negativity that saw gold prices melt nearly $50 top to bottom on the session.
First, the U.S. core CPI surprised to the upside for the second month in a row, sending bond yields higher. But the stop-loss trap door gave way when the Office of the USTrade Representative said that the U.S. administration would delay imposing a 10% tariff on a specific Chinese product. This triggered a robust correction in safe-haven assets. Equities jumped, yields rose, and the USD climbed while the gold haven bid virtually evaporated.
Positions were stretched with a lot of new money in play, so the market was very prone to any glint of risk positive news.