With corporate America already straining under the weight of a collapse in demand, it seems unlikely that US-China tensions will escalate from threats to higher tariffs in the near term, even if the run-in to the US Presidential election has China in the crosshairs. If the market were morphing into full-blown trade war mode, the S&P 500 would not be eyeing 2900, nor would Brent be trading +$30 in this market climate.
The Yuan Watch
And with all eyes on USD/CNH fix, the PBoC went a long way to extinguishing one major trade war hotspot by setting the Yuan reference rate on a more risk-friendly level. USD/CNH dropped about 200 pips on the stable fix, and a recovery in risk sentiment ensued, and there was no follow-through on US President Trump's threat to China.
The return of onshore China investors after US-China tensions over recent days failed to elicit fireworks in USD/CNH and China equities. USD/CNY was fixed only 0.17% higher at 7.0690, with USD/CNH attempting to bridge the gap and selling off towards 7.10.
Whether any of this matters very much depends on how tensions escalate and drive CNH weakness and spill over into China-sensitive currencies like AUD, KRW, and TWD. But ultimately it boils down to whether tariffs get reinstated and at this time trade and tariffs remains in the highly doubtful category.
Oil Markets
But from an oil market risk perspective, we have seen China in the past retaliate by quashing US oil imports at a drop of a dime, and this could partially explain today’s Asia oil markets mini sell down.
But the reality probably lies somewhere between the too quick to fast narrative and the nascent trade war risk
Indeed, oil markets have come along way over the past 72 hours after traders lapped up the view that the oil complex is rebalancing quicker than expected. On the supply side, yes, but I am certainly not throwing caution to the wind going max-margin long on oil after hitting +30 Brent, which was my July recovery target. Sure, the world is reopening, but that does not mean there is an immediate snap back in global oil demand, although products should get off to kick start with consumers eager to get back in their cars.
Currency Markets
Bottoming US interest rates and low volatility suggest investors believe low-interest rates are here to stay and are not moving higher time soon. And it's the global economic dependency on the cheap dollar( interest rate wise) at the start and throughout the crisis which is keeping the US dollar in demand. When global growth and risk sentiment are weak, the US dollar by default is strong.
It was reasonably quiet in currency land in Asia, with traders still unsure what to do with the euro. I am waiting for London to come in for direction before hitting the euro with the ugly stick.
Still, the USD can selectively sell-off if investors differentiate those economies returning to social business as usual sooner. The focus is on how quickly countries can return to closer social interaction beyond the firing up manufacturing facilities. After all, the service sector has a much higher weight in the global economy, and without end-consumer demand, manufacturing orders will dry up pretty quickly. Australia, South Korea, and China have substantial servicing sectors that could see those currencies flourish before the eventual brick and mortar rebound. Now we are getting creative in a way to justify my bearish USD view.
Pre London-Open View
Nothing beyond the obvious is stirring sentiment today, just a concern that while the world might be past the peak of the coronavirus, the sizzling equity gains since the lows are not reflective of the extent to which the economy faces more fundamental longer-term changes.
Still, it remains to be seen if this trade war complexity mushrooms into something more risk menacing as time goes by.