Trumped

A great nation in the Far East
Is seeing its growth rate decreased
Their trade has been ‘Trumped’
As exports have slumped
According to data released

There are two stories of note this morning as follows:

1. Chinese Trade data
2. Brexit vote tomorrow

While both of these stories have knock-on effects, they are the conversation drivers today.

Starting with China, last night’s data showed that both exports (-4.4%) and imports (-7.6%) fell much further than forecast with the resulting Trade balance expanding to a $57 billion surplus. Adding to the concerns was a -13% decline in vehicle sales there, so a trifecta of poor data. The short-term response has been for equity markets to sell off as concerns over slowing global growth mount. In Asia the Hang Seng fell -1.4% while Shanghai fell -0.7%. European equities are also suffering, with the Stoxx 600 down -0.8% amid universal weakness there, and US futures are pointing toward opening declines on the order of -0.8%.

Highlighting the risk sell off, Treasury yields have fallen 3bps, oil prices are down 1.5% and gold has climbed 0.6%. Finally, in the FX market, the yen is today’s leader, rising 0.45% as I type. However, while that describes today’s market movement, the narrative seems to be shifting slightly, toward the idea that a resolution of the trade conflict between the US and China is coming sooner than previously thought. Certainly, if growth in China is slowing more rapidly than expected, President Xi will be motivated to get a deal done, and with the ongoing tribulations in Washington, President Trump would love nothing more than to trumpet a victory on trade. So, it certainly makes sense that both sides will find a solution, but it must be remembered that there are a number of very difficult issues to address, notably the question of IP theft and forced technology transfer, which will not be easy to fudge. With that said, it is clear that a resolution to the trade fight will result in a significant risk-on atmosphere in global markets.

The other story is the imminent vote in the UK Parliament regarding PM May’s Brexit deal. As should be expected in any compromise, nobody is happy with the deal. However, in this case, given May’s weak underlying support (remember she is leading a minority government), it appears that the deal has extremely limited support, even from her own party. It is no longer a question of whether the vote will go against the government, (it will), but by how many votes will it lose. Apparently, anything on the order of 40-50 votes could be seen as close enough for PM May to go back to the EU and seek some minor tweaks in order to get the deal done. However, it is increasingly looking like the loss will be catastrophic, on the order of 100 votes, which will remove any possibility of a Brexit deal.

A ‘No’ vote will leave two possible outcomes, either a no-deal Brexit, something that is greatly feared by markets and politicians alike, or no Brexit at all! The second choice seems quite confusing, given the referendum results in 2016, but several months ago, the European Court of Justice ruled that the UK could unilaterally decide to remain in the EU. Of course, if that is the decision it seems likely to ignite an extraordinary political firestorm within the UK, given that a legal referendum called for Brexit. So, all eyes will be on London tomorrow, but for right now, traders seem to be falling into the no Brexit camp as the pound has rallied 0.3% this morning. I would argue, however, that a no Brexit outcome would see major government upheaval and have quite a negative impact on the UK economy and the pound in the short run.

Away from those stories, there is not much interesting discussion. Overall, the dollar is mixed this morning, with both AUD (-0.3%) and CNY (-0.15%) falling after the Chinese trade data, RUB (-0.45%) and CAD (-0.15%) softer on weakening oil prices and TRY (-1.10%) suffering the slings and arrows of US threats in the event the Turks attack the US-backed Kurds in Syria. On the plus side, it has mostly been the yen and the pound as described above. Net, the dollar is little changed on the day.

Turning to this week’s data, there is a decent amount highlighted by the Fed’s Beige Book on Wednesday.

Tuesday PPI -0.1% (2.5% Y/Y)
  -ex food & energy 0.2% (2.9% Y/Y)
  Empire Manufacturing 11.25
Wednesday Fed’s Beige Book  
Thursday Initial Claims 220K
  Philly Fed 10
Friday Capacity Utilization 78.5%
  IP 0.2%
  Michigan Sentiment 97.0

In addition, we hear from four more Fed speakers, including uber-dove Kashkari and NY Fed President Williams. However, the Fed speak is unlikely to have changed from the onslaught last week, meaning there will still be a dovish bias perceived by the market.

As for today, while risk has been reduced, it does not feel like a major rout, but rather a modest adjustment to positions. My sense is that the Brexit vote tomorrow will be the big story for the market, and we will likely bide our time for the rest of the day, at least in FX markets. As long as the narrative continues to focus on a dovish Fed, the dollar will remain under pressure, that is unless the focus turns to more disruptive possible outcomes, when fear really blossoms. However, I don’t see a good reason for that to occur in the short run, so the dollar is apt to stay soft for now.

Good luck
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