In Hanoi, the talks fell apart
In London, there’s cause to take heart
The market response
Sell stocks at the nonce
But Sterling looks good on the chart
The Trump-Kim denuclearization talks in Hanoi ended abruptly last evening as North Korea was apparently not willing to give up their program completely although they were seeking full sanctions relief. It appears that many investors were quite hopeful for a better outcome as equity markets across Asia fell as soon as the news hit the tape. Not surprisingly, South Korea was worst hit, with the KOSPI falling 1.5% while the won fell 0.5%. But the Nikkei in Japan fell 0.8% and Shanghai was down by 0.5% as well. In the currency market, the yen, benefitting from a little risk aversion, gained 0.2%, while the renminbi slipped slightly, down just 0.1%
Of course, the US-China trade talks are still ongoing and the big news there was that the US has, for the time being, removed the threat of increased tariffs. It appears that real progress has been made with respect to questions on technology transfer as well as verification of adherence to the new rules. It is surprising to me that this was not a bigger story for markets, although that may well be a sign that a deal is fully priced in already. In the meantime, Chinese data continues to disappoint with the Manufacturing PMI falling to 49.2, its third consecutive print below 50.0 and the weakest number in three years. It certainly appears as though President Xi is feeling real pressure to get a deal done. Of course, the Chinese equity market has had an even more impressive performance than that of the US so far this year, so it may be fair to say they, too, have priced in a deal. While things seem pretty good on this front right now, what is becoming apparent is that any hiccup in this process is likely to result in a pretty sharp equity market correction.
Turning to the UK, it appears that PM May’s game of chicken was really being played with the hard-liners in the Tory party who appeared perfectly willing to leave the EU with no deal. In yesterday’s debates, they were conspicuous by their silence on the subject and the growing belief is that May will be able to get support for her deal (with a side annex regarding the length of the Irish backstop) approved. While this will probably result in a three-month delay before it all happens, that will simply be to ensure that the proper legislation can be passed in Parliament. In another surprising market outcome, the pound has remained unchanged today despite the positive news. As I mentioned yesterday, the pound has rallied steadily for the past several weeks, and it appears that it may have run out of steam for the time being. While an approval vote will almost certainly result in a further rally, I’m skeptical that it has that much further to run. Unless, of course, there is a significantly more dovish turn from the Fed.
Speaking of the Fed, yesterday’s Powell testimony was just as dull as Tuesday’s. Arguably, the most interesting discussion was regarding the “Powell put” as one congressman harped on the concept for much of his allotted time. In the end, Powell explained that financial markets have an impact on the macroeconomy and that the Fed takes into account all those factors when making decisions. In other words, yes there is a put, but they want us to believe that the strike price is not simply based on the S&P 500, but on global markets in general. Given the importance of this comment, it was quite surprising that equity markets yesterday did not rally, but instead fell slightly. And futures are pointing lower this morning. At the same time, the dollar is generally under pressure with the euro rising 0.4% and now trading above 1.14 for the first time in three weeks. The single currency remains, however, right in the middle of its trading range for the past four months. In other words, this is hardly groundbreaking territory.
It is hard to ascribe the euro’s strength to any data this morning, although there has been plenty of that released, because generally it was in line with expectations. But even more importantly, it continues to show there is a lack of inflationary pressure throughout the Eurozone, which would undermine any thoughts the ECB will tighten earlier than now anticipated. Perhaps the one exception to that were comments from ECB member Francois Villeroy who explained that keeping rates negative for too long could have a detrimental impact on transmitting monetary policy properly. While that is certainly true, it has not been seen as a major concern to date.
Turning to this morning’s data story, Q4 GDP growth will finally be released (exp 2.4%) as well as Chicago PMI (57.8). In addition, we hear from six Fed speakers today starting with Vice-Chair Clarida at 8:00 this morning and finishing up with Chairman Powell at 7:00 this evening. However, given we just got two days of testimony from Powell, it is not clear what else they can say that will change views.
Overall, the dollar remains under pressure, and while it rallied during yesterday’s session, it has reversed that move so far this morning. As I have consistently said, the market is highly focused on the Fed’s more dovish turn and so sees the dollar softening. However, as other central banks become more clearly dovish, and they will as slowing growth permeates around the world, the dollar should regain its footing. Probably not today though.