Hope for trade-deal diminishes as trade-war becomes more complex

Risk-off again, as geopolitical issues reign

Hopes for a positive outcome from this week’s US-China trade negotiations diminished overnight, and that’s sent stocks lower and safe-havens higher. Numerous stories inflamed and fanned fears that the US and China remain miles apart when it comes to trade and foreign policy The reversal in market sentiment comes after China’s markets came back online yesterday without a hitch. Investors were also glued to Brexit developments yesterday, too, with hopes for a surprise breakthrough between the UK and Europe also diminished. Fed Chair Jerome Powell also delivered a speech during the North American session, and managed to settle investors nerves about a US economic slowdown, somewhat.

Trade-war takes on a new moral dimension

As China’s trade negotiators jump onto planes to Washington to begin trade-talks, several stories in the past 24 hours have surfaced that will only complicate already complex trade-issues. The thorniest will be the US decision to blacklist several Chinese companies for its involvement in human rights abuses by the Chinese Communist Party against China’s Muslim Uyghur minority in Xinjiang. The decision from the Trump White House to use trade-policy to punish China for its human right’s abuses has added a totally new dimension to the trade-war. Trade-policy is now being used to hurt China for its moral failings, adding a murky philosophical bent to the conflict.

The US, China and a clash of cultures

For an act that must seem like egregious sanctimony – no matter how clearly justifiable objections to China’s human rights abuses happen to be – the CCP has declared that market participants ought to “stay tuned” for its retaliation to the US’s moves. Investors will wait with bated breath to learn what that means. But it seems clearly that the trade-war is becoming somewhat of a clash of cultures. Case in point: another slightly left-field story yesterday: China’s decision to stop televising NBA basketball games in response to a Tweet published by one of the league’s franchise’s General Managers that expressed support for protesters in Hong Kong.

US still mulling capital market restrictions on China

Of course, the trade-war primarily remains an economic battle, and there were some developments on that front yesterday, too. Somewhat contradicting previous statements that the White House isn’t considering banning Chinese companies from listing on US stock exchanges, reports were released during North American trade that the Trump’s administration is considering limiting the volume of Chinese stocks that US pension funds are allowed to invest in. That news has thrown back into the equation the chance that trade-sanctions could transform into capital market restrictions – a move, if it were to materialize, could wreak considerable pain of global financial markets.

China’s markets return without a hiccup (initially)

The turmoil in the US session, which has seen the S&P 500 drop just-shy of 1.00%, bucked what was a relative, and surprising, calm in Asian markets on Tuesday. To the puzzlement of investors, Chinese stock markets returned to trading yesterday, and despite a plethora of reasons to fall, or at least display some level of volatility, managed to come back online without a hitch. It supported a notionally positive day for Asian stocks, with the ASX 200 climbing another half-a-per cent. Of course, that looks likely to change this morning, as Wall Street’s negative lead sets up equity indices in Asia for a soft start today.

Powell speech reaffirms the Fed’s company-line

There proved one very negligible mitigant to last night’s Wall Street sell-off. And that was a speech delivered by US Fed Chair Jerome Powell. Entitled “Data dependence in an evolving economy” the Fed-head used his speech to pledge to markets, primarily, a raft of new measures designed to address the volatility recently seen in short-term US money markets. But broader macro issues were also touched upon. Powell suggested that the recent weakness in the US economy belies the fundamental strength of the US economy, that recent rate cuts are a part of a “mid-cycle adjustment”, and the Fed is on standby with policy support if its required.

A Brexit deal still miles away

Crossing to European trade, and the news flow was dominated by Brexit developments. And the news, as far as market participants are concerned, took on a negative bent. Headlines flashed that UK Prime Minister Boris Johnson had told German Chancellor Angela Merkel that a Brexit-deal is impossible if any proposal included Northern Ireland remaining in the EU’s customs union. The view is here that neither side will back down on this issue – and that means a Brexit-deal is highly unlikely. The news pushed the Pound into the deep 1.22 handle. Stocks in the European session also broadly fell.