Mixed messaging about trade-talks confuses, concerns markets

Trade-war dominating the news flow in markets

The attention in global financial markets remains fixed on the ups-and-downs of US-China trade-talks. Mixed messages are still being received from both sides, and that’s lead to a slight diminishing in traders’ risk-appetite. The S&P 500 closed at record highs again to end the week, nevertheless. Significant moves are still occurring in bond and gold markets, however, as traders price-in improvements to the global economic outlook. The ASX 200 is set for gains this morning, after having traded practically flat on Friday, in a day whereby market participants were mostly preoccupied with the RBA’s Statement of Monetary Policy, which delivered a slightly downbeat view on the economy.

Traders still deciphering details of trade-talks

Traders are hanging onto every trade-war headline as they come through the wires. Though hope remains high that a trade-deal is imminent between the US and China, the point of contention is what that deal may encompass. Some confusion exists about where and when any deal will be signed – however, that’s all considered to be quite a superficial issue. The crux of the matter currently is whether any trade-deal will include a roll-back of existing tariffs, or not. The Chinese, obviously, are pretty adamant that such a policy is a necessary pre-condition to any agreement. The Trump Administration, curiously, seems a little divided on the subject.

Divisions in, and mixed messaging from, the White House

From the outside, there looks to be some sort of miniature power-struggle going-on within the Trump administration. The past several days has seen several conflicting messages about whether the White House is open to rolling back tariffs on the Chinese economy. The political strategists and economic consultants in the team appear keen to be rid of the tariffs and free up the economy leading into the 2020 election. But the “China-hawks” like Peter Navarro are less than obliging, firing off numerous warnings in the last week that despite indications to the contrary, the tariffs on the Chinese economy aren’t going anywhere.

China hawks driving White House policy

Judging by the US President’s most recent commentary, it’s the China-hawks who are winning the argument, right now. Stock markets were somewhat hobbled on Friday night, after US President Trump stated the US has not agreed to unwind tariffs. US equities sold-off off the back of that news – before, admittedly grinding out another new record high in the final stages of Wall Street trade. Overall, optimism remains that the trade-war has achieved an inflection point, and that that should benefit global economic activity. The quandary is, however, whether there’s to be further progress from here – or whether this is all the market will get.

Traders still pricing in better global growth

When assessing the moves in broader financial markets, one is lead to the assumption that things ought to get better from here for the global economy. Sovereign bond yields continue to climb as traders price in a stronger outlook for growth and inflation, with the yield on the US 10 Year Treasury note – for one – climbing to a fresh 3 month high towards the end of last week. The move in bond yields has seen gold prices plunge to its own multi-month low, as the combination of higher global rates and higher risk appetite draws traders away from the yellow metal.

ASX lead by cyclicals, lagged by defensives

The ASX200 ought to open quite substantially higher this morning, according to SPI Futures, despite Wall Street’s somewhat soft-lead. Australian investors will be hoping for a slightly stronger week for the stock market this week, with the ASX200 only managing to gain 0.8% last week. The market has been very macro-driven in the last 7 days. Growth sensitive and cyclical sectors of the market have underpinned the ASX200’s strength, courtesy of improvements in the global economic outlook. By the same token, defensive and yield sensitive sectors have been the laggards, with utilities and real estate stocks suffering from the recovery in global bond yields.

RBA keeps door open to rate cuts in 2020

The domestic news flow was dominated by the RBA’s Statement of Monetary Policy on Friday. And what was delivered by the RBA was perhaps slightly to the “dovish” side. The RBA downgraded its growth forecasts for 2019, deferred when it expected domestic inflation to return to target, and strongly implied that full employment and satisfactory wage growth sit some way-off for the economy. While clearly wishing to keep their powder-dry, the RBA has kept the door wide open for further policy easing in 2020. Traders are once again giving a 50-50 chance of a cut from the RBA next year.