It might be time for markets to take the trade war seriously – McKenna Macro Markets Weekly

on May 12, 2019

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Key Takeaway

Things could have been worse last week. Were it not for President Trump’s clear and effective manipulation of Twitter and markets sentiment the lack of a deal Friday and the imposition of the tariff increase to 25% should have seen stocks and risk asset crater while safe haven plays like bonds and gold went bid.

But hope springs eternal and traders clearly think – or are betting – that a deal is coming eventually. How they can think that after the past week is hard to fathom. Perhaps it’s the temperate response from China.

Either way, even with the huge negative of trade escalation, stocks held at support while hold and rates weren’t bid as much as they could have been.


The Week That Was…

Now for the week ahead, let’s dive in.

Key Themes driving markets

From Tweeter in Chief to Master Manipulator

Donald Trump might be President of the United States but he is also the biggest market and geopolitical troll on Twitter. I have little doubt that he knows exactly what he is doing when he goads his opponents, puts out combative tweets on trade only to then follow that up with soothing and constructive tweets.

“Trump put” I saw one of the news wires headline and article over the weekend. But can the market really have a Trump Put when the President has just jacked up tariffs to 25% and has now apparently given China 4 weeks to sort this out or all imports from China will be hit?

Can there be a Trump Put when it seems President Xi holds some of the cards too?

Certainly China is playing a long game here. To hit back hard, rather than show the conciliatory tone the Chinese keep banging on about strikes me as though they are looking beyond Trump. To hit hard would be to galvanise both sides of politics against them – or at least harden up the Dems.

But President Trump seems to have covered that contingency neatly. He’s now trolling both the Democrats and the Chinese in the one series of Tweets.

Source: Twitter

So what’s next?

The price action in stocks Friday tells me the market wants to believe a deal will get done. The chart below of the S&P 500 futures shows a new low for the week, a reversal and then a close above the top of the previous day’s range.

Bullish engufing.

S&P 500 Futures Daily – Trading View

But can stocks really rally sustainably now the tariff increases to 25% are in place with more threatened. Certainly not withstanding the bounce Friday price certainly looks to have rolled over.

And, of course, part of the issue in the past week or so has been President Xi vetoing what it appears he saw as China kow-towing to US demands.

I don’t use that phrase lightly.

That said, I can’t really know the minds of either leader. But this  escalation seems to make de-escalation more difficult and thus the argument more intractable.That’s particularly the case given President Trump’s conflation of China and the Democrats together in to one 2020 issue.

A politician would say Trump is “wedging” the Democrats on China. And that means the whole of US politics  become more forcefully anti-China as the 2020 election gets closer. Unless there is a resolution that is. 

This is the book I studied for a year many, many years ago – “Thucydides: the Peloponnesian War” by Hecuba’s Story is licensed under CC BY-NC-SA 2.0

And while Trump may be playing politics for 2020 it’s clear the hawks are in the ascendancy in this Administration and that means the hegemonic battle between the world’s two biggest economies is front and centre.

Regular readers know I was banging on about the Thucydides Trap for for a very long time now. Up to this point the trade and hegemonic battles have been viewed by myself and many others as kept separate. That may no longer be the case.

And that means we are looking toward a less open, slower growth world. Markets don’t care yet. But they will.

That’s especially true if that tweet from President Trump above and of the US approach to the talks and documentatation of the agreement doesn’t change. And of course the Tweet from Hu Xijin Editor-in-chief of Chinese and English editions of the Global Time below is any indication of Beijing’s thought process – both the most recent and the one before that. 

Source: Twitter

In some ways the older Tweet is more troubling given what I’ve been saying about Thucydides for a long while…it’s where it ends up eventually. Just a matter of when. 

A reckoning or complacency?

The price action is the price action and as I was discussing with a client in Hobart on Friday evening – actually he was reiterating something I probably don’t bang on about enough – if a market doesn’t do what it should in reaction to stimuli then we get a powerful signal of reversal often.

So is that where we are after the bounce Friday?

Rhetorically I have to say no way, not on your nelly, you have to be kidding, gimme a break….And that accords with my technical view short term.

That said though, my JimmyR inidicator is still pointing up, though the price last week – using he S&P 500 futures as the benchmark – held the 15 week ema neatly on close, my daily system is short and the weekly MACD system has a sell order under last week’s low. That’s the fist sell signal on the weekly system since the second week of January. So watch out if last week’s low breaks. 

S&P 500 (futures) Weekly – Arrow is JimmyR direction

USD still can’t catch a break

The USD is another example of price action is price action and we need to pay attention to what happens when a catalyst doesn’t get a reaction. .

While the USDCNH/Y rallied with CNH ending the week at 6.8440 and while many EM currencies came under pressure against the US dollar against the majors the USD for the most part struggled.

The SGD and CAD didn’t confirm the break of the Yuan. The Euro was a slight gainer on the week, USDJPY managed to hold onto the range bottom, the Pound held on better than it should have – respecting an important level, and of course even though the Aussie dollar finished below 70 cents it too is probably holding in better than it deserves.

But forex correlations with stocks and risk are not what they were last year. Though they have been rising over the past 20 days.

So does the price action in the USD suggest we need a decent pullback before the rally can commence. Or perhaps does the lack of traction from the escalation which should have been USD positive – given the US economy is likely healthiest of the big economies and Fed less dovish than other jurisdictions – mean the the USD’s run is done. 

USD Index (DXY) Weekly – TradingVIew

My sense is that traders and investors need to see evidence the US economy is actually doing better than other economies. Sure we saw 3.2% Q1 GDP in the first estimate. But there are many sceptics and the reality is the US dataflow – as measured by the Citibank Economic Surprise Index is actually pretty crook relatively.

So the USD has an anchor dragging it back and weighing it down. Likely we need to see a continuation of the turn in the data for the USD, and perhaps for stocks too as this chart of the rate of change of both versus the US CESI score suggests. 

And bonds aren’t running either…not really

And it’s not just the USD that’s not convinced the trade war has escalated and the US is in a relatively (eventually anyway as suggested above) more healthy position. 

US 10 year Treasury yield Weekly – TradingView

There is however a 0.84 correlation between the US 10’s and USDJPY which in turn has a 0.84 correlation with moves in the S&P 500. So watch that space folks. Stocks go offered its time to be tactically long of bonds. Personally I like them structurally as well. 

And just quickly,  the CFTC data

In terms of the majors, there has not been a lot of change from a forex point of view. Little material moves in the grand scheme of things so no necessary change to positioning. WTI longs were pared a little – no surprise really. While gold longs are clearly waiting for a bigger break – in the price of gold or of stocks – before diving back in with gusto – that’s what a range will do to you :S

I’m not exactly sure what’s going on with the specs when it comes to US 10’s right now. As you can see in the chart above there is not a lot of directional bias, but as a “gun to the head trade” I’d rather be long than short. Yet specs are through the roof at the biggest net short since the big uptick around the time of the December FOMC meeting.

And of course you can see that last week’s little bit of stock market funkiness took out a few weak short volatility players, though shorts are still high historically.

The week ahead

you have to wonder if there is even a point to worrying about the data this week. realistically it’s going to be about China’s response, de-scalation or escalation. You’d probably argue from the tweets I highlighted above it could be a little messy. 

Anyway, Monday is quiet with the relatively little data out. In Australia we get home loans data for march, the Kiwis release food inflation data we get Chinese FDI and vehicle sales, while japan releases its coincident and leading indexes. In the US we get speeches from the Fed’s Rosengren and CLarida along with consumer inflation expectations.

Tuesday kicks off with export and import prices in South Korea, the BoC’s lane is giving a speech early doors Asian time, visitor arrivals are out in NZ and then we get the monstrously important NAB business survey. Want to see an RBA easing? You’ll see it here first. Japan’s eco-watchers survey is out, German inflation too along with price data for Spain. UK employment data is out, the ZEW’s for Germany and Europe and we get the NFIB survey along with import and export prices in the US. We also get speeches from the Fed’s George and of course it’s API crude day.

Wednesday is Westpac consumer sentiment day in Australia, we also get the wage price index, and its China’s triple treat day with the release of investment, industrial production, and retail sales for April. German GDP for Q1 is out, as is French inflation and EU employment. Canadian inflation, US retail sales, NY Empire manufacturing, industrial production and associated data, NAHB housing index, business inventories, and speeches from the Fed’s Quarles and the ECB’s Coeure and Praet are speaking along with  the Bundesbank’s Buch as well. EIA crude and other data is out as well. 

Japanese PPI and Australian employment are out Thursday along with Chinese house prices and a speech from the RBA’s Bullock while later in the day the Bundesbank’s Weidman will speak. In Canada manufacturing sales are out along with US building permits and housing starts are out along with the Philly Fed and jobless claims. The ECB’s Guindos is speaking and there is a Eurogroup meeting. Jens Weidman is speaking again. 

Friday is PPI day in NZ, a sleepy one in OZ, but we get EU inflation data. More speeches from ECB officials and then we get Weidman, Claridea, and Williams all speaking as well.

And of course Saturday is the Australian Federal election.


Greg McKenna
@gregorymckenna on Twitter
In collaboration with SMART Markets

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Greg MckennaIt might be time for markets to take the trade war seriously – McKenna Macro Markets Weekly