Risk-off kicks in on poor US data and in a stream of trade headlines, VIX +15%
|- US benchmarks take a hit following poor US data and a series of trade headlines crossing the airwaves.
- Wilbur Ross is telling Fox that President Trump will increase tariffs if there is no China deal.
- Hong Kong Human rights Act signing sparks up concerns over US/Sino trade relations.
- White House advisor, Conway, says phase one of China trade deal is being written up.
- Trump to restore tariffs on steel from Brazil and Argentina.
In a nervy start to the week for US markets, US stocks have been roiled in recent trade following a period of Thanksgiving holidays. A series of trade headlines have streamed through that do all but instil 100% confidence in investors who are seeking a resolution to over 17 months of a trade standoff between the US and China. However, the headlines are conflicting and US data was weak which has made for a sell-off in tentatively high US benchmarks on Wall Street, fuelling a bid into the VIX which met a high of over 15% in slightly earlier trade, (this was the highest level in nearly six weeks).
At the time of writing, the Dow Jones is down 0.74%, or over 200 points and the S&P 500 is off by 22 points, or 0.71%. Gold rallied back towards neutral by just over $10.00 from a low of $1,454 to tread water in the $1,460s and the yen rallied across the board resulting in USD/JPY to fall from a high of 109.72 to a low of 109.00 the figure. Meanwhile, and a little strangely, AUD has been less affected – AUD/USD remains elevated by over 80% and trades near to the day's highs of 0.6822 at the time of writing.
Conflicting trade sentiment
The fact that Wilbur Ross has stated that the US will increase tariffs if there is no China deal should not come as any surprise, but it doesn't exactly offer much conviction that the US and China are, as Trump put it recently, 'in the final throes' of a trade deal. It comes as a reminder that US and Chinese relations are fragile, to say the least, and a trade deal could be jeopardised at any moment. Indeed, the latest moves by Trump to sign the Hong Kong bills and China's retaliation are a perfect example in this regard.
It has been reported by a source that told the Global Times that China will release an "unreliable entity list" soon, which includes relevant US entities. Secondly, the US House is expected to pass a Xinjiang-related bill that will harm Chinese firms’ interests, prompting China to speed up the move. Trump was earlier reported stating that the HK bill doesn't make the trade talks better. Despite all of this malaise, US advisor, Kellyanne Conway, said a phase one of China trade deal is being written up. However, what markets are figuring, is that that's all well and good, but it's being written up while walking through a minefield of ticking time bombs.
In the same vein, Trump has said he will restore tariffs on steel and aluminium imports from Brazil and Argentina and he has justified the move saying those countries' weak currencies had made it harder for US food exports to compete. "Brazil and Argentina have been presiding over a massive devaluation of their currencies, which is not good for our farmers," Mr Trump said. Trade wars are not going away and that is creating uncertainty and angst in markets.
Update
- Brazilian government is in touch with US trade representatives and other agencies on Trump's moved to restore tariffs on Brazilian steel and aluminum.
- Brazilian government rejects Trump's claim that it is manipulating its currency.
AUD remains robust despite intermarket drags
AUD/USD is shrugging off the concerns. Usually, the Aussie is mostly correlated to the commodity complex and trades as a proxy to the trade headlines, so its robustness deserves some deeper digging into to really try to understand where the focus lies within these headlines.
Firstly, the week started with a series of good news from the Chinese economy and its manufacturing sector which has fuelled a bid into the Aussie. In today's session, the US data was dismal with US ISM manufacturing missing the mark and contracting deeper from 48.3 prior to 48.1 and below the expected 49.2.
All in all, that would do it for AUD/USD bulls, and it would appear that the trade headlines, for the time being, will be taken in their stride when it comes to the Aussie. However, what should be a canary in the coal mine to Aussie traders are the price actions in copper, base metals and the like - Copper, for instance as a barometer for the global economic health, is off -0.25% on the news. Therefore, an air of caution could be advised as we move into the Reserve Bank of Australia and Gross Domestic Product event risks that kick off later today in Asia which could entice a delayed bearish correction, if not solely motivated on profit-taking.
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