Navarro Comments On Trade War Spook Markets

The trade war is over. Just kidding. That is literally what's happened in the overnight Asia-Pacific session. Really volatile session. I'm going to run you through some different graphics and charts, but essentially overnight we've had a situation where it looked like for a brief moment in time that the trade war was in fact over according to the trade advisor Navarro in the US, and that caused an immediate spike across assets showing how markets continue to be super sensitive to what's going on with the trade deal, you know, despite the focus we've had elsewhere on COVID. However, shortly after, I'll talk you through the narrative, markets have reversed. He said those comments were taken out of context. Trump has tweeted to kind of say as well how they he thinks that the trade deal is still on and China will commit to their pledge and so on. So let me just show you the overall sentiment this morning. Uh, before I begin, don't forget to like the video and subscribe to the YouTube channel. Plenty more content coming your way throughout the entire week. But looking at the charts here this morning, and as you can see, you've pretty much got these extreme kind of pops reflective across every single different asset class. So in the equity markets here, for example, You can see we've had this extreme kind of V-shape where we fell down toward what had been quite a key technical area actually, which was around the low point that we had in yesterday afternoon session, uh, the, the overnight session as well, and then some previous data points going back to the 17th or the 16th and the 18th. This might make a little bit more sense though from a timings point of view. You know, the guys on the, the Squawk News, Squawk, did a had a fantastic job in, in the overnight. Um, I've gone back through and, and just kind of gone through and looked at the headlines and when the comments actually came out. And the Navarro comment came out roughly at around 2:03 AM London time, and there was a good couple of minutes there to get on that move. Before then, it started to get kind of circulated and broadcasted across other major newswires, and then obviously we saw a pretty spectacular move. And Somewhat exacerbated, of course, by the overnight conditions. Liquidity obviously pretty thin at that time of night. And, you know, for anyone who's new to markets, sitting there thinking, well, you know, could you have gone on that move? And I mean, the answer is, well, it depends. Depends if you're really lucky. Um, and what I mean by luck is you just happen to be up in the overnight session. Uh, sometimes if you've got various different chart alerts, or you've got— for me, I, I get the guys on the Squawk desk to actually text me, but that's because of the relationship I have with them. So if there is something big that happens like that, you know, if it was super big, they would give me a call even in the middle of the night. So having some mechanisms like that certainly helps. But yeah, you definitely had timing on that first one to, to ride some of that move back down. The Navarro retraction came and the markets were obviously fully engaged at that point because most people were aware of the overnight developments. And so you had this extreme pop all the way back to reverse the entire move. And then Trump came back with a, with a tweet to basically say that the trade deal is still intact, and then we reversed the entire move. So net-net of the volatility overnight, we are pretty much at scratch from where we were before the entire episode of volatility that had been seen. So as you would imagine, With that move in equities, what did that mean for T-notes? Well, T-notes spiked and fell, gold spiked and fell. And let me just give you a run-through then of some of the headlines and other charts to, to kind of summarize the move. Well, here, here is some of the other movement that we did see. The, the VIX July futures rose more than 8% before then dropping back. If you're looking at this, is looking at the orange line is the dollar spot index, and then the black line is dollar-yen but inverted, just so that the two are kind of in sync. And you can see here immediate kind of risk-off reflection, so flight to quality into the dollar, and then completely reversed when the rebuttal came out about the comment taken out of context from Navarro. The Australian currency as well, given the close trade ties to China, very sensitive to the trade war developments. And the Aussie dipped quite sharply overnight, but again fully recovered, but has been slowly just grinding a little lower as we've gone into the European open. So what exactly happened? Well, Trade Advisor Navarro responded basically to quite a lengthy question on Fox News where he was interviewed, and he was asked whether aspects of the trade deal was over, and he basically replied saying It's over, yes. And, and, uh, it took the market, I think, a little bit of time. Perhaps, you know, if you think about the trade advisor Navarro, he's not a chief architect of the trade negotiation ongoing between the US and China. That is the trade— well, the Treasury Secretary Steve Mnuchin and then the Trade Secretary Robert Lighthizer. They're the two, like, main guys who are involved in these discussions, not Navarro. And so perhaps not a lot of people were tuned in at the time, certainly at that time of night, and in the US in the evening it takes a little longer for it to gain a bit of traction, for it to circulate accordingly, then for action to be taken and then to be reflected on the charts. So hence that little latency with the actual kind of move or reaction on that initial phase. Um, then what happened was Basically, this— Navarro came out, he walked back to his statement implying that the trade deal between Trump and Xi Jinping is over. He basically said that his comments were taken wildly out of context, and this came within the kind of hour or so after he initially delivered that, because he'll know full well what the stock market reaction would have been— say, the stock market futures reaction would have been. And so he quickly walked that back. Um, not forgetting as well, this is the same guy when asked about John Bolton's, um, kind of, uh, memoirs that he's written quite negatively about administration and their handling over China. He did say— he basically blasted Bolton and said that what he's doing is the equivalent of swamp revenge porn. So this guy certainly got his way with words, um, in that respect. But yeah, not only did he walk it back, but then Trump came out and he basically tweeted shortly after as well, pretty quickly, this, that the trade deal is fully intact. Hopefully they'll continue to live up to the terms of the agreement. So yeah, for me, there's really, there's really two points I want to make here. Now just going back to the chart here, first point is the way of which the market tends to react to this type of information. And what I mean by that is, well, where is the kind of opportunities when you're trading this type of news-driven event? And the real opportunity comes with the first, first bite, if you like. If you're not in that one, then it can get a little bit tricky. Um, now I know what it's like when this type of situation develops in real time, because in, in hindsight, in the rearview mirror, it looks like obviously quite an easy short, but at the time It can be a little bit more nervy than that because he says a comment and you think you know what you heard and you want to get short, but actuality, the market's not really moving. So you're thinking, well, it's almost like your interpretation is too quick and you're too, you're too on the ball for the rest of the market, and you kind of second-guess it a little bit. So you've got to have some pretty strong conviction of just following through on what you thought you heard. Perhaps then the actual trade entry point for me— I mean, I'm just looking here on a, on a very tight time frame just to kind of give the example of, uh, of execution. For me, the trade opportunity would have come— you would have heard that news, you would have been a little bit second-guessing yourself going, why isn't the market reacting? This is definitely negative. The market then does react breaks that previous low there, which then trades a little heavy. And as you can see, there's a cluster of price activity that we had at the end of Wall Street trade. This is looking at the S&P future, the reopening of electronic trade. And, and here then, that was your opportunity to get short— the break and what we call the classic entry— to then play that market back down accordingly. So that, that for me would have been how to have played it. But one of the other things here, you can see if I put it back on a 30-minute, you see how the market, as I said before, respected some of these previous lows. So whenever you get a fast money move like that, you want to be thinking, well, I need to be booking this trade, scaling out of it to ensure then that if the market turns on itself and there is a rebuttal, that I'm not gonna, you know, put myself in harm's way. In that respect, these trades by definition are very short-term and You know, whenever you do get that type of move in the Asian session, it does tend to be over-exaggerated to a certain degree. And as I said, reflective of the fact that there's not a lot of bid and offer in the liquidity in the market at that point in time. So here you can see, as soon as you got down to around that, that kind of pivot level, you can see that the fast money traders were just booking some of that profit. We go back down to those previous lows that I looked at on the 30-minute chart and then you're out of that trade. I definitely would say that at that point, you know, you'd have your stop trailing pretty tight to then try and avoid this type of situation. And you can see from the characteristic of that candlestick when the Navarro retraction came out and he basically said his comment was out of context, how fat that green bar is on the upside. And that's what you want to try to avoid in this situation, you know, particularly when it comes to commentary from the Trump administration. You know, you can almost guarantee then that there's going to be some type of response, um, in that. And particularly when there's been a pronounced move in markets in a negative way, if you think about it, that's definitely what they don't want really to happen. They want to talk tough on China, but they don't want it to have a meaningful lasting impact. So by that point, you really want to be out of the market. You know, these are short-term trades in that respect. Trump comes out, obviously you get another little bump higher as he kind of says the trade deal is fully intact, and then the whole thing's reversed. So for me, there's kind of a couple of different phases to the move. The one that's most harming is the retraction, but the same thing can happen often when you get a newswire source report, you know, like saying the ECB room— or sources say the ECB are going to do X, the euro might move. Really, you want to be out of that trade pretty prompt because usually what the process is, what happens is Bloomberg source says this, the Reuters source says that, the market flips on itself. So just a couple of words of warning there for anyone new to trading. Things have steadied though, and this is kind of the second point that I wanted to make. And if I just— I'm going to use this picture just to give me a bit of a backdrop as I discuss it. This, to me, you know, when you're coming into the market this morning, I don't want you guys to be kind of somewhat influenced by the activity that's happened overnight. For me, it's really important now that you hit the reset button, and it's almost like, well, if you weren't part of the action overnight, then for me, this activity, these comments, given the source is Navarro, I think are absolutely redundant. I don't think they mean anything. Um, there's a couple of things that you'll know that are happening at the moment in various pockets of the United States of America. COVID-19 cases are rising quite rapidly. We've seen record levels in the likes of California, Florida, Arkansas, Carolinas. You know, there's some key areas here where cases are rising very sharply. And so this has put out questions then about the impact of the US to be able to reopen. We obviously saw the news about Apple, for example, not the Apple stores as the be-all and end-all. But is that, you know, a sign, for example, of what could be then a delay in these overoptimistic expectations about how quickly the economy can reopen? So at the moment, Trump is in full assault to try and spin and frame the narrative that this is the, the Kong flu, you know, this is the Chinese virus, as he did in his weekend when he was in Tulsa, I think it was, in Oklahoma, when he was having his first kind of main physical rally again, you know. So here he really needs to try and pivot away that as these cases get worse, which undoubtedly that they will, they've probably not quite hit their peak yet in the second phase wave that we're seeing in some states, then he knows he's got to start talking this in a certain type of way. And so what I feel he's doing here, and I would not be surprised at all because tactically I'd probably be thinking the same, that Trump and Navarro have probably coordinated this type of scenario where what they're trying to do here is send a little bit of a political message to China as to say, look, we are willing to end this trade deal completely. And we know that that's not the case, but they just want to put that out there on the table. And soon as the markets react like they do, it's kind of like, well, no, actually that's not what I said, that's out of context. And then Trump comes out very quickly, suspiciously quickly, and then tweets, yeah, actually the trade deal is still on. But that— they've already achieved their objective there. Markets have recovered, we're flat now from where we were, and But that warning sign, that gun has been put on the table now as far as the, the US tactical approach politically is concerned. So yeah, for me this is all just politics, you know. Trump also following up as well, saying that a second stimulus checks for Americans are going to be coming for the COVID-19 aid package. Details are coming in a few weeks. So it's a full-on assault at the moment as far as Trump is concerned. 'it's a Chinese virus, we can end the trade war.' But actually, no, the trade war's going ahead, the agreement is in place, and actually American citizens, don't worry if you are losing confidence, I'm gonna swing you another stimulus check your way. It's all gravy at the moment. So yeah, I don't think you should get too spooked by what's happened. Perhaps I will end up being wrong, but I don't really think it's a big deal, quite frankly, despite the severity of the volatility that was seen in the overnight session, of course. So yeah, that's my, my take. The other thing here as well, that as a proxy— and I've mentioned this a couple times before, but it's always interesting how correlated it is to these, these kind of bumps, if you like, in negotiations between US and China— and that is that North Korean provocations raise fears of military escalation, where Kim Jong-un is using threats against Seoul to Set negotiations with the US, according to analysts, a warning. You know, this is the sort of thing where, again, Trump doesn't want to look weak in his control in other geographic regions around the world as well. Remember, he was the one who was really pumping it that he had brokered a historical peace agreement only, what, probably less than 2 years ago when the North and South literally crossed over the DMZ line and to shake hands for the first time, with Trump being the main investigator of getting that, that deal done. And now, any, any, um, the way that China tends to respond here geopolitically is by unsettling the Korean Peninsula. Now we know that there's no direct obvious communication, but we know the strategic alliance that these two countries have. So if Korea, North Korea starts making sounds against the US allied country, which is Seoul in South Korea, that makes Trump look a little weak. In his control, and what otherwise was quite a key kind of, you know, badge of honor, if you like, of his administration and what he had achieved in that peace agreement. So all of these things are definitely connected in a geopolitical sense, and that's what I think this is. This is purely just, uh, strategical or strategic moves on, on the political side. So for an intraday trading basis, what I want is for you guys to kind of almost come to the notion that, look, we're all square again. Now, the only one final thing I would say is that what you can evidently see is that markets do remain very sensitive to trade war news. Headlined reaction to a certain type of trade war comment from a certain type of individual can have the propensity to move the market quite sharply, as you've seen. So hence the reason why you always need to be kind of semi-engaged, listening to the squawk, keeping an eye on Twitter and the news feeds just in case. But hopefully my explanation about the execution side, you know, it was a little bit over-pronounced because of the overnight session, but there's definitely a method to how to trade that type of, um, kind of headline-driven event. All right, a few other things I just want to cover off, and then I'll wrap things up. This is Talking about the UK, and what we have here is Boris Johnson today reject, or will reject, misgivings for some leading scientists and press ahead of, uh, with a plan, and will basically push ahead with a plan to cut England's 2-meter social distancing rule. He'll also add cinemas and galleries and museums to the list of premises able to reopen on the 4th of July. Pubs, restaurants, hotels, hairdressers will also be given approval to reopen their doors with coronavirus precautions on the 4th of July. This comes a day after the death toll from the virus in the UK had risen by just 15— one-five— that is the lowest in fact since mid-March. So yeah, definitely Boris in a similar situation of course to what we've seen in other areas like the United States of America, where these politicians who are in charge are definitely under pressure to to kickstart the economy again. And part of that would be helped along by a reduction of the social distancing rules to what I think they're calling the 1-meter-plus rule rather than 2, allowing then some of these other types of sectors to reopen to some degree of normality. And obviously that means people get back to work and the economy can start somewhat functioning again. Whether or not though that comes at risks, of course, of a secondary virus. That's the tail risk that we'll be monitoring. The other thing is this, and I'm covering it really more again for anyone who is relatively new to monitoring this type of information. So basically, Iran-backed Houthis have been— well, Saudi has intercepted a ballistic missile headed to Riyadh from Yemen. Now, one of the things here is that that sounds like quite a punchy headline. You know, you would see that and you'd think, hang about, what, there's a neighboring country where there's Houthi Iran-backed militants firing ballistic missiles on the capital city of Saudi Arabia? That sounds quite worrying. The problem is here is that this happens frequently. The Iran-backed Houthis have been fighting Saudi-led military coalition since basically 2015. So about the last, well, over 5 years now, they have repeatedly claimed responsibility for attacks on targets in Saudi Arabia. They try to also disrupt the Aramco network, particularly any infrastructure based in the south of Saudi Arabia. And this is all part of the kind of ongoing proxy war that is then the underlying tension between Saudi Arabia and Iran in the Persian Gulf. So yeah, I just wanted to really stress that, you know, you see a headline like this, context is definitely important because as you've seen in oil, it's not interested and quite rightly so. You know, as nasty as this headline might sound, it's not a market mover because this is, this is actually the normal status quo. What did move the market overnight was a momentary blip on the Navarro comment, but obviously that's been reversed like every other asset has. All right, a few other things to look out for for today. There are some meaningful data points coming out momentarily, uh, this morning. So I'm just wrapping this up, just coming up to half 7 AM this morning now. But as we go through 8:15, 8:39, we're going to get the French, the German, and the eurozone Manufacturing and Service PMIs, and these are indeed the flash numbers. The UK numbers will also come out at 9:30. So all of these are important. The PMIs always are, they're forward-looking, so it does give us a little bit of a, a kind of a barometer of how confident people are about the, the future. One thing I would say is that most of these data points are going to reflect quite sharp bounces from their previous numbers. I think I mentioned this in my macro menu issued on Sunday, my kind of look ahead. I wouldn't read too much into that. And the point being here is that you're coming from a very low base. You know, the PMI has got absolutely decimated as a reading during the midst of the lockdown. So as we start to reopen, albeit in phased and gradual approach, then we are expecting this kind of almost V-shaped movement that we've seen with payrolls, that we see with retail sales. The PMI should follow suit. The problem that we have is that when you start looking at some of the underlying activity in the economy on— in, in real terms rather than these soft sentiment-based indicators, is that the economy still is quite far away from functioning anything like it was pre-COVID-19. So if we go back to sort of January, February time So this is a diffusion index. It basically means is how confident are people. They either are or they aren't, and to what degree then will dictate whether this figure is over 50 and expansionary or below 50 and contractionary. So yeah, confidence is going up does not necessarily mean that confidence can't come back down all the meantime before then reality actually takes place. So, um, yeah, will it move the market? I mean, if we get a spectacularly strong number, sure it might, but what I'm saying is, is that Um, it might be a fairly short-lived response, um, because I think other people will be looking at a similar way that I've been explaining. Otherwise, going into the afternoon, you get the US equivalent from Market, the data provider. Otherwise, it's relatively quiet in the US session. You've got the new home sales data, you get the weekly oil inventory numbers coming out the API. There is a Chinese-Russian-Indian foreign ministers meeting happening. No set time today, but just given the context of what's just happened with some of these US-related comments, you know, the relationships being forged between China and Russia is always quite interesting. So maybe worth keeping an ear out for that. And then Bank of England Governor Bailey is speaking at an event, Women in Finance event, at 9:45 this morning. And that's it. So Yeah, any questions, feel free to leave me a comment on the video. Absolutely happy to, to engage and help if I can. Hopefully you found that session useful. PMIs this morning definitely warrant monitoring quite closely. But with that, I wish you guys a good day ahead. Thanks for listening.