What To Expect From US-China Trade Talks This Weekend

Okay, very good morning to you. Hope you're doing well. It is Friday the 14th of August. First of all, don't forget to like and subscribe to our YouTube channel if you haven't already done so. We've got new content coming from Eddie. He hasn't had a video now for a couple of weeks, so he's quite eager to get back on. He's going to release one on Saturday and And then Sam North's usual trade setups will come out on Sunday as well. Also remember to check out my macro menu, my thoughts fundamentally for the week ahead. You better access that on my Twitter account. I'll pin it when I post it on Sunday. But look, let's get straight in and look at the charts this morning. I'd say it's relatively quiet. There certainly are a few things I can update you on in regards to some Chinese data overnight, expectations for the upcoming US-China telephone call that's happening on, on Saturday. What can we expect from that? There's potential outcomes. There was also a fairly tepid auction that's moved government bonds last night in the US that I think is quite important because technically we're an interesting area in the US 10-year. And then we've got US retail sales, University of Michigan, coming later on this afternoon in the US session. So definitely some things for me to talk about. But as I said, overall this morning Equity index futures are relatively flat. The DAX exactly that at the moment, albeit a little bit of a bump up as Europe is coming to the market and futures just looking to pull off away from its pivot level, which was really hugging that marker in overnight Asia-Pacific session. I guess, look, quick look at the likes of the NASDAQ, and you can see here just a little bit higher, and in the context of the week and how we've performed Um, that 21 DMA continues to be a really significant level, as does that ongoing trend channel we've been looking at in the NASDAQ over the last couple of months. And yesterday we got very close to retesting the all-time highs again, of course, is where we got up to on the 6th before we then saw that quite aggressive turnaround on the 7th. So right back up there in proximity of all-time highs again in terms of number of these US indices. The NASDAQ, of course, has been the one that has continued to push up at those levels. The S&P yet to get to the all-time full kind of movement reversal of the, the pandemic, but it's getting ever closer. Uh, talking with the traders yesterday with Sam, he's still pretty bullish. He's been in a more longer term from way down at the 2800s in a position long in the S&P, and I was asking him yesterday, he's been managing the trade as it's been developing. But I was asking him what's his kind of play when we get up to the inevitable, which is, uh, that all-time high again around that 3,400, or just a few, um, ticks short of that. What are you going to do? You're going to take some? And he's pretty confident that he just wants to remain on, uh, in size, that his view is that we're just going to continue to just plow on here. And yeah, I don't necessarily disagree with that. I guess there is that, that is a strategic area to book some profit back at those highs because inevitably you might get a little bit of a rejection off it initially before inevitably we get the break like we've had on so many other occasions here as on the recovery over the last couple of weeks and months. But yeah, within striking distance again, um, we've got about, what, 17 points or so to get to that, that level. And yeah, definitely a few things that are happening later on today could liven things up, as I said, on the US data front. Otherwise, gold, we continue to kind of, I'd say, put in what is areas of consolidation and then recovery. This is looking at gold, obviously the big move lower that we had earlier in the week, but as relatively stabilization in the yield movement as to comparative to some of the steep gains that we're seeing, that kind of was a key culprit in triggering that gold sell-off. And we have continued to sort of recover, and much of this is playing out technically as it did on the descent, now for the, the bounce back higher. And just looking at a Fib retracement from that initial high on the 6th to the low that we printed obviously back midweek, uh, and that 382 reversal has been a nice measurement. You can see here the market responding to it perfectly, actually, on that initial more aggressive bounce that we saw on the following day of the sell-off. But then here now acting as a bit of a platform. And if you're looking at the intraday, not only have you got that 382, you've also got the pivot level and the low from the overnight Asia-Pacific session. So quite a nice little cluster of support all coming in and around that level of 1954 to 55, 56 type level, uh, that then marking out now the new range, which would be up at 1975, which was the high that we had in yesterday's session, of course, kind of US, um, late in the session in the afternoon. Currency markets, the Dixie's a little softer, so both major pairs up around 20 pips respectively. Cable just having a test and finding a little bit of near-term restriction on the gains at the pivot level, which was also the overnight Asia-Pacific high. And then in the euro, likewise, just trading around its pivot for the moment, finding a nice floor here. Just put an ellipse there, but you can see market has seen some relative response to that, that price level around 1.1808 in the futures at least. At the moment we've had a failed break above the pivot. Similar kind of setup then to, to cable in that respect. Um, so just keeping an eye on whether or not we can get above there. So near-term range there, but downside level support quite interesting given the weak performance that we've had and the reaction when we've got around that 1.1808 mark. Elsewhere in the crude market, things are relatively quiet for the moment. The IEA came out yesterday estimating— well, they reduced their estimates for every quarter until 2022 in terms of demand, but they did say that market should tighten as OPEC limits oil output. Just as a, as a guide, you've got the JMMC, that, that kind of technical monitoring committee meeting where they, they kind of check on compliance levels, which is absolutely key of course course, in order to get this, uh, this deal to have a meaningful impact on prices, particularly the likes of Iraq, for example, which have had to, as part of the agreement, actually step up the strength of the cuts in order to then make up for being non-compliant before. That was part of the T's and C's of the deal. So I'm interested to see whether or not that is in fact materializing. So that's next Wednesday, that meeting. So it's not an official OPEC meeting, it's a joint ministerial monitoring committee meeting, so it's not something where they'd normally change policy. It's just updates for us on how they're getting on. The Russian energy minister, Alexander Novak, said that he does not expect quick decisions on output cuts when OPEC+ monitoring committee meets next week. So I wouldn't be expecting any real changes there. So at the moment, uh, we'll see from a US data point of view. Jobless yesterday, we've gone sub-1 million now for the first time since the pandemic took hold, which is a, a positive in a way. And I guess it helps that kind of demand outlook. And be interested to see, of course, what the outcome is of the US-China talks this weekend. But for the time being, then it keeps oil, I guess, where it is. No need to really at this point, I think, push higher or lower. I think in terms of that demand recovery story, it's still fairly supportive and positive, but we're talking more about a medium-term picture than necessarily intraday here. So I wouldn't just think that that's an initiator to just buy oil immediately without a strategic point of entry. But if all things remaining equal, I kind of foresee a little bit of consolidation perhaps to see off the end of this week. What's been quite interesting is the market and how it's been responding, as you can see here, to that 21 DMA, which is the blue line. It's been pretty decent this week, going back to the beginning of the week and also last Friday, but also on prior occasions as well on the, the recovery that we've had post the, the kind of April-May dip. And so yeah, that's the, that's the kind of oil picture for the time being. But look, let's delve into some of the headlines, a couple of stories for me to update you on, starting with China. So overnight in the Asia-Pacific region, again, a little bit mixed. South Korea was the worst of the bunch. Daily virus cases on the corona front almost doubled. So again, not that the numbers are spectacularly high, but just the, the fact of the reproductive rate obviously can become— it can accelerate quite quickly. So worth keeping an eye there. China and Hong Kong a little bit lower. Stocks in Japan more fluctuating and fairly modest gains following the underperformance last night in Australia. Um, so nothing too massive to speak of that certainly is going to dictate too much the opening or influence that of the European morning, as we've, as we've seen so far. In terms of China, you had industrial output come out last night, uh, 4.8% below the expected 5.1%, retail sales -1.1%, expectations were for +0.1%. So this is just having a look at this here IP, the black line, retail sales, the pink line. And as you can see here, there is a bit of an uneven recovery happening at the moment where internal consumption, consumer confidence, and their ability on a consumer level is still fairly lackluster comparative to that of some of the industrial output figures of late. Overall though, the sensitivity in the domestic market was, was limited. The Chinese equity and, and the currency market saw very little reaction to this data overall. Overnight in China, they did have more action out of the PBOC on their kind of regular market activities. They added the most short-term funds into the financial system for pretty much about 3 months or so, going back till May, which is— if you remember, we're still in a fairly stressed position post the initial kind of March volatility. An April global lockdown at that point. So they're looking to move to reduce risks of a cash squeeze amid large government bond issuance and maturity of interbank funding, is what Bloomberg have commented on this morning. So further liquidity injections— we saw the similar thing yesterday from China. Leading on then, sticking with the Chinese theme, obviously a lot of people are awaiting then what's going to happen this Saturday. And according to Reuters report this morning, top US and Chinese trade officials are expected to recommit to Phase 1 trade deal during their review on Saturday, even though China's promised purchases of US exports are far behind schedule. To give you a bit of a flavor of that, China is falling, uh, far short of the promised additional $77 billion in purchases of US farm and manufactured products energy and services up to this point, although it has ramped up purchases of US farm goods including soybeans and corn in recent weeks. Now, a couple of points around this. For one, you remember, if you think about the period of where Phase 1 was initiated, was actually prior to the pandemic. This was going back to, uh, kind of late Jan, early Feb when they struck that deal. The pandemic in mainland China I should say the epidemic at that point hit at exactly, literally the week after or so that deal got signed. Because remember, it actually started quite early in mainland China. Before then, it started to break out into other areas like South Korea or Iran and Northern Italy. So pretty much the moment they signed that, China, in my mind, have got a pretty solid excuse to eradicate at least a minimum of 2 months of that, as they were, you know, what, what could they have done? You know, their economy, although we're talking about, as we saw with that data, uh, you know, it's well recovered from where it was, but at the time it was looking very precarious. So the fact that they were just going to start buying tens of billions of dollars of US goods was, I think, a little bit of an ask at that point. So I think they've got a bit of wiggle room on that front. And the fact then that they can also come back and say, well, look, if you look at the last 2 or 3 weeks, we have actually ramped it up again. So despite the TikTok, WeChat, consulate tit-for-tat that's going on in the public sphere, actually they've been ramping up their purchases. And this then leads to a couple of other things more politically minded. Then one is, what do we think about the outcome for this meeting? Could It's good to go into this with a degree of expectations. And I would say my base case scenario is you see recommitment on both sides to continue to adhere as best as they can to the deal, and that they will continue their dialogue on the matter. I would say the reason for this being is that I think if the administration lets the Phase 1 deal die, it becomes incredibly difficult for Trump to justify what he's been doing. Over all of these years, because it has been harmful for the US economy, and it's, and it's fractured a lot of global relationships beyond that of just China as well, because it's kind of galvanized even further this protectionist kind of mentality. And so that would also hand a massive victory to Biden, who's already been using this as quite a, a target of his agenda, which has been to kind of state about how he's failed to deliver on China and China aren't living up to the deal and that's Trump's fault and how much it's damaged American livelihoods across the nation and all these types of things. So for me, I can't see how Trump can allow this trade deal to collapse completely. And actually then, then it leads to the third part, which is, I don't want to label it conspiracy conspiracy, but it has been talked about in recent months, which is, look, Trump needs to appear on the surface to the voting public in America to be dealing with China in a certain way, which is fairly aggressive, assertive, you know, make America great again, right? But what the reports were suggesting a few months ago on the sidelines of some of the G20 meetings was that actually Trump and Xi have got a little backdoor deal going where actually he says this in the public arena, he's doing something completely different behind closed doors with China. And the idea being that perhaps even China want Trump to get a second term. I know that sounds pretty weird because you would think, why would China want Trump? Trump's like causing this trade tension and these tariffs. But what some strategists have suggested is that perhaps then China would prefer Trump, because at this point what Trump has led to is a fragmented global alliance of more Western forces, let's say. What I mean by that is it's accelerated the mentality of US against the world, whereas if you get Biden, perhaps then you get a more united ex-China Western world front where the Eurozone, the UK, and the US come back to working in more unison together. And that actually is more problematic then for China over that period. So yeah, it's just interesting. I think bottom line here, um, I think politically there's too much to lose for Trump, and I think from a China point of view, they, they will just toe the line they will commit and do what they can. I would assume that they will always fall short a little bit of the commitment, but they will do what is enough to be deemed then for both sides to be a victory in that, in that sense. So what would I suggest for this weekend? Well, if you're trading short-term positions, I would suggest not keeping a position on, even though I'm sounding like fairly confident about a fairly level outcome to this meeting. Obviously it carries big potential risk to markets, and if a surprise thing were to happen, a complete breakdown would be on the balance the more likely rather than some successful deal of sorts, because nothing really beyond words can be said. Then you're going to see a big gap in prices and you wouldn't want to be holding a position over that. So I would suggest just clearing the deck, have a, uh, bit peaceful weekend. Keep an eye— I'll tweet over the weekend all of the outcome things that I hear, and then just look to take action accordingly, perhaps on the reopening of electronic trade Sunday night if there's something interesting, or just, just come back at it on, on Monday. So yeah, that's how I'd see things at the moment. Given that this is happening on Saturday, wouldn't be surprised at all to hear Trump tweeting later on, just giving it a little extra kind of aggression on the issue, just to kind of set the frame and scene. I don't think that that should be taken any more than just him politicizing the event for his benefit politically. So yeah, rumors perhaps. Look out for any leaks, source reports about any details of these discussions, or all the feelings and sentiment going in. Could be quite interesting. If anything, I'd expect that to come out of US press. So if that were going to happen, it'd probably be into the afternoon, evening part of the session. All right, the other thing I wanted to mention was, was, um, we had it— we had quite a decent move lower in the US 10-year last night. I don't know if you guys were watching about 6 PM London time. You can see here, this is the US 10-year, but the move was even more pronounced in, in longer-dated US bonds because you had a 30-year bond auction. So yeah, you can see that one extremity of that red candlestick there. We moved down in the preceding kind of half an hour, not a massive move of course, but yeah, pretty decent on the back of an auction these days to see like an 8-9 tick move. And technically speaking, I thought it was quite interesting as well because You know, yields have been an important theme, um, for this week, uh, as behind some of the partial explanation of why gold was kind of unwinding some of its aggressive bid tone it's had over the last couple of weeks. But one of the things that worked really nicely actually post the CPI number— I know a couple of the guys got hold of a really excellent trade, uh, shortly after that, which was the 13th of July low in the 100 DMA. The CPI saw a momentary move in yields and saw the T-note pop lower, but no other asset class was really buying into that narrative. And so it was quite a good entry point technically to get long, and they rode that out through the pivot and some and managed to execute a really great trade, um, kind of early yesterday. But then you can see we— that auction has bumped us back below that level So, so we had been trading, we're kind of right at it at the moment, but yesterday we did close below the 100 DMA and that technical sensitive support level. So I was just quite interested to watch it today to see how it performs, and it has recovered a little bit here, but just giving how meaningful yields have been, I just want to see whether or not that, that potentially could open a door to resuming that downward trend that we had been seeing. Um, in terms of the auction itself, what exactly happened? Well, if you think about it, the US is trying to fund, as the title suggests here, record stimulus. And if anything, there's more stimulus coming. But at the end of the day, someone's got to buy these bonds, right? And do that— is the market going to get exhausted by the just mammoth amount of supply on offer? Now, earlier this week, we've had a couple of different bond auctions The 10-year auction was met with strong demand. Investors also snapped up nearly $50 billion of the 3-year offering with a, with another record amount. But this 30-year longer-dated amount with, with record low interest rates, the bid to cover was 2.14 times. I guess on the surface you would say that's still fairly healthy, but actually for that maturity, it's the lowest we've seen since July of 2019. The actual yield they had to pay was 1.4%, which was more than 2— well, 0.02 percentage points above market expectations. So having to actually offer a little, little bit more just to get them away, given the fairly lackluster demand. So yeah, just quite interesting. I guess it's not a major thing for other asset classes, I would say. But it's something I think that's worth just monitoring going forward because the US Treasury, if they are going to deliver more trillion dollars worth of stimulus going forward, with ever more supply has got to be offered. Um, and with yields so low at this point in time, it'll be interesting to see the appetite for picking those up. The other thing then, looking on the corona front, is Boris Johnson, who obviously delayed, um, a few weeks ago the next phase of reopening, but he's going to push ahead So as of Saturday, tomorrow, the easing of lockdown in England continues, and basically it's a twofold strategy. For one, he's going to open theaters, casinos, beauty parlors can all reopen. So some of these ones that would constitute more towards people naturally, where there's more mass kind of gathering in that sense. But the second part would be fines for breaking rules will be increased to bolster compliance. I think Every time you get fined, it doubles basically up to an amount of, I think it's a few thousand pounds. So this, this in itself I don't think is a big thing. However, the next phase of any reopening, particularly when it comes to theaters, casinos, I think this includes then weddings and gatherings of that nature of up to 30 people, anything where there's a lot of people involved does mean that there's a potential then where we need to think about over the next week or two, how does that then start to impact the reproductive rate generally in the UK. And in the UK, although it's not, um, really troubling at this point, the actual number of new confirmed cases in the UK on a 7-day rolling average of new cases per million has been going up already. And so I'm just quite interested to see then how, how this unfolds in kind of 10 to 14 days' time when we kind of have that natural incubation period of then the virus starting to show any symptoms or not. Just looking at the broader picture, US, as we've discussed this week and has acted as part of that kind of general positivity, has been the deceleration, if anything, of some of the numbers in some of those key areas. As well as hospitalizations and so on. Australia as well, which has had a really rough time with that outbreak in Victoria, but given that lockdown and fairly stringent one that's been in place in, in the metropolitan area of Melbourne, and also any movement across borders state to state, has helped to manage now. And we've seen that actually drop off in terms of new cases And then India is just continuing one way at the moment to get worse at this point in time. From a global overall summary though, uh, COVID for the moment is ongoing, it's being tracked, but it's not, I would say, the defining factor that's moving markets on an intraday basis right now. Looking at the, the calendar, what's going on today, there are definitely a couple of things to look out for. First of all, For the European morning, you've got the GDP flash estimate for Q2, uh, quarter-on-quarter expected at -12.1%, uh, the flash employment figure quarter-on-quarter expected at -1.7%. You've then got the US retail sales report, US industrial production, cap utilization, the University of Michigan sentiment, the preliminary reading for August coming out this afternoon, with the Baker Hughes rig count as well for any energy traders. So yeah, very, very busy docket. Keep an eye out then on the European-denominated assets at 10. But then really it's a US session. Retail sales, what can we expect there? Well, this is the retail sales last 12 readings, and it's been such a, a roller coaster. Obviously deep contraction with consumers' inability to spend through this severity of the main lockdown that occurred in April. Then we had this spectacular rebound, uh, in May. As you remember, in America they were quite early to start reopening, and then it's dropped quite sharply, and we're expecting another quite sharp drop again today. So the retail sales month-to-month expected to come in at 1.9%, so we should register down here. The range definitely to be aware of, 0 to 5%, so flat to 5. So with this, what I mean, generally sales recovery expected to moderate. Yep, you, you would expect so. I mean, we are looking at July, and remember what's happened in the US in July. Although things are looking a little bit better as of today on the US COVID side, through July was when we saw the reversal of the reopening of some of those key most popular states like Florida, Texas, California. So hence the reason why this number should be continuing this, this deceleration of the pickup in retail sales that we had. So I don't think that should come as too much of a surprise. I guess the thing that will be the defining factor is how much of an impact did that have. And I'd say on balance, the risk then for a downside surprise— and if we move down there, then obviously we'd be looking for appropriate responses in the in the market where yields might drop again. That might help that T-note bounce back off those low technical levels I was just discussing. Could then impede some of the, the recent dollar recovery we had late yesterday and put that back on the back foot again. And if anything, for equity markets, yeah, it's a bit of a hard one to call with equities. Ultimately, it doesn't— I don't think in one retail's reading really influenced the Fed to a great deal. I guess the thinking there being that at the moment, if good is good and bad is bad, then you might get a little bump lower in equities. But then ultimately, does— if it was a disastrous retail sales figure, you know, would that then sharpen the minds on the negotiations on Capitol Hill, which have remained at an impasse all week? Zero movement on those discussions about the extra stimulus package. And so, you know, is it going to take some really bad economic data to really just get the job done on that front, which ultimately then is a positive force for equities and for markets in general? So yeah, just keep these things in mind between initial reaction and then the following reaction you might see materialize thereafter. Yeah, and then elsewhere, Michigan, this is the preliminary number. So yeah, getting a good track of the US consumer's confidence at the moment alongside the retail sales report should be quite interesting. And of course, this is much more August data, so looking at the here and now. Speaker-wise, you've got Fed's Kaplan was a speaker early in the week. Again, fairly cautious with the rhetoric. Kaplan, kind of centrist, if you like neutral partaking in a Q&A session, 3 PM London time. So look out for that. And that's it. So any questions, of course, just let me know. Hopefully that was useful. Again, don't forget to like and subscribe to the channel. More video content coming this weekend. Otherwise, have a good one and I'll see you on Monday. Thanks very much, guys.