US and China disagree

By David Morrison  |  19/11/2018 15:37

Disagreements at this weekend’s APEC summit mean the focus is now all on the G20 meeting at the end of this month
 
Disagreements between the US and China were evident at the Asia-Pacific Economic Cooperation (APEC) summit over the weekend. This ended with the group unable to produce a joint communique for the first time in its history. Investors are now focusing on an expected side meeting between President Donald Trump and Chinese President Xi Jinping at the G20 in Argentina at the end of this month.
 
Positions harden
 
The breakdown between the world’s two largest trading powers followed a tense week of discussions. It is understood that China objected to a reference in the draft communique to ‘unfair trade practices’. But what was of most concern to investors, desperate for the US and China to end the escalating tariff tit-for-tat, were comments from US Vice-President, Mike Pence. Mr Pence said there had been major differences between the US and China, not just on trade, tariffs, forced technology transfers and intellectual property theft, but also extending to human rights and freedom to navigate the seas. If anything, this sounds like a hardening of positions on both sides, suggesting there may not even be a meeting between Trump and Xi Jinping later this month. However, the immediate market reaction was muted, suggesting that investors sense some brinksmanship being played out but that the two leaders would ultimately reach agreement. That may prove to be overly optimistic.
 
Weaker dollar?
 
Last Monday the EURUSD was trading just above 1.1200, close to an 18-month low. But one week on it’s retesting resistance around 1.1460. If it can push on and take out the intra-day high of 1.1500 from 7th November then further gains look likely. But otherwise the current move may just prove to be a countertrend bounce as the EURUSD has posted a series of lower highs and lower lows since the end of September. Worries over Italy’s proposed budget and the UK’s withdrawal process from the European Union persist. However, these were eclipsed last week by a bout of short-side profit-taking and comments from members of the US Federal Reserve. On Friday Fed Vice Chairman Richard Clarida and Dallas Federal Reserve President Robert Kaplan both expressed caution over the global growth outlook. This led traders to reassess the pace of future rate hikes from the US central bank. According to the fed funds futures market, the probability of the FOMC hiking rates next month has dropped below 70% from over 75%  a week ago.
 
More Brexit grief
 
The British pound continues to exhibit a high degree of volatility as UK Prime Minister Theresa May struggles to sell her Brexit deal. She had a better weekend as there were no further cabinet resignations and it appears that the threat of a ‘no confidence’ vote has passed for now. This helped sterling to recover against both the dollar and euro in Monday’s trade. But as things stand, there seems very little chance that her ‘Chequers Deal’ will pass through parliament in its current form, so expect further sharp headline-driven gyrations in the pound over the coming weeks.  
 
US Thanksgiving on Thursday
 
We’re going into a holiday-shortened week with US markets closed on Thursday for Thanksgiving. This means that trading volumes will be lighter than usual, but that can often lead to a pick-up in volatility. Tuesday sees the release of minutes from the Reserve Bank of Australia’s last monetary policy meeting, the Bank of England’s Inflation Report Hearings and another OPEC-JMMC meeting, which is bound to affect the oil price. Later in the day we have US Building Permits and Housing Starts. On Wednesday we have US Durable Goods, Consumer Sentiment, Inflation Expectations and Crude Oil Inventories. Thursday brings the release of the ECB Monetary Policy Meeting accounts and it’s US Thanksgiving. Japanese markets are closed on Friday. Later that day we have Flash Manufacturing and Services PMIs from across the Euro zone together with Canadian CPI and Retail Sales.
 
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