Markets May Rally as Tariff Relief Outshines Trade-Pact Letdown
The onshore yuan may rise and the Australian dollar will be boosted by a potential advance in crude oil and industrial metals.
(Bloomberg) -- Even though it wasn’t the trade deal some analysts hoped for, China dodged more tariffs, and that may be enough to spur a market rally.
The onshore yuan may rise and the Australian dollar will be boosted by a potential advance in crude oil and industrial metals, according to Vijay Valecha, chief investment officer at Century Financial Consultancy in Dubai. He also sees the euro strengthening against the U.S. dollar in the near term, buoyed by Prime Minister Boris Johnson’s decisive win in last week’s U.K. election.
Washington and Beijing agreed to a first phase of a broader trade deal on Friday that will see China boost imports, including of American agricultural products, and the U.S. halving duties on $120 billion of Chinese goods. The U.S. has also delayed levies that were due to be imposed on Sunday, and China said it will suspend additional tariffs on certain American imports.
While the trade deal fell short of some analysts’ expectations for a bigger decrease in tariffs, the delay in Sunday’s levies on Chinese goods is a comfort, said Charles-Henry Monchau, a managing director at Al Mal Capital in Dubai.
“The mood should be positive” in the short term, he said, adding that a risk rally might last a few days. He’s expecting the U.S. dollar to weaken and emerging-market currencies to advance.
The Deal
Initial euphoria over the deal sent yields on 10-year U.S. Treasuries to a one-month high of 1.95%. They closed at 1.82% as investors realized the pact fell short of expectations. Currency traders, meanwhile, appear to be in watch-and-wait mode. Early Asia-Pacific trading Monday saw the euro and the yen holding close to the levels where they ended last week against the greenback, and while the Australian dollar was in the green, its move was relatively limited to start the week.
“This is only a short-term solution,” Luciano Jannelli, the head of investment strategy at Abu Dhabi Commercial Bank, said in a Bloomberg TV interview. “The big issues have not been tackled yet.”
Implied volatility in global currencies, as measured by a JPMorgan Chase & Co. index, rose from the lowest level in more than five years, and the offshore yuan suffered its worst sell-off since August.
“One of the reasons for some of sell-the-news behavior on Friday is the fact that the decrease in the tariff in aggregate is about 10%, and some were betting on about 20%,” Monchau said. “The most important thing now is phase two, because that’s the hard part.”
It includes agreeing on technology transfer, intellectual property, and state subsidies, which Monchau described as a big hurdle.
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Other Drivers
There may be more than just the trade deal driving markets on Monday. The yuan could find solace in China’s industrial production and retail-sales data, both of which are expected to accelerate on a year-on-year basis.
That said, the mood may be soured by the biggest dollar bond default among the nation’s state-owned companies in two decades.
And later in the day, the same series of events that may have contributed to turmoil in the U.S. repo market will come together for the first time since September: quarterly corporate tax payments and a mid-month Treasury auction settlement. If overnight rates stay elevated, it may be a sign of volatility toward year-end.
The difference this time is that the U.S. Federal Reserve is flushing the market with liquidity. It announced last week that it plans to offer $490 billion in liquidity via repo operations for the turn of the year, including $75 billion that it has already injected.
“Less Brexit and trade uncertainty paired with a truckload of dollar liquidity. No one dares to be short risk in such an environment,” Nordea Bank analysts including Martin Enlund said in a note emailed on Sunday. “The only material risk for reflationary trades into the holidays is if everyone is already positioned that way.”
--With assistance from Manus Cranny, Filipe Pacheco, Aline Oyamada, Benjamin Purvis and Michael G. Wilson.
To contact the reporter on this story: Dana El Baltaji in Dubai at delbaltaji@bloomberg.net
To contact the editors responsible for this story: Paul Dobson at pdobson2@bloomberg.net, Paul Wallace, James Amott
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