Morning Commentary: Light at the End of the Tunnel?

Foreign Exchange - Morning Commentary
Light at the End of the Tunnel?
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Yesterday, things seemed pretty bleak regarding the prospects of a near term conclusion to Phase 1 of the U.S. - China trade deal. The U.S. Senate passed unanimous legislation in favor of the pro-democracy movement in Hong Kong, and the White House, late in the day, indicated that a signing of the Phase 1 document might not even occur this year. Markets, by and large, had a negative reaction, but equities were only lower by nearly 0.5% and interest rates fell only a few basis points.

Today, there appears to be some light at the end of the tunnel regarding prospects for Phase 1. China’s chief trade negotiator, Vice Premier Liu He, indicated that he was “cautiously optimistic” about reaching a deal but gave no further specifics or a time table. This headline is important as it follows earlier statements from the White House that President Trump will sign reconciled legislation from the House and Senate to support the Hong Kong protest movement in their fight for democracy which would seem to complicate matters regarding the trade talks.

Markets have been so whipsawed over the past weeks and months by both positive and negative headlines regarding the trade talks, that despite the more upbeat news, market reaction is subdued and muted. European equities are fractionally in the red and U.S. equities are scheduled to open nearly unchanged. G7 interest rates are fractionally higher and the U.S. dollar is mixed with commodity and energy-linked currencies outperforming. From the cheap seats where I sit, it would appear that both China and the U.S. need a win-win and that even a slimmed down Phase 1 document is a step in the right direction.
  • The South African Reserve bank surprised many in the market by keeping interest rates unchanged at 6.50% sending the South African rand soaring by nearly 1% before correcting lower. Many in the market were calling for a 25 bps reduction as both growth and inflation have been moderating.
  • U.S. jobless claims came in higher than expected at 227,000 which is the highest level since June 22. The data suggests some softening in the labor market.  Job growth this year has averaged 167,000 per month compared to 223,000 in 2018 as the trade war has slowed economic growth over the past 18 months.
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