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Wednesday 12

December, 201812:12 PM



The Daily Fix - Inter-Market Analysis and Macro Insights

The Daily Fix - Inter-Market Analysis and Macro Insights

The link between politics and financial markets will be tested once again over the next week or so.

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28.11.2018 03:42 PM

The link between politics and financial markets will be tested once again over the next week or so. So, for most, keeping up with the intricacies of the minute-to-minute news flow will be too tiresome, and therefore the savvy trader would already be set in core exposures, looking to trim around the edges and react as and when the script changes.

We have already been treated to a raft of narrative from Trump and various members of the US trade team addressing trade tensions with China, although its hard to cut through the political theatre at times. It still feels as though the market has sufficiently low expectations of a solid resolution, and it's perhaps too late in the day for Trump to reverse his decision to increase tariffs on $200b of imports to 25% from 1 January. What could be a positive though, is if we sense a platform building to curb tariffs on the balance ($267b) of trade, and the markets will take their cues from the show (or lack of) unity here. China seems to be reaching out.

Donald Trump will try his hardest to command the central focus over the coming days, but behind the scenes, Theresa May will be using this stage to promote post-Brexit Britain to various other dignitaries. She will need to defend what is a very precarious position, and for traders, how May goes about using her charms to attract future deals is probably irrelevant at this stage, as we all want to know how GBP reacts to the Meaningful Vote on 12 December (at 06:00aedt) when it is likely voted down. The fact that almost everyone expects the vote to fail suggests the immediate move in GBP should be limited. However, the real issue is how big a part the financial markets could play.

Faced with going back to the EU for a reworked agreement, we will see massive political brinkmanship (again), and the more volatility in markets, specifically European assets, the more leverage May will have. It's almost in Theresa May's interest to see heightened volatility, as this will give her leverage not just in her own party, but to Labour MPs too. Of course, the views from the EU that this current agreement is as good as it gets may be proved true, in which current implied volatility levels in GBP are not expensive, as some have argued, and we should see GBP move like a bat out of hell.

It’s not just the Trump/Xi dinner that macro-watchers are keen to follow, but the oil story has more to play out here. Specifically with the recently announced meeting between Vladimir Putin and Saudi Prince Mohammed bin Salman. When the worlds two biggest exporters get together, we tend to listen, especially if there is scope for Putin to break the linkage between Trump’s desire for weaker crude prices and the Saudi’s role in making that happen. Putin, in theory, could cause a gapping risk in Brent and WTI crude, should he make clear that Trump has no leverage on Saudi production levels.

The Saudi/Russia meeting has all the hallmarks of a re-run of September 2016, when these two oil superpowers got to together prior to the broader agreement (in December) between OPEC and 11 other nations (including Russia) to balance the oil market. So, while this meeting lays the foundations for the OPEC meeting in Vienna on 6 December, traders will take their direction from the tone of the rhetoric and precisely how determined they are to balance out the supply-side of the equation. A concerted supply cut is needed because Trump appears to be shooting himself in the foot, and the US economy will slow as a result of lower oil prices. The high yield/investment-grade credit spread is telling us this, and we can already see in various regional survey’s, with capital spending intentions heading lower.


It feels as though the US bond market is ready to head lower on this theme too, so I will be a buyer of UST 30s on a move through 3.30%, while 10s through 3% to 3.02% would also be noted. The US yield curve will become front-page news again, and at 22 basis points (bp) this differential between US 2- and 10-year Treasuries sits just four basis points from the August lows. I have enclosed a chart of the US 3-month 10-year Treasury curve as the Fed has talked about this many times before and again this sits at the lowest levels since 2008. Various Fed members have acknowledged that they really don’t like the idea of hiking into a flatter yield curve. Expect FX volatility to rise a touch should we see the pace of curve flattening pick-up.

(US 3month-10year Treasury Curve - the red area represents prior recessions)

(Source: Bloomberg)

Another worrying aspect reported in German media (citing EU sources) is whether Trump will slap a 25% tariff on car imports (ex-Mexico and Canada). Naturally, we think of Germany here and for those who read my daily yesterday will know this is the last thing Germany and the wider EU need. It is the last thing the global auto trade needs anyhow as we can see from the Bloomberg chart. But it just makes buying EURs even harder and makes me think it is a matter of time before the 11,000 mark gives way in the DAX, in which case its goodnight Vienna.

My USD trade is playing out well so far, both against the CAD and the wider basket (USD index). Happy to stay long both here and in the case of USDCAD I would add on a daily close through 1.3317. The daily or weekly chart of USD index looks so strong, and of course, that may change, but I won’t be trading from the short side here, just yet. USDCNH is back on the radar as well ahead of the G20 meeting, where the daily chart shows strong consolidation, and it will be fascinating to see where price goes from here. I suspect it goes higher.

Event risk ahead

On the docket tonight, we are treated to the next revision of Q3 US GDP, which shouldn’t move markets unless it deviates greatly from the 3.5% rate expected. Naturally, the Fed Chair Powell will be the bigger event risk for markets, when he steps up at 04:00aedt, to speak at the Economic Club in New York. Vice-chair Clarida last night enforced the idea that risks have become more symmetric, and the rates market has responded aggressively of late pricing just one hike for 2019. Powell should align with this view, albeit remain positive on inflation and employment trends.

Published by Chris Weston, Head of Research, Pepperstone
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