Trade war hopes spark “risk on” rally; U of M consumer sentiment, China CPI

Rates as of 05:00 GMT


  • SELL AUD/JPY: I don’t see much follow-through on the trade front this morning. I think we could have some mean reversion in the “risk on” trade
  • BUY EUR/USD: Same thing there too. RISK: The US could come out this morning and confirm the Chinese statement. That would cause a continuation of the “risk on” trade.
  • SELL GBP/USD: The market move there was underdone. I think there’s more to go as people pay more attention to the economy, at least temporarily.

Market Recap

The main driver of markets yesterday was continued optimism about the resolution of the US-China trade war. An announcement from China’s Ministry of Commerce that the US agreed to lift some tariffs as part of the phase one agreement, sparked a global “risk-on” move that sent bond yields sharply higher around the world. The move seems to have petered out somewhat this morning however as the US administration has failed to confirm the news. Asian stock markets are generally lower.

It’s no surprise then that the “risk on” pair in FX, AUD/JPY, was the big mover of the day, with AUD the best-performing currency and JPY the worst. Other currencies were relatively little changed.

It’s noticable though that EUR/USD is down again, albeit slightly. This confirms what I was wondering about yesterday – the market’s attitude towards EUR is just plain negative right now. When the trade war looking like it was worsening, people were buying USD as a “safe haven.” Now that the trade war seems to be winding down, people are buying USD because the US economy will benefit. Plus less need for the Fed to cut rates to support the economy.

I always admit it when I’m wrong – pardon me if I kvell a bit when I’m right! The Bank of England not only turned dovish, as I expected, but there were even two dissenters who called for a rate cut, as I also thought might happen. The response in the market was relatively muted though – GBP was down but not massively. In the gilts market, the yield on the 10-year gilt initially fell by 5 bps on the news, but as global bond yields rose on trade war optimism, it ended the day significantly higher nonetheless. It’s clear that politics, not economics, is driving UK markets.

For today, I wonder if there’s likely to be some mean reversion in the risk-on trade The tepid response of most Asian stock markets today makes me apprehensive. I think instead of carry-through, we may get profit-taking unless or until the US administration chimes in with some confirmation. Watch for the usual tweet at the beginning of the US day.

Today’s market

Canada’s employment picture is expected to be little changed. The number of new jobs is forecast to be fairly low – 15k, well below the six-month average of 40k. The unemployment rate is forecast to stay at 5.5%, the middle of the recent range. It looks to me like the labor market has stopped improving in Canada, in contrast to the Bank of Canada’s observation in its recent (Oct. 30th) statement that “Employment is showing continuing strength.” I suppose that’s true insofar as the unemployment rate isn’t rising yet, even if the rise in jobs has tapered off. In that respect maybe it is still strong. Nonetheless, I don’t think this round of figures will do anything to improve people’s view of Canadian economic conditions. CAD neutral

The University of Michigan consumer sentiment index is expected to be unchanged. That’s not too bad, considering the huge uncertainty about trade and the looming impeachment battle. In fact the consumer sentiment/confidence indices have more to do with the stock market and the job market than with the overall US economy.

The index is a fairly good leading index of the US employment situation, with a lead time averaging around 18 months. It peaked back in May.

Over the weekend, China announces its inflation data. The key point here for global markets is not their consumer price inflation but rather their producer price inflation, because that’s what affects the price of Chinese exports and therefore prices around the world. It’s expected to fall further, which should mean a continued deflationary impulse to other countries.

No one outside the country is affected by the Chinese consumer price index, which in any case is being driven almost entirely by food prices, which in turn are being driven by the devestation by illness of the pig population. That’s driving up pork prices by over 60% yoy, and as people shift from pork to other meats, chicken prices are up 16% and beef prices 14%. Excluding food though the consumer price inflation rate has actually been falling. Ex food was up 1.0% in September, falling steadily from the recent peak of 2.5% in August last year.

Then Monday morning, while I still have visions of sugar plums dancing in my head, Japan will announce its machinery orders and trade data.

Japan machinery orders are expected to be up slightly on a mom basis. The series is incredibly volatile and I’m not sure it’s even possible to discern a steady trend in it, but if it is, then the trend would seem to be upwards. That’s good news for Japan. JPY positive.

Japan’s current account surplus is expected to be down slightly on a seasonally adjusted basis. I don’t think this is going to be a major market-mover though, considering how the yen is being whipsawed by risk-on, risk-off. JPY neutral


The information and opinions in this report were prepared by Marshall Gittler and do not represent the views and opinions of any other person or company. Though the information herein is believed to be reliable and has been obtained from public sources believed to be reliable, the author makes no representation as to its accuracy or completeness. This report is provided for informational purposes only and does not take into account the particular investment objectives, financial situations, or needs of individual traders. It is not an offer or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy.

The author is not acting as a financial adviser, consultant or fiduciary to you or any of your agents (collectively, “You” or “Your”) with respect to any information provided in this report. Information contained herein is being provided solely on the basis that the recipient will make an independent assessment of the merits of any investment decision, and it does not constitute a recommendation of, or express an opinion on, any product or service or any trading strategy. The information presented is general in nature and is not directed to retirement accounts or any specific person or account type, and is therefore provided to You on the express basis that it is not advice, and You may not rely upon it in making Your decision.

The author may hold positions in any of the currencies that he is writing about. He may also be holding debt or equity securities in any of the markets or issuers he writes on.

Hyperlinks to third-party websites in this report are provided for reader convenience only. The author neither endorses the content nor is responsible for the accuracy or security controls of those websites.

‘The key is not to predict the future, but to prepare for it.’ Pericles, 500 BCE