The real red lines
Today's news headlines:
- ‘Trump meeting with Xi to overshadow G-20’. Overnight, Premier Xi decried selfishness and bullying while Trump promised ‘very big’ deals with Japan and India. Despite being the most anticipated event of the upcoming G-20 meeting, it isn’t clear how much progress can be made. (Financial Times)
- ‘Biden comes under attack from all sides in Democratic debate’. Last night’s Democratic debate was filled with tense moments, and quite a few surprising sallies were aimed at Joe Biden, the establishment candidate for the Democratic primary race. He hasn’t come out of the event looking strong, which opens the field for the 20 other contenders. (New York Times)
The mystery prize
Yesterday, Chinese President Xi spoke out against ‘bullying practices' and protectionist behaviour in advance of this weekend’s G-20 meeting in Osaka. It appears the Chinese are coming to the realisation that the various false starts with the Trump administration aren't a prelude to success. Their hardening stance over past weeks demonstrates an understanding of President Trump's political motivations—the real red lines behind the bluster—that in order for the US to progress, China must be contained. Xi's response is clear: if you make no concessions, you will receive none either. There is no magic moment awaiting us where the President heals the breach and reaches a conclusion to his various trade disputes. The President's tactic has always been to preserve the tension, so these negotiations aren't a journey to a goal, they are the goal. There is no mystery prize at the end of this process, and markets should prepare themselves.
Bottom line: There is a collective breath-holding in markets as we await the outcome of the G-20 meetings, but it isn't evident that actual progress can come out of this event. The status quo is likely to endure, despite any headlines or Tweets over the next few days; although, they may be entertaining.
Are prices misaligned?
Concerns around global economic growth along with rising trade tensions have pushed up safe-haven asset prices along with equities—a somewhat counterintuitive trend. When economic fundamentals are weakening, equity prices typically fall. This year, economic data has consistently disappointed and low inflation has plagued major economies around the world. The trend is expected to continue as today’s Eurozone year-on-year core inflation reading is forecast to be 1.0%—well below the European Central Bank’s (ECB) 2.0% target and approaching a two-year bottom. Despite low inflation and the lowest business confidence since 2012, Europe’s Stoxx Index is up 16% year-to-date, and the trade-weighted Euro Index is at the top of its recent trading range. While the equity rally in Europe may be partly explained by the anticipation of ECB monetary easing, the weakening fundamentals are a stark contradiction to rising asset values. Despite its contradictory nature, it’s likely to require a larger catalyst to facilitate a broader consciousness of this fundamental truth
Bottom line: Europe’s weak fundamentals and equity rally seem to be misaligned, and a correction will likely weigh on the Euro. However, the trend is not isolated to Europe, and so the catalyst for a reversal will need to affect other major economies as well, which may be harder to come by. For the time being the status quo is likely to prevail.
Both the US Dollar and Pound traded in a tight range yesterday. While this afternoon’s US consumer data has the potential to move markets, all eyes are turned towards Osaka and the G-20 summit.
Sterling has traded marginally lower over the past week and held within a very tight trading range. The Euro, on the other hand, has been making marginal gains with the trade-weighted index breaking above the 200-day moving average this morning.
With the US Dollar holding fairly steady and EUR registering marginal gains, the pair is making a fresh attempt at three-month highs. Rather upbeat French consumer and inflation readings might be a contributing factor and provide support for the common currency.