New Spanner In US-China Relations Weighs On Risk Appetites

Overview: The global capital markets were fragile amid trade uncertainty and economic slowdown fears. News that Canada arrested the CFO of Huawei on behalf of the US, ostensibly for violating the embargo against Iran triggered an almost immediate risk-off wave that has extended the equity markets losses, sending core bond yields lower, with the US 10-year slipping below 2.9%, and underpinning the dollar against most currencies, with the notable exception of the Japanese yen and Swiss franc. Oil prices are unwinding the gains scored earlier in the week amid some skepticism that OPEC+ will agree on the magnitude of cuts that will impress the market.

Asia Pacific

The US and China were not in sync about what was agreed at the G20 meeting. There were contradictions and miscues among the Americans themselves. The US President penchant for overselling and then retreating is being played out again with China, but also North Korea, which reports suggest is developing a new weapon and perhaps a new secret test location may have been discovered. With reports that China was already making good on its promise to buy more US agriculture goods and energy, the arrest of the CFO from Huawei in Canada has earned the ire of Chinese officials and kept global investors on the defensive. Although it is not related to US-China trade dispute, it does play into ideas that 1) trade is only one of several issues US and Chinese interests clash and 2) there is much distrust between the two largest economies and military powers.

Despite better macro news today, the Australian dollar has not been able to shrug off yesterday's disappointment over the Q3 growth which was half of what was anticipated (0.3% vs. 0.6%). Australia's 10-year bond yield is falling through 2.5% to its lowest level since the middle of last year. Today's data includes a smaller than expected October trade deficit and slightly better retail sales. The trade shortfall narrowed to A$2.2 bln from a revised A$2.94 bln, while retail sales rose 0.3% after a 0.2% gain in September was revised to 0.1%. The Australian dollar is the weakest of the majors today, losing about 0.75%. It had started the week knocking on $0.7400 and today is testing $0.7200. This area corresponds to a 50% retracement of the Aussie's gains since the low for the year was recorded in late October (~$0.7020). The next retracement level is found near $0.7165, which is also the mid-November low. The New Zealand dollar is holding up better, but it is still paring its recent gains. With today's slippage, the Kiwi filled the gap created by Monday's sharply higher opening. The next support is seen near $0.6850, where an option for about NZ$ 200 mln will expire today. 

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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