Vol Stimulants Around The Corner Via FOMC & China-US Trade Talks

However, what doesn’t provide much space to maneuver is the potential weakening trends not only emerging off a global slowdown but also from the longest government shutdown on record, that’s why no matter the talk around the balance sheet, a very cautious tone is still warranted. Another reason for the Fed not to sound too aggressively committal on its balance sheet normalization narrative is what Morgan Stanley Strategy team notes.

“There is for the Treasury’s cash balance to be depleted in March, should the debt ceiling waiver fail to be extended, which serves as a form of “mini QE” by raising excess reserves and liquidity in the system, in turn supporting financial markets and keeping volatility suppressed, leading to a USD-negative catalyst by rendering higher-yielding currencies elsewhere more attractive.”

But the FOMC won’t be the only volatility stimulant as the market must also pay extremely close attention to what’s arguably been the most constant and regular story playing out in markets since the turn of the year. Yes, the Fed’s Put did its wonders to carve out a bottom in stocks, but in the background, the root cause of the Fed easing its stance comes as a response of falling equities, which was also influenced by concerns over global growth, mainly emanating from China. At the risk of sounding like a broken record, the perfect analogy here is that if China sneezes the rest of the world catches a cold. You cannot expect that the country engineering, through over-leverage, half the global growth in the last decade to slow down and the RoW (rest of the world) stay immune. There complex webs built over the years with China through supply chains, investment in properties, trading activity are way too intertwined with each other. But here is the problem, China as a patient is suffering a cold itself, with the policies of its own making spreading across the broader economy…

Source: Bloomberg

and since these symptoms are going to be magnified elsewhere, there is little wonder that one of the key narratives for 2019 is the topic of a “global slowdown”, which implies a reversion back to easing policies. The PBOC appears to have truly abandoned any vague commitment towards de-leveraging the economy (just check the chart below), the ECB has vowed to make further use of its monetary toolkit if conditions deteriorate further, the Fed is on a collision course with a wall of reality called ‘takes the foot off the QT pedal or you’ll be punished’, while the rest of countries will play along.

The above paragraph was just a primer aimed to set you up with the right levels of attention about what I am about to say. The market and risk assets wouldn’t have been supported the way they have unless the market thought there is a silver lining in the China-US trade talks. As a Chinese delegation lands in Washington to discuss the most pressing issues leading to the present stand-off (enforcement of commitment, IP thefts, access to Chinese markets, reduction of the trade deficit), one cannot help but suspect that the stage has not been set up for the best possible start.

Just read some of the headlines from the last 24h carried by mainstream media the likes of the WSJ. It’s in both countries interest to reach an agreement to stabilize markets, but again, this is as pure a game of chicken as it gets, and no country seems to be willing to give too many concessions that may pose a risk to their strategic outlook. In the case of Trump, he must get away with the best possible deal to re-inflate its approvals (he is a man willing to prolong the agony as seen via shutdown), while the Chinese do feel areas such as IP, access to local markets, as sacred areas that must be very carefully discussed not to disrupt its 2025 Made in China strategy.

Besides, one of the reasons that it’s going to make it even more difficult to reach a deal, at least won’t happen overnight, is the demand for extradition and the charges by US federal prosecutors after Chinese telecommunications giant Huawei and its chief financial officer Meng Wanzhou for financial fraud in a sweeping 13-count indictment. It includes charges from stealing trade secrets from an American competitor to defrauding banks to evade sanctions on Iran, among others, which without a doubt is throwing a wrench into trade talks. The Ministries of Industry, IT or the Foreign, have already manifested their disagreement, stating that the charges are ‘unfair and immoral’.

There are just way too many moving pieces. For instance, China has been trying to play along by creating a conducive and positive mood ahead of the meeting judging by the Yuan appreciation.

source: @Schuldensuehner

It won’t be an easy path before a deal is reached. Semantics will play a key role, and I can expect that while grave discrepancies will come afloat, the talk to the media may remain constructive. This is high-level prime time talks folks, so expect China to try its best to provide concessions and a clearer timeline. We should see if that moves the needle because they both badly need it, especially the Chinese side.

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The Daily Edge is authored by Ivan Delgado, Head of Market Research at Global Prime. The purpose of this content is to provide an assessment of the market conditions. The report takes an in-depth ...

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