US-China trade-deal in doubt as relations sour

Sentiment turning in global markets, after positive run

Stock markets have dropped across the globe in the last 24 hours, as doubts emerge about the likelihood of a US-China trade pact, after relations between the two mega powers show signs of souring once again. It sets up a soft start for the ASX 200 today, which was smacked-down on multiple fronts yesterday, shedding 1.35%. Oil prices bucked the anti-risk activity overnight, after US Crude Oil inventories revealed a bigger draw down than expected. And US Federal Reserve Minutes released this morning revealed a central bank wishing to hold interest rates steady, for now, but remains sensitive to global risks.

Traders pricing in greater risk in US-China talks

In a day of high-volume trade, at least on Wall Street and across the ASX200, stock markets have taken a fall, as traders price-out, apparently, the optimism baked into market pricing of a US-China trade-truce. Certainly, many have come out of the woodwork in the last 24 hours, and stated that this is no surprise. And the rationale is fair: power is a zero-sum game, and neither the Chinese nor the US look particularly willing to compromise on some of the core issues in trade-talks. Nevertheless, the markets have been primed for a deal, and that’s now looking increasingly unlikely before year end.

A trade-deal looking less likely before year end

The latest trade-war headlines have suggested as much. The bulk of the S&P 500's losses last night came upon the release of a Reuters report that flashed: “Phase one US-China trade deal may not be done this year.” Numerous counter reports, mostly popped-out by the Trump administration, have been released since that story, in order to counter it, and probably support markets. But fear has settled in for now, and as such, so has the anti-risk sentiment. And given how stretched valuations have become, along with how imbalanced market sentiment has been, then perhaps now is the next wave lower for global stock markets.

US Congress complicates US-China trade talks

The Reuters news wasn’t what set the fire, however. Concerns about US-China relations were piqued after the Chinese pledged to “retaliate” to the passing by US Congress of the Hong Kong Human Rights and Democracy Act. Though there’s apparently a reluctance from the Chinese to conflate trade-talks with US President Trump, with diplomatic wrangling with the US legislature, there is a sense that national pride and prestige may take priority for China over economic rationalism now. Focus turns now to the matter of December’s planned tariff hikes. Do they go ahead, if no deal arises, like US President Trump has threatened?

ASX200 slapped down by several bearish stories

Owing to the fact that yesterday’s trade-war news basically broke in the Asian session, futures markets are only pointing to a small 10-point loss for the ASX200 today. But that comes off the back of a big sell-off yesterday. The ASX was hit by a combination of punches during Wednesday’s trade. The trade-war developments were perhaps the biggest. But bank stocks also sucked the momentum out of the market, after investors dumped Big 4 shares after it was revealed Westpac had allegedly broken Anti-Money Laundering laws a whopping 23 million times. Australian equities were also hurt by a slight unwinding of bets for an RBA cut next month.

Fed signals its desire to hold rates, remains on standby

On the central bank front, the US Federal Reserve released its monetary policy minutes for its last meeting. Of course, the Fed cut rates at that meeting, so the interest in this document was ascertaining the Fed’s desire to cut again in the future. As expected, the central bank took a moderate line on the matter, suggesting that rates ought to remain on hold, for now, but can be adjusted if global “downside risks” increase further. The US Dollar popped upon the release, while US Treasury yields reclaimed a margin of the losses they sustained as-a-result of last night’s trade-war developments.

Oil prices jump on crude build

Bucking the market’s broader macro themes, oil prices leapt over 2 and a half per cent higher last night, after US Crude Oil inventory numbers revealed a bigger drawdown in crude last week than expected. US exports also climbed, showing better than forecast global demand for US oil. In the bigger picture, oil still appears largely range bound, from a price perspective. Evolving views on the global growth outlook is keeping the oil market choppy. While confusion reigns regarding the demand side of the equation, as traders find difficulty in determining OPEC’s desire to curb oil supply into global markets to underpin crude prices.