This week will be all about the follow-through from the trade truce struck over the weekend in Argentina where Donald Trump and Xi Jinping agreed to a 90-day cease fire.
The key short-term takeaways for markets are: 1) the tariff rate on the $200 billion in Chinese goods that were taxed from September 24 will not be raised to 25% in January, 2) there will be no new tariffs while negotiations are ongoing.
Needless to say, folks are skeptical about the durability of this pact and the early commentary suggests analysts are concerned that 90 days isn’t enough time to come to terms on the variety of complex issues that are keeping the two sides apart. Also unclear is whether Trump will still push the auto tariff issue with other trading partners even as he holds fire on China.
Read full coverage of the trade truce
This will be a shortened trading week in the U.S. as Trump declared Wednesday a national day of mourning for President Bush.
U.S. equities are of course coming off a blockbuster week thanks to Jerome Powell’s dovish relent last Wednesday. The November Fed minutes were interpreted as dovish as well, with the committee now seemingly keen on convincing the market that policy is not in fact preset despite Powell’s penchant for emphasizing just how appropriate ongoing gradual (read: quarterly) rate hikes are in light of the data. EDZ8-9 is now pricing in just ~23bps worth of tightening next year, for instance.
Some folks are looking for an extension of that U.S. equity rally. It’s possible that a combination of trade-related risk-on sentiment, systematic flows, gamma effects and, perhaps, underexposed fundamental/discretionary investors attempting to “catch up” could contribute. The following chart suggests that the exposure of the Long/Short crowd to equities is still relatively subdued after the massive de-leveraging catalyzed by the October selloff.
On the data front, we’ll get payrolls this week. The October report was another blockbuster and Trump could use a solid November report in light of recently soft incoming data stateside. The average hourly earnings print will invariably be juxtaposed against the Fed’s newfound dovishness if wage growth comes in hot. We’re sitting at cycle highs there.
Consensus is for another 200k print on the headline and 3.2% YoY for AHE. Goldman is a bit cautious. “We estimate nonfarm payrolls increased 185k in November, compared to its 6-month average pace of +216k”, the bank writes on Sunday, adding that “underlying job growth may have slowed somewhat, given rising jobless claims, mixed employment surveys, and tighter financial conditions.”
ISM and durable goods are also on deck in the U.S. and the list of Fed speakers is so long that a quick glance at the schedule suggests it’s easier just to list who isn’t going to be on the tape this week than all the people who are.
[Note: the National Day of mourning for President Bush could lead to scheduling changes for some data, speakers etc.]
Solid data would likely end up arguing with easing trade tensions and interpretations of the Fed as overtly dovish when it comes playing tug-of-war with the greenback. Wall Street consensus is for a soggy dollar in 2019, but someone forgot to tell the specs, because the net long was extended in the week through Tuesday, although the latest data doesn’t capture the Powell speech or the November Fed minutes, so I suppose the better read will come next Friday.
Meanwhile, specs continue to cover the bond short. They were the least net short the 10Y since March through Tuesday. The latest week of short covering comes just two weeks after the most aggressive paring of the 10Y short since April 2017, which played out in the week ended November 13.
We are of course back under 3% on the 10 and don’t forget that when it comes to foreign demand, the September blowout in X-ccy basis has completely reversed, suggesting that the dollar funding squeeze everyone was sure would play out into year-end is actually abating.
Then again, the biggest one-day jump in Libor since March (on Thursday) certainly seems to suggest that dollar liquidity/shortage concerns aren’t going to disappear entirely.
As a reminder, rates vol. remains the odd one out across markets as evidenced by the following visual which is just the ratio of equity vol. to rates vol. in the top pane and the ratio of crude vol. to rates vol. in the bottom pane.
Speaking of crude, we’ll get the OPEC+ meeting this week. “In our view, OPEC has three real options at this week’s meeting: a ‘quiet cut,’ lacking specifics about country-level adjustments, a ‘precision cut’ with explicit country-level new production adjustments or the ‘elegant solution,’ excluding Venezuela and Iran from compliance calculations and allowing Saudi Arabia and other countries to reduce output”, Barclays wrote over the weekend, adding that in their view, “the elegant solution is the most likely because it is the most agreeable, achieves the messaging objective, and allows OPEC to chart its own course, supporting the oil market in the near term.”
Oil market vol. is obviously elevated and will probably remain so into the meeting. Last month, crude suffered its three largest one-day declines since September 2015 all in the space of just 10 days
Part of the problem there was that once crude plunged into a bear market, the momentum chasers piled on, driving prices through key strikes tied to producer hedges. The dealers who sold those puts then had to sell more and more crude to stay hedged themselves. That dynamic led to the three collapses you see highlighted with the yellow circles in the chart. A quick glance at the beta of the SocGen CTA index to crude shows a veritable collapse (right-hand side) which presumably means at least some strats have recently flipped short.
The cartel and allied producers are under enormous pressure from Trump to not cut production despite plunging prices and many believe the outcome of the meeting was actually decided in Argentina over the weekend when Crown Prince Mohammed and Putin chatted. Putin says he and bin Salman agreed to extend the cut agreement, but remember, there’s a ton of nuance here.
In Europe, any calm will be fragile. The Deutsche Bank situation is pretty dire, Italy remains at odds with Brussels over the budget, there’s still a chance of a “hard” Brexit and, to top it all off, it’s still possible that Trump forges ahead with auto tariffs. As a reminder, the two worst performing sectors on the Stoxx 600 this year are banks and autos, a testament to what’s causing the consternation across the pond.
Let’s see, what else? This is a BoC week and we’ll also get the RBA. Both of those are potentially interesting given the impact of crude prices for Canada and the trade truce for Australia.
Oh, and lurking in the background is Robert Mueller. Don’t forget about him – Donald Trump sure hasn’t.