Monday’s trade euphoria morphed into confusion on Tuesday as markets attempt to discern the contours of Trump’s fuzzy deal with Xi Jinping.
Any news that wasn’t bad news was good news to start the week, and to be sure, everyone buying on Monday knew the terms of the ceasefire were nebulous. The whole rationale behind the upbeat mood wasn’t that anything had been “solved” (per se), but that the market would get a 90-day reprieve from the incessant trade escalations and shrill rhetoric.
Nothing has changed in that regard.
But markets are palpably cautious on Tuesday. A snapshot of the global equity picture betrays consternation.
The Nikkei was especially hard hit overnight, falling the most since October 25 and snapping a seven-session streak of gains.
Mainland shares in China managed to log another day of gains, but a quick look at an SHCOMP chart shows a rebound in the afternoon sessions, which in many cases is the hallmark of the vaunted “National Team”. That may or may not be the case on Tuesday, but it wouldn’t be surprising if officials wanted to ensure that the “right” message continues to be sent to markets following the trade deal.
There was no ambiguity in the yuan however. Monday’s rally continued apace there, with the onshore yuan logging its best two-day gain in a decade. This is a massive move:
Panning out, here’s some context with the rally the unfolded back on November 1/2 following Trump’s tweet about his “very good” phone call with Xi Jinping. Hours after that tweet, Bloomberg turbocharged sentiment by reporting that Trump had instructed aides to draft a truce to present to Xi (that report was subsequently played down and the rally faded, but now it’s back with a vengeance).
Meanwhile, 10-year yields in China fell to their lowest in 19 months.
It would appear, then, that the biggest winner from the trade truce is the yuan, for now.
Depending on how you want to look at it, that’s actually good news for both sides. For Trump, it alleviates concerns that the relentlessly stronger dollar is undermining the effectiveness of the existing tariffs. For China, it takes the dreaded 7-handle off the table at least in the near-term, allaying fears of capital flight and forestalling the need for an emergency response in the form of aggressive spot market intervention, heavy reliance on the CCAF or whatever else the PBoC has in that bottomless bag of policy levers.