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Watching, Waiting

Minutes to midnight (Friday).

As tipped after the bell on Monday, Vice Premier Liu He will in fact travel to the US this week with the Chinese trade delegation despite the looming threat of more tariffs.

Liu stands accused of backtracking on promises (who knows if they were explicit) Bob Lighthizer says China made during recent rounds of tense negotiations. One gets the feeling the US is finding itself in a conceptually similar situation to CIA interrogations of terrorists after 9/11 – after a while, you can’t discern if your techniques are working or whether you’re just being told what you want to hear because the captor is tired of being tortured.

The Chinese Ministry of Commerce confirmed Liu’s participation in a statement. Sources familiar with the Ministry’s thinking also said Beijing is prepping retaliatory tariffs on US imports if the Trump administration goes ahead with the tariff hike on Friday. We’re back to tit-for-tat, it would appear.

Here’s what Lu Xiang, from the state-run Chinese Academy of Social Sciences had to say:

The fact that China sends a delegation to the U.S. shows it is still willing to solve the dispute by negotiations regardless of what the US is saying. If the Trump administration follows through with the tariffs threats on Friday, I think it means the talks fall apart. We then need to be prepared for worse than worst.

Details of what exactly went wrong remain sparse or, if that’s not the right way to describe things, suffice to say we’ve only heard from one side – Trump’s. Steve Mnuchin claims that a fresh draft of an agreement sent over last weekend contained language that suggested Beijing was looking to renegotiate key issues. That, Mnuchin claims, had the “potential to change the deal very dramatically.”

Chinese stocks staged a feeble recovery from Monday’s rout, rising around 1%. Investors favored consumer names, presumably in an effort to steer clear of anything that would be disproportionately affected by an escalation in the trade conflict.

One person who isn’t particularly enamored with the latest developments is IMF chief Christine Lagarde.

“We thought this threat was waning and relations were improving and we were moving toward an agreement”, she said in Paris. “We hope that is still the case but today rumors, tweets and comments are not very favorable.”

Right – “tweets are not very favorable.”

Early last month, the IMF slashed its forecast for global growth in 2019 to just 3.3%. That represented the most dour outlook since the crisis. It was also a more pessimistic take than the Fund delivered just three months prior (the forecast was 3.5% in January). It was the third time the Fund has slashed its outlook in the space of six months.

Markets were blindsided after the close on Monday when Lighthizer confirmed that the US would in fact hike the tariff rate on $200 billion in Chinese goods on Friday.

Read more: Anarchy Reigns: After Stunning Reversal, Markets Blindsided Again By New Tariff Headlines

The mood improved around 2 AM ET when confirmation of Liu’s participation in the talks crossed the wires, but the good vibes faded.

Also notable, the RBA refrained from cutting rates on Tuesday. It was a close call (basically a coin flip), but ultimately, Philip Lowe held fire despite the deteriorating outlook for inflation.

That was welcome news for Aussie bulls, who were staring down the prospect of a rate cut piling still more pressure on the currency during a week when trade worries were weighing on sentiment.

“The market still prices a very high probability of an RBA cut this year, though the implied probability of a second cut (to 1%) has fallen from 60% to a little over 40%”, SocGen’s Kit Juckes wrote Tuesday, adding that “in real effective terms, the currency is trading 12% below its 10-year average and at this level there’s an awful lot of bad news priced in.”

Eyes now turn to the RBNZ. “Maybe longs in AUD/NZD are easier to hold onto than shorts in EUR/AUD, and maybe that trade will get a lift if the RBNZ delivers a rate cut overnight”, Juckes continued.

Tuesday looks like a “watch and wait” game – that is until Trump starts tweeting.


 

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