‘Big League’ Drama: Full Week Ahead Preview

Barring something (else) out of left field, the week ahead will be dominated by trade jitters.

Investors will once again feel compelled to parse what will almost surely be a barrage of competing headlines in search of something definitive to latch onto. Trump’s Twitter feed will, unfortunately, remain a must-read. One imagines Trump and Xi will speak over the phone at some point. That readout should be amusing.

On Monday, the USTR will release details around prospective levies on an additional $300 billion in Chinese goods and markets are watching for Beijing’s response to the ratcheting higher of existing tariffs on Friday.

Over the weekend, Trump took things up another notch. China, he claims, was feeling “badly beaten” in the negotiations. He also warned that if Beijing decides to wait him out until 2020, he’ll make things “much worse for them” after he secures a second term.

Read more: As Trump Threatens China Again, Here’s What Happens To Inflation In A Worst-Case Tariff Scenario

On Sunday, the Global Times insisted that China will “never concede on issues of principle.”

All eyes will be on the yuan. USDCNH fell to a four-month low last week. Going forward, market participants will be keen to see whether the PBoC countenances depreciation in the interest of cushioning the blow from the tariffs or leans against it in order to preserve confidence, guard against capital flight and avoid a scenario that opens China up to allegations of currency manipulation, something which could further undermine the chances for a lasting truce with Trump.

“In FX policy, while the PBoC might tolerate further CNY weakness, we also expect the central bank to prevent sharp currency depreciation in order to preserve authorities’ efforts to build investor confidence and avoid capital outflows”, Barclays wrote Sunday, adding that “the PBoC has been fixing USDCNY lower than implied by market moves of the previous day [and] in fact, Friday’s USDCNY fix was a whopping 270 pips below our estimate, which was based on previous market moves — the largest such deviation since 2017.”

(Barclays)

On the data front in China, we’ll get the retail sales/IP/FAI trio for April. You’ll recall that the March figures were a home run, and the fact that they were released concurrently with a better-than-expected read on Q1 GDP helped make the case that China’s economy may well be stabilizing. More recently, the data has looked less encouraging. April PMIs disappointed, as did the latest credit growth figures. April exports missed estimates as well.

“While patience on trade negotiations is being tested, any extrapolation of sequential growth improvement in March is risky”, BofA cautions, before citing the usual holiday effects and noting that “high frequency indicators on industrial machinery usage hours and raw material production recently suggested growth may have eased again after a strong March, implying some normalization is due in data reporting next week.”

Obviously, weak April activity numbers could exacerbate concerns about the Chinese economy’s vulnerability to escalating trade tensions and could also stoke bets for further stimulus from Beijing. State buying in Mainland equities on Friday suggests that while authorities might well have wanted to let a bit of steam out of the screeching A-share tea kettle, a meltdown (e.g., what happened last Monday) isn’t particularly palatable.

In the US, stocks are coming off their worst week of the year. Things would have been even worse were it not for Friday’s 450-point turnaround in the Dow predicated in part on the notion that talks with China aren’t going to fall apart completely.

Volatility seemed to get tired by the end of the week, and some of the de-leveraging (from asset managers and trend following strats, for example) has been worked through. That said, there’s likely to be further de-risking from volatility-targeting funds in the days ahead. Here’s Deutsche Bank:

The renewed tensions in the US/China trade negotiations and the decision of the US to impose an additional 15% tariffs on USD200bn of US imports from China was unexpected. Even if the direct impact (as estimated by our economists ) is relatively modest, it does open downside risks to the view that the global economy is stabillising and likely to improve as suggested by leading indicators. In the UK, there has been so far no agreement between the government and Labour. This is not too surprising given that the opposition has little incentives to “own” the Brexit outcome. Furthermore, these adverse geopolitical developments are occurring just as equities reach local peaks and investors’ long positioning appears stretched on some metrics (graphs below). 

We’ll get retail sales, IP, Empire manufacturing, Philly Fed, and U. of Michigan this week in the US. While some of that is worth watching, it’s safe to say that the evolution (or devolution) of the trade narrative will determine the path of US assets.

“The USD was driven by risk sentiment last week [as] safe havens outperformed”, Barclays notes, on the way to musing that “risk sentiment is likely to continue to drive price action as markets wait for China’s countermeasures… and assess the potential length of the standoff.” The bank goes to say that renewed uncertainty around trade has the potential to undermine the “green shoots” story and will likely “favor the dollar against trade-dependent EM currencies.”

(Barclays)

Don’t be surprised to see Turkey in the news again this week. Political tensions are running high thanks to Erdogan’s successful bid to nullify the Istanbul vote and competing headlines around the critical S-400 standoff left market participants in the lurch on Friday.

Turkish banks were seen selling dollars in thin Asia trading to close the week, a desperate move designed to shore up the currency, which cannot count on the central bank to come to the rescue thanks to CBT being beholden to Erdogan.

Meanwhile, the Trump administration is juggling three sticks of lit geopolitical dynamite in Iran, North Korea and Venezuela. Although we’ve been here before (so to speak) when it comes to a seemingly inevitable maritime confrontation with the IRGC and rumors that Maduro is on the verge of being toppled, things seem particularly tedious right now thanks in no small part to John Bolton.

Domestic politics in the US is a bad soap opera. On Friday, Richard Neal subpoenaed Steven Mnuchin and IRS Commissioner Charles Rettig in what amounted to the start of the legal battle to obtain Trump’s tax returns. At this point, the White House is staring down subpoenas from the Ways and Means, Judiciary, Oversight, Financial Services and the Intelligence Committees. The president has promised to fight literally all of them.

Elsewhere, Australia votes and elections in India wrap up. We’ll also get GDP data out of Germany.

Full calendar via BofAML