The market reaction to the Osaka trade truce struck on Saturday between Donald Trump and Xi Jinping will be in focus right out of the gate in the new week.
The read-through of the ceasefire for an eventual comprehensive deal is ambiguous, but Trump’s pseudo-relent on Huawei appears to have been something of an upside surprise for markets. Other than that, the outcome was largely as expected. Negotiations will resume and tariffs on the remaining $325 billion of Chinese goods are delayed indefinitely, although, as Goldman cautions, “the comment period on the notice to impose additional tariffs ends July 2 and the White House will be able, from a procedural perspective, to issue a final notice soon after [so] if talks break down again or fail to produce an agreement, tariffs could be put in place quickly”.
Trump is poised to get quite a bit of backlash from lawmakers on the Hill who, over the weekend, derided the president’s conciliatory remarks on Huawei as a potential “catastrophe”.
Read more: ‘He’s Rolling In A Trojan Horse’: Trump’s Huawei Relent Draws Jeers From Schumer, Rubio, Kyle Bass
Assets of all stripes are coming off a stupendous first half. US equities surged 17% on the back of the dovish Fed pivot. The IG credit ETF had its best half on record.
Meanwhile, bond yields plunged amid persistent global growth concerns and the dovish pivot from central banks. With both equities and bonds rallying, it was a fantastic H1 for multi-asset investors.
(Goldman)
Most doubt whether progress on trade will discourage the Fed from embarking on a rate cut cycle. With the market pricing a trio of cuts by year-end and the US economy showing signs of cracking (the most recent dour data point came courtesy of a contractionary print on the MNI Chicago PMI), the only question is whether the Fed manages to deliver on extremely dovish expectations.
We’ll get June payrolls this week. Following May’s grievous miss on the headline (red shaded box in the figure) and in light of subsequent data disappointments and the Fed meeting, the June report has the potential to be a watershed moment of sorts. Another bad miss would further cement a July rate cut, but it would also suggest the US economy is getting closer to the edge.
“An announcement of delays of the additional tariffs to China could be neutral to mildly positive for risk appetite, and this outcome would likely bring downside to USD-Asia crosses, while oil-sensitive currencies could outperform amid expectations of the OPEC meeting bringing further support to oil prices”, Barclays wrote Sunday. The bank expects a 150k headline print for June payrolls. BofA sees 155k. (BBG consensus is 160k)
ISM is on deck and that too could be crucial. Last month’s print was the lowest of the Trump presidency (bottom pane) and if ISM slips into contraction territory, what were alarm bells will morph into a blaring siren. As a reminder, Trump is now the proud owner of the largest monthly drop on the Empire manufacturing gauge in history (top pane).
Generally speaking, analysts expect ISM to stay in expansion territory, but just barely (51.0).
As alluded to above, crude will be interesting this week. The OPEC+ meeting is now little more than a formality after Vladimir Putin and Mohammed Bin Salman agreed at the G20 to extend the cuts. They’ll be some debate about whether that will be a six month or a nine month extension but, really, that doesn’t matter all that much.
Read more on the Putin/MBS agreement
Crude is coming off a nice June, when the flareup in tensions between the US and Iran helped oil overcome a challenging demand backdrop to climb back from the most recent bear market plunge.
Oil may benefit from the trade truce and could get further support from any inflammatory rhetoric out of Trump aimed at Iran. On Friday, European leaders failed to impress Iranian negotiators at a meeting in Vienna where diplomats gathered in a last ditch effort to convince Tehran not to violate elements of the nuclear accord. That will undoubtedly come up at some point this week. (Iran was expected to breach key thresholds over the weekend.)
It’s also possible that risk assets will get a boost from Trump’s surreal meeting with Kim Jong Un at the DMZ. That spectacle was unplanned and both sides are keen on billing it as a sign that the push to denuclearize the peninsula is alive and well.
Turkey will be in focus following a cordial meeting between Trump and Erdogan who says he received a “personal guarantee” that the US would not impose sanctions in connection with Ankara’s planned S-400 purchases. We’ll see about that.
Read more on the Trump/Erdogan meeting
Expect more dovishness from central banks. The RBA will likely cut rates again this week in a continuation of the bank’s ongoing dovish pivot, which markets expect to persist for the foreseeable future. 10-year yields in Australia are now at 1.32%, which is pretty remarkable.
“A cut in July would give the central bank the ability to influence the market-implied cash rate, which will be assumed as the future rate path in deciding the Bank’s economic forecasts in the August SoMP”, Barclays notes, adding that “there’s downside risk to AUD, as the market is not fully pricing a July cut (around 75% probability) and consensus is divided between a cut in July or August”.
The Riksbank is on deck too – that’s always amusing. They’ll almost surely temper the rate path in light of the ECB’s decisive dovish lean and Draghi’s comments in Sintra.
On Sunday, China’s official manufacturing PMI printed 49.4 for June, a smidge below consensus and still in contraction territory. That’s hardly a disaster, though, all things considered. Essentially, it just underscores the need for stimulus and makes the truce with Trump all the more welcome. The non-manufacturing gauge was in line with expectations.
Full calendar via BofA
