Risk-On, But For How Long? The Data Is Dour

Unsurprisingly, the mood was risk-on in early trading as the market cheered another trade truce between the world’s two largest economies.

The new ceasefire looks a lot like the agreement struck in December, when Donald Trump agreed to delay a planned hike to the tariff rate on $200 billion in Chinese goods, originally scheduled for January 1. That tariff hike was implemented in May after talks broke down.

With the threat of new tariffs on the remainder of Chinese imports now delayed indefinitely (or at least until Trump blows another gasket), stocks are free to surge to all-time highs. E-minis jumped 1% right out of the gate. Treasurys fell.

FX markets registered predictable reactions with AUDUSD up (be wary of any Aussie gains into the RBA this week), USDJPY up and, of course, the yuan gaining. With trade tensions set to abate, one assumes a breach of the psychologically important 7 handle is now off the table in the near-term.

For now, the good news on trade is enough to overshadow more lackluster data, including a miss on the BoJ’s quarterly Tankan report (large manufacturer fell to 7, missing consensus that was looking for 9).

South Korea’s trade data showed exports declining 13.5% in June (essentially in line with estimates), while imports fell a worse-than-expected 11.1%. Markit’s June manufacturing PMI for the country printed 47.5, down from 48.4 in May. Output fell to 44.6 from 48.1 in the previous month – that’s the lowest read since June 2015. Nevertheless, there’s likely to be some optimism around South Korean equities and the won following Trump’s photo op with Kim Jong Un. Indeed, USDKRW fell below the 100-DMA for the first time since March.

Here’s BofA with some brief color:

The outcome of the talks points to more engagement in the weeks ahead. Importantly, US President Trump is pressing hard on North Korea, meeting with Kim Jong-Un in the de-militarized zone between N and S Korea after his meeting with S Korean President Moon in Seoul this weekend. This 3rd meeting between Trump and Kim Jong-Un, and a possible 4th in the US, suggest progress on geopolitics, helping to sustain risk-on. While the market may still worry about future escalation, the top level agreement coupled with gestures to placate the hardliners on both sides, suggests this negative tail risk will be limited for at least a few months. The absence of any deadline (in contrast to Buenos Aires) is positive in our view as it makes the promise of no new tariffs slightly more credible. We think there is sufficient substance from the G20 to tilt us into quadrant II for the coming weeks as trade negotiations get back on track. This would encompass NE Asia FX outperforming SE Asia FX and paying front end rates in KRW, SGD and THB.

Meanwhile, manufacturing PMIs missed in Indonesia and Taiwan, with the latter printing 45.5 for June versus 48.4 in May. It was 54.5 a year ago, for reference. The June read for Vietnam managed to beat expectations and, at 52.5, is still hanging on in expansion territory. New orders hit the highest since December.

Ultimately, the data continues to come in soft on balance. You’re reminded that China’s manufacturing PMI printed a slight miss over the weekend and is still mired in contraction territory. On Monday, the Caixin manufacturing gauge missed, printing 49.4 for June, the lowest since January. That only underscores the importance of the truce between Trump and Xi holding. Another escalation would almost surely be the straw that broke the camel’s back when it comes to deepening the global manufacturing slump.