The Balance Of The News

Global equities moved higher Friday, albeit gingerly as circumspect investors assessed the balance of the news flow.

Sino-US relations worsened at the margins, as the Pentagon confirmed this week’s early reporting that the Trump administration would add CNOOC, SMIC, China Construction Technology, and China International Engineering Consulting Corp to a list of firms controlled by the PLA, raising sanctions risks. It’s the latest in a series of aggressive maneuvers by the Trump administration, which is keen to cement the outgoing president’s “tough on China” reputation and perhaps undermine early efforts at diplomacy under Joe Biden.

Shares of CNOOC, which came under enormous pressure when the news first leaked, closed out their worst week since the oil crash earlier this year, tumbling nearly 22%.

The US is also reportedly open to some manner of settlement in the case against Huawei CFO Meng Wanzhou, who spent the last two years as a kind of political prisoner in Canada, after she was arrested in December of 2018 at the behest of the US, even as Donald Trump dined with Xi Jinping in Buenos Aires.

Although sources said the terms of any deal are not final, Meng could be allowed to return to China in a deferred prosecution agreement if she admits to wrongdoing, which in this case means lying to banks about transactions linked to Tehran. Meng, sources contend, wasn’t immediately inclined to accept any such deal given that she still claims to be innocent.

China’s incomparable Hua Chunying (a fireball of a spokeswoman for the Foreign Ministry who has an amusing Twitter account for those interested), reiterated Friday that the US’s case against Meng is “100% a political incident.” Her detainment prompted retaliation from China, which subsequently arrested two Canadians in a truly absurd tit-for-tat which I won’t recount here in the interest of protecting your sanity.

It’s not immediately clear why Trump would want to resolve this issue with China prior to Biden taking office while simultaneously turning the screws on multiple other fronts. But I suppose there’s a method to the madness. Or not.

Meanwhile, oil is apparently satisfied with a compromise OPEC+ deal that avoids a taper tantrum, even as this week’s tortured negotiations seem to presage similarly fraught proceedings in the months ahead as the cartel and its allies attempt to navigate the choppy waters around balancing the market ahead of vaccine rollout.

500,000 barrels per day will come back online starting next month. After that, members will hold monthly meetings to debate next steps. If each one of those monthly get-togethers is as drawn-out as this week’s meeting, they may as well just hold one, ongoing, open Zoom session.

For Goldman, the near-term compromise is satisfactory. OPEC+ hurdled the bar, and the plan to exit the cuts in a coordinated fashion, with an eye towards expanding production and drawing inventories, is acceptable, the bank reckons. Goldman sees an ongoing and durable rally in prices next year, alongside a collapse in implied vol. The bank’s 12-month Brent target is unchanged at $65. (I guess what I would ask is why monthly OPEC+ meetings would be conducive to lower volatility — it seems to me that would increase the scope for price swings.)

For macro context, higher oil generally supports rising breakevens, which were the talk of the proverbial town in bond land stateside this week. Rising oil prices are part and parcel of the reflationary narrative and will be a risk-positive development at a time when disinflation is still the main concern for most economists in the wake of the pandemic (despite some shrill calls that “money printing” and fiscal largesse are “destined” to push the entire developed world towards Weimar-style inflation.)

The market was awash with Brexit headlines Friday. Making sense of them is an exercise in abject futility. They’ll figure it out. Or maybe they won’t. If they don’t, the worst downturn for the UK economy in 300 years (and that “extra” zero is not a typo) will probably continue into 2021.

“The whipsawing headlines on a deal are spurring demand for currency options that would benefit no matter the outcome,” Bloomberg’s Ven Ram wrote. “Long strangles are being priced ever higher given that the window for getting a trade agreement done is narrowing by the hour [and] that follows a steepening of the GBPUSD vol skew, a result of sharp demand for low-delta out-of-the-money options,” he added, noting that “pricing in the volatility markets show that, depending on the result, traders anticipate a move to $1.3189 to $1.3703 on cable.”

That gives you a sense of just how indeterminate this really was as of Friday.

As an aside, it’s never been entirely clear to me why the UK periodically pretends to hold all the cards in this now four-and-a-half-year-long debacle. Like everyone else not directly affected, I’m just hoping for the best. But I would gently advise that the next time a major, developed economy decides to hold a referendum on something, lawmakers ensure the public is fully informed about the potential consequences ahead of time.

Of course, if the US adhered to that exhortation, elections would be impossible given the American public’s aversion to reading anything longer than a tweet.