US-China trade talks resume in Washington today with the aim of striking a comprehensive deal ahead of the March 1st deadline. A sharp slowdown in auto sales sparked fresh worries about the Chinese economy Monday but the holiday-thinned market shrugged. Gold and silver are the only gainers versus the US dollar while all major currencies are down against the greenback. Another round of UK economic data is due as parliament continues to fray. The Premium video below discusses the updated EURUSD charts and analysis, GBPUSD, DAX, SPX, VIX and USDCHF.
Metals are supported by the premise that as long as gobal economic data shows no support for fresh policy tightening as inflation remains neutral. Energy prices are also pushing higher, while the Premium OIL long deepens in the green.
UK Jobs growth for December pushed higher, adding 167K for the quarter, while pay growth rose 3.4% for the year further exceeding the level of inflation at 2.1%.
Chinese auto sales fell a staggering 15.8% in January in the seventh consecutive decline. The drop underscores the challenges that policymakers face in re-stoking demand. Much of the risk trade rebound in the past six weeks has been based on the belief that Beijing can re-ignite growth with easing but that's no guarantee.The drop in sales stoked speculation of further easing and that helped to boost gold to a 10-month high and oil to a three-month high on Monday. The question then becomes: When will China's stimulus program start to to show up in the data?
The market brushed off the worries in early trading after Trump touted progress on a trade deal. At the same time, there is growing fear the US will pivot to a battle with the EU starting with auto tariffs. The Dept of Commerce is due to report on national security concerns as a justification for tariffs but the White House may keep the recommendation secret for now.
In the UK, seven Labour MPs quit the party over a shift leftwards, Brexit policy and other grievances. In the big picture it's a further fragmentation of the traditional parties, which are both struggling with internal divisions on Brexit. In the smaller picture, this may free up a handful of Labour MPs to support May's deal rather than face a hard Brexit. Cable certainly wasn't bothered as it rose 40 pips to start the week.
US indices are bouncing higher ahead of the long weekend (US presidents Holiday on Monday), with gold and oil firming along. Interestingly, energy is outperforming metals, while gold rallies against silver as the mint ratio (Gold/Silver Ratio) reaches a 2-month high. The OIL Premium long deepens further in the green. UK retail sales jumped 4.2% y/y, their biggest annual rise since December 2016, but GBP remains weighed by the Brexit impasse. Yesterday saw the worst US retail sales number in a decade, which weighed on USD, but the market was skeptical. 2 Premium trades were added yesterday to the Premium Insights. Technically speaking, both metals trades remain the strongest as the chart below shows. January Empire manufacturing (NY Fed) is due at at 13:30 GMT, followed by US industrial production for January exp +0.3% is due at 14:15 GMT.
Emergency solution usually not a good signThe White House confirmed there won't be another shutdown with Trump poised to sign the spending bill. At the same time, he will declare an emergency to build his border wall. That's sure to create political drama but will matter little to markets. If anything, his fight over the wall may sap his resolve to battle with China where multiple reports said that negotiations are stalled on structural issues – something we warned about yesterday.
US Treasury secr'y Mnuchin continues to sound off his usual optimistic notes, describing talks with with China's Vice Premier Liu He as “productive.” But officials familiar with the discussions indicate that China is resisting US demands for further structural economic reform. Investors are becoming increasingly cautious as the round of talks looks set to wrap up without a resolution. SPX has yet to make a decisive close above the 200-DMA.
Yesterday, US retail sales sank 1.2% in December in the biggest decline since 2009. They had been expected to rise 0.1% after a 0.2% climb in November. The weakness was widespread with the control group down 1.7% compared to +0.4% expected. That was the worst since 2000. Initially the US dollar sank but it later recovered against the euro and pound. USD/JPY fell a half-cent and the losses stuck.
What puzzled investors is how sales could have been so weak when other indications were that customers were solid in the month. Redbook sales were strong and corporates have been upbeat on the US consumer. The government shutdown may have hurt and the equity selloff on Christmas Eve may have curbed Boxing Day sales. If so, those are issues that reversed.Retail sales bounced back sharply in January, rising by 1% on the previous month, official figures showed.
Strong UK salesUK retail sales rose 1% in January after a 0,7% decline in December. Year on year, retail sales rose 4.2%, posting their biggest annual rise since December 2016.
|Retail Sales (m/m)|
|1.0%||0.2%||-0.7%||Feb 15 9:30|
The market remains upbeat about US-China trade negotiations but may be underestimating the risks. Lofty exports Chinese data were released overnight. US retail sales on Thursday are sure to be a market mover. A new Premium trade in commodities was issued yesterday and a trading update was posted on GBP. All indices trade are now closed and a new Trade is due up today. Sterling traders await new debate on Brexit-related amendments in Parliament later this eveing so expect prolonged GBP swings.
The consensus in markets is that the US and China are on their way to deal. Trump and Xi have both sent signals that they don't want a trade war to derail their economies. Based largely on that sentiment, Chinese stocks have climbed 13% from the recent lows and the S&P 500 is up 17% including 8 more points on Wednesday. Markets have gotten a bit ahead of themselves.
The rule of thumb on negotiations is that they're always toughest right at the end. It won't be smooth sailing to the finish line and at this point negative headlines are going to hurt more than positive ones might help. The wild card in negotiations is Robert Lighthizer. He's been pining to be in this spot for his entire 40-year career and he's a notorious China hawk. It would be a big surprise if he doesn't try to push China further than Xi is willing to go.
Elsewhere, economic news Wednesday showed that the market hasn't entirely moved on from inflation worries. US CPI rose 2.2% y/y compared to 2.1% and that gave a lift to the dollar, especially against the euro which slid 65 pips to 1.1260 on the day including a dip after CPI. EURUSD basing process turns to US retail sales and PPI.
Gold also posted an outside day in a fall to $1302 after rising as high as $1318. Keep an eye on $1300/$1296 in the day ahead. A break below would signal a deeper retracement and possibly the end of the uptrend.
Coming up is big slate of economic data culminating with US December retail sales at 1330 GMT. This is the December data that has been delayed due to the shutdown. It's a key month for consumers and the consensus is for a 0.1% rise following the 0.2% climb in November. The control group is the spot to watch and it's forecast up 0.4%. Beware of the secular trend towards earlier Christmas shopping around Black Friday in November pushing sales ahead then leading to a miss in December.
|Consumer Prce Index (y/y)|
|1.9%||1.9%||Feb 15 1:30|