Risk Can't Stay on, Bass Gives up

Risk trades pare yesterday's gains, which were caused by Trump downplaying trade tensions with China. But follow-up is lacking as markets return to macro factors.  The yen and franc are the only gainers vs USD since the start of the Asian session. US retail sales (exp 0.2%) and Canada CPI (exp 2.0%) due at 13:30 London and US industrial production (exp unchanged) due 45 mins later. More on what Kyle Bass did below.

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Trump's attempt at defusing tensions helped global equities rallya across the board on Tuesday by calling the dispute with China “a little squabble” and said his relationship with Xi remains “extraordinary.” A spokesman for the US Treasury Secretary also said he would head to Beijing soon for another round of talks. The commentary lifted USD/JPY by 30 pips and led to a 22 point rebound in the S&P 500 after Monday's 69-point plunge. But USDJPY is back down to 109.20s on decline in risk appetite.

Beneath the surface the market is concerned about increasingly hawkish and nationalistic commentary in Chinese state-approved press. That could be a sign of the government preparing the domestic audience for a prolonged and worsening battle. The talk from Mnuchin is also double-edged because it appears he may not travel with lead negotiator Lighthizer.

Kyle Bass Throws Towel

One of the most notable stories of the week is of renowned hedge fund China bear Kyle Bass announced the closing of his 4-year old short bet against the Chinese currency. The bet, started in July 2015 gave luster to Bass' star as it occured one month ahead of one of the currency's biggest declines in history. In March of this year, Bass posited China would eventually erode its $3.0 trillion in FX reserves in trying to shore up the yuan. Another well known hedge fund China bear is Mark Hart, who abandoned his his 8-year old yuan short in 2017.

The day ahead will be an opportunity to refocus on the US economy and the crowded long-USD trade. April retail sales are expected to rise 0.2%, or 0.7% excluding autos. Watch the control group closely; it's forecast to rise 0.3%. A strong reading may strengthen Trump's belief that tariffs are working.