US China Talks Lose Momentum

In the latest trade (tennis) match between US and China, markets are off their lows after Chinese officials announced earlier they were inviting US negotiators for more talks. Markets had dropped to new session lows (SPY 3091) in late Asian trade on mounting threats from Beijing as US Congress sent a bill on Hong Kong human rights to pres Trump to sign into law (more below). If/when he does, expect a firm reaction from China. GBP, NZD and EUR are leading FX ahead of the US session. US jobless claims, Philly Fed survey, existing home sales and LEI are due next.  The Premium video focuses on the use of risk reversals in trading EURUSD and unveiling/dissecting that mystery ratio. 

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Economic news was light Wednesday aside from a Canadian CPI report that was precisely in-line with estimates. Oil rebounded strongly on tighter-than-expected US inventories, thereby helping to provide support to indices. US crude seen capped at 57.95, while USDJPY struggles for fresh momentum at 108.75.80. SPY remains capped at 3091, but a break below would seen stabilizing at 3079, while upside capped at 3114.

Signs are mounting that Trump is less-inclined to make a deal with China than markets believe. A report saying talks could stretch into 2020 weakened risk trades Wednesday, leading to JPY strength and AUD weakness.The main market mover continues to be the hot-and-cold China-US trade game. Signs have been mounting that trouble is brewing but it's been impossible to fight the recurring positive momentum in markets.

A Reuters report Wednesday finally dented the upbeat armor. It said that talks are getting more complicated and could slide into next year. It sent the S&P lower by more than 1% at one point and USD/JPY quickly fell 30 pips.

The dip buyers bought both, as usual, but later there were more signs of trouble. CNBC reported that the deal was 'in trouble', citing four sources. The sides are failing to find common ground on tariff removal.

Then the President himself said he didn't think China was “stepping up to the level that I want.” He also took on the argument that tariffs are hurting the economy by highlighting the strength in employment and equities.

Finally, the US Senate passed the Hong Kong support bill and Trump is expected to sign it. The legislation demands sanctions for anyone found to be interfering in the region. It will undoubtedly anger China.The market believes Trump won't risk an equity selloff and economic consequences but his comments today suggest he doesn't think the impact will be overly damaging to his re-election chances.

At this point, it doesn't appear as though Trump has made up his mind but the risks of a blowup are higher than markets are implying.