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Daily Fix: Question of the day - Will the HK bill derail the US-China trade talks?

21 Nov 2019
A quick update today but one that seems important. There is an intense debate on whether the US Senate, having passed the HK Human Rights and Democracy Bill, truly impacts and derails the US-China trade deal.

A quick update today but one that seems important. There is an intense debate on whether the US Senate, having passed the HK Human Rights and Democracy Bill, truly impacts and derails the US-China trade deal. Importantly, the bill now heads for a vote in the House, then onto Trump, who has 10 days to sign it through or veto the act. That said, and on a technical note, should Trump veto the bill, it can be trumped by a two-thirds majority ruling in Congress.

Some have focused on a series of tweets today from CNBC Beijing bureau chief, Eunice Yoon, who has relayed a view from China academics, that China will not link the HK bill to a trade deal. It goes against the narrative that China has already stipulated they will retaliate, with China’s foreign ministry putting out a statement that read “Don’t say I didn’t warn you”. I guess it also seems unlikely we are going to see a ‘Phase One’ trade deal emerge in the immediate future, especially with the PRC in HK, but whether the talks collapse is another thing.

Anxiety has naturally picked up, and while Europe is modestly de-risking, there is absolutely no panic and it’s all very measured. The fact we have heard that “US commerce department confirms it has begun issuing some licenses for some US companies to supply non-sensitive goods to Huawei technologies” is helping.

Calmer heads therefore prevail, and it feels like just some modest profit-taking in a market priced for perfection. The lack of gold buyers suggests that at the margin, the market is part buying the Yoon story, thinking that faced with the choice of new tariffs on the 15 December, it may not be worth walking away from talks for the sake of a human rights bill.

I have an eye on the US500 as today’s candle has shown decent buy orders coming in at 3101 and we’ve had every opportunity to really rollover. I remain bullish for now, but understand we are pricing in so much news and the market is now sufficiently long and should vols pick up, I will be happy to turn neutral.

US500 daily chart

"US500 daily chart"

As always, USDCNH is the go-to guide on more direct sentiment around trade. If the market feels tariffs are to be reduced, we go short USDCNH, and vice versa. As we can see, USDCNH has poked its head above the 38.2 Fibo of the October sell-off, as concerns have picked up a touch and should this push into 7.60, it could be the catalyst for the S&P 500 to actually head below 3100. It may be the trigger for active managers to move away from FOMO and perhaps lock in performance.

USDCNH daily chart

"USDCNH daily chart"

AUDUSD, another China proxy, printed an outside day reversal yesterday but has lacked any follow-through today and found sellers easy to come by, although we should see support kick in around 0.6770.

Aside from trade, it's hard to turn away from UK politics, notably, because I am in Blighty and immersed in the constant flow of election-related news. The televised debate between Johnson and Corbyn saw Johnson just about get the bragging rights, but he wasted a chance to really take it to Corbyn and his lack of focus on anything other than Brexit was his undoing. The Tories are romping it in the polls though, with one sports spread betting market, giving the Tories 345 seats and a decent majority. This could be very important for the next stage, the Transition Period.

GBPJPY is a chart firmly on the radar, although right now it is a snooze fest, with price moving in a tight range really since 18 October. Which way this goes, no one knows, but I suspect it’s higher and it could be the start of a new trend into 144.00 and above. Respect and react.

GBPJPY daily chart

"GBPJPY daily chart"

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