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Has Trump's impatience derailed the China-US trade negotiations?

Posted on: 13 May 2019 , by: Darren Sinden , category: Market Review

Pulling no punches

Donald Trump is at it again.

Love him or loathe him, the US President is consistent. 

Thanks to a series of tweets and blunt comment at a political rally, Mr Trump appeared to undermine weeks of goodwill and negotiations over US-China trade talks - or did he? 

I say that because it's not only the President that has been highly critical of China. Chief US trade negotiator Robert Lighthizer accused the Chinese of reneging on items in negotiations that had been previously agreed. Was there a massive misunderstanding between parties about where the other was situated according to the agreement? 

Lost in translation?

Cross-cultural negotiations like these are full of potential for misunderstanding. Discussions as complicated as these provide plenty of opportunities for misinterpretation. Indeed the phrase Chinese whispers is an apt metaphor for critical nuances that may have been 'lost in translation'.

Whatever the cause, the markets have taken flight, concerned that negotiations could fail and the trade war escalate. That escalation is, at the time of writing, less than twelve hours away thanks to President Trump’s threat to add an additional tariff of 15% to a $200bn basket of Chinese exports to the USA. This is on top of the 10% duty that they currently attract.

Unsurprisingly, China has said that it will retaliate if additional tariffs are imposed.

An uncertain outlook from here

Markets have, to some extent, voted with their feet over the additional uncertainty. The narrative that opened 2019 and led through much of Q1 was that US rates were staying low and a US-China trade deal would soon be concluded. Both have now been called into question.

We got a clear insight into the market's reaction to the 'cooling 'of relations between the US and China in the results of the ten-year bond auction on Wednesday last week. 

The sale of $27bn worth of US govt ten-year treasury notes had the lowest bid-to-cover ratio of any ten-year treasury bond auction for a decade. This implies that buyers stayed away from the auction.

A costly exercise

Refinancing the US$15.8tn national debt through regular bond sales is fundamental to the ongoing prosperity of America. Any additional friction in that process is certainly worthy of note. FYI, China holds around US$1.3tn of US national debt according to data from Bloomberg and the US Dept of the Treasury. Indeed, some 40% of US national debt is owned by foreign states, institutions, and individuals. How many of those stayed away from Wednesday's auction I wonder?

Equities sold off too

US equities took flight, and at the time of writing, the US 500 index was down 2.63% over the prior seven days and looking likely to fall further.  

As we can see from the chart above, those falls have taken the broad-based US index below the uptrend line extended from the 7th of January low of 2524.56. That line was broken circa 2898 on the 7th of May.

2862 is where we find the 50-day EMA-line, which has effectively supported the 2019 rally since mid-January. The 20-day EMA-line, which had underpinned the rally from the turn of the year, has already been taken out and could now act as resistance. 

What could happen from here

My thoughts are these: Markets hate uncertainty, however over the last month the secure narrative that they had been following has unwound. This opens a door to a chaotic landscape, in which the path for US interest rates is unclear and an escalating trade war inhibits global growth.

We have seen these fears reflected in Aussie dollar weakness (significant exporter to and trading partner of China) and Japanese yen strength (safe haven).

Trade talks were due to resume in Washington on Thursday, however, the chances of a deal appear to be receding into the distance.   

Levels to watch

Look for a weekly close below the 50-day EMA-line. From there, we can expect to fill the gap left over from the 29th of March, at 2836, and then test the 4th of March high at 2816.88. 

That day's low at 2767 comes into focus thereafter (incidentally that's where we currently find the 200-day EMA-line). The 8th of March low at 2722.27 is next on our list, with the 8th of February low at 2682 the next downside level of interest in the index. 

The placement of stop-losses on any short trades will depend on your entry point. However, just above 2862, the 50 day EMA-line, is an excellent place to start. 2848, the 1st of April low could be another. 

Be aware though that this whole course of action could be moot if China and the US conclude a trade deal or move significantly closer to one, but at the moment they look like they are sailing away from each other.

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