After months of waiting Donald Trump finally dropped a hint suggesting that Chinese negotiators have been dragging their feet in meeting US demands. On Saturday, the US president threatened to enforce higher tariffs as trade talks stall. Financial markets immediately adjusted to the downside at Sunday/Monday opening with the Japanese yen appreciating as much as 0.75% against the greenback. In the equity market, indices sharply dropped with futures on the S&P 500 opening more than 1% lower – front month contracts slid as low as 2,883 points. Across the Atlantic, futures on the EuroSTOXX 50 gapped 0.75% to 3,433 and continued to grind lower to reach 3,381 points. EUR/USD suffered a moderate sell-off as the single currency returned quickly to Friday close after sliding 0.40% during the Asian session. Looking at both markets, it seems that FX traders were more conscious of the risk of failure of the negotiations as the USD appreciated only moderately against its peers, while overall volatility remained low. On the other hand, equity investors were overly optimistic, as they didn’t even consider the possibility of failure. The VIX is up 42% on Monday morning as it jumped to 18.30%.
It was only a matter of time before the truth came out: the negotiations between China and the US are not going particularly well despite lots of enthusiastic tweets from Donald Trump and positive comments from its administration. In view of most recent events, it looks like President Trump greatly overestimated the grip that he has on China. According to the latest news, it seems that Chinese officials are still traveling to the US for the “final” round of talks.
However, it is hard to tell whether it was just a threat aiming at forcing China to make real concessions or measures that will be implemented soon. We tend to favour the second option. Nevertheless, it may take a couple of days for the equity market to stabilise. After such a long and sustained rally, what could be more normal?
US crude production, Trade weigh on oil prices
Resisting the steady increase in US oil inventories over the past two weeks, oil prices are losing momentum, as headlines about the year-long trade dispute between the United States and China has prompted investors to divest themselves of risky investments. Oil prices have turned down from 6-months high, with Brent crude trading below 70 (-1.75%), West Texas Intermediate at 60.80 (-1.80%) and finally Shanghai futures at CNY 471 (-2.80%). Yet it seems that despite recent tweet from US president Donald Trump about potential tariffs hike, the situation has not changed. OPEC output cut is still in place while major supply shortages related to Iran, Venezuela, Nigeria or Libya are still in place. It is therefore to consider that positive headlines concerning US – China trade talks should again benefit oil prices.
US EIA crude oil inventories for the week ended 26 April have been pointing to a rise of 9.93 million, its highest level since November 2018 while total production reached a record of 12.3 million bpd.
Currently trading at 60.80, WTI is heading along 61.50 as buying pressures are emerging.