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Global core bonds lost ground today with US Treasuries strongly underperforming German Bunds. General risk sentiment improved substantially with the US-China trade war on hold for at least three months. Asian and European markets opened higher causing investors to abandon safe havens. Several Fed heavyweights spoke today, striking a note of caution and perhaps helping US Treasuries’ comeback at the time of writing. German Bunds already paired intraday losses early in European trading without obvious driver. The final reading of European manufacturing PMI’s was slightly revised upwards but had little impact on trading today. Meanwhile, signals of a growing Italian willingness to alter its 2019 budget deficit pushed the Italian BTP futures higher. Italian media reported that Deputy PM’s Di Maio and Salvini are ready to accept new budget deficit targets. The Italian spread over the German 10-yr yield falls back to 280 bps. German yields rise with changes between +0.1 bps (30-yr) to +0.5 bps (10-yr). US equity markets opened with gains around 1.5%. US yields add 3.9 bps (5-yr) to 2.1 bps (30-yr) across the curve.

The usual beneficiaries such as the euro couldn’t profit from today’s risk-on environment following the Trump-Xi Jinping armistice. EUR/USD initially did trend higher, boosted further by reports that the Italian PM Conte is preparing for a deficit of only 1.9%-2.0%. Such a move would indeed satisfy the EC’s demand and clear Italy from the worry radar at least for the short term. The overall positive momentum soon lost some of its mojo however. Investors welcome the recent developments in the trade conflict but rightly stay cautious ahead of difficult trade talks. EUR/USD peaked in morning trading hours before forfeiting virtually all of today’s gains. Clarida’s interview largely went unnoticed. The Fed vice chair said the economy is in a good shape and the (US) outlook looks very solid. He stressed the symmetric aspect of the inflation target, saying the Fed could operate “somewhat above 2% inflation”. On forward guidance Clarida suggested to keep the dot plot but its use/appearance might evolve over time. The pair changes hands near opening levels at 1.134. USD/JPY’s morning rebound lacked conviction and is trading in the 113.5-area. The Chinese yuan holds on more tightly to recent gains, trading at 6.88 USD/CNY.

Sterling’s attempt to recover from Friday’s last minute hit failed despite today’s risk-on climate. A stronger (53.1) than expected (51.7) manufacturing PMI wasn’t able to change the pound’s fortune. Investors are fully focused on the crucial Brexit vote in the British Parliament next week. The Labour Party threatening with a vote of no confidence should Parliament reject the current deal, discomforts markets. Sterling also braces for the UK Attorney General Cox to give a “full and reasoned statement” on the legality of Brexit later today, despite requests of MP’s to publish his legal advice in full. Stakes are high, especially for the hard brexiteers since reports suggests that Cox in his advice warned the UK could be trapped “indefinitely” in a customs union with the EU. That would add further fuel to the fire and damage May’s campaign to broker the Brexit deal to Parliament. EUR/GBP is hovering near 0.892. Cables’ moves are significantly larger, filling bids at an 1.282 intraday high only to fall sharply to around 1.27 currently.

News Headlines

The ECB adopted legal acts on the regular five-yearly adjustment to its capital key and the contributions paid by the national central banks of the EU. These changes will have an impact on the ECB’s reinvestment policy which uses the capital key as distributive code. Italy, Portugal, Greece and Spain will have lower capital key’s going forward.

Qatar said it will leave OPEC next month. The Gulf state indicates that it wants to focus on its liquefied natural gas production. The troubled relationship with Saudi Arabia is probably at play as well.

The US manufacturing ISM rose from 57.7 to 59.3 in November, way above 57.5 consensus.

The USDTRY ticked higher on Monday and probes through falling 10SMA (5.2644), after the downtrend was rejected above 200SMA (5.1216) for the third straight day. Lira was weaker on risk appetite after US/China tariff ceasefire agreement that pushed the dollar higher, as well as overextended daily studies which signal correction. Higher oil prices and high inflation in Turkey, despite Nov reading (21.6%) coming below expectation at 22.5%, weigh on lira. Today's rally also cracked the upper boundary of larger bear-channel (5.2515), adding to signals of correction. Daily close above 10SMA/trendline resistance would signal correction, which needs further verification on extension above 20SMA (5.3408) and 30SMA (5.4062). Such scenario would also confirm temporary base and keep on hold attempts through 200SMA and attacks at psychological 5.00 support.

Res: 5.2850; 5.3450; 5.4062; 5.4373
Sup: 5.1360; 5.1216; 5.0854; 5.0000

US ISM manufacturing rose to 59.3 in November, up from 57.7 and beat expectation of 57.5. Price paid dropped to 60.7, down from 71.6 and missed expectation of 70.5. Employment component rose 1.6 to 58.4.

ISM noted that:

• Comments from the panel reflect continued expanding business strength.
• Demand remains strong, with the New Orders Index rebounding to above 60 percent, the Customers' Inventories Index declining and remaining too low, and the Backlog of Orders Index steady.
• Consumption strengthened, with production and employment continuing to expand, both at higher levels compared to October.
• Inputs — expressed as supplier deliveries, inventories and imports — gained as a result of inventory growth.
• Supplier delivery easing improved factory consumption as well as inventory growth, and import expansion was relatively stable.
• Lead-time extensions continue, while steel and aluminum prices are declining.
• Supplier labor issues and transportation difficulties are at more manageable levels, but they continue to limit production potential.

Full release here.

The Canadian dollar has jumped to a 2-week high in the Monday session. Currently, USD/CAD is trading at 1.3175, down 0.88% on the day. On the release front, the key U.S. indicator is ISM Manufacturing PMI, which is expected to edge lower to 57.5 points. Canada will also release Manufacturing PMI. On Tuesday, Canada publishes Labor Productivity, which is forecast to dip to 0.4%.

Investor risk appetite has jumped on Monday, and that has translated into strong gains for minor currencies like the Canadian dollar. On Monday, the currency improved to its highest level since November 20. The catalyst for the boost was the meeting between President Trump and Chinese President Xi Jinping on the sidelines of the G-20 summit. Just last week, Trump had threatened to raise tariffs on $200 billion in Chinese products from 10 percent to 25 percent on January 1. However, the tone was optimistic after the meeting, with China receiving a short reprieve. The sides have agreed to continue talks for another 90 days, and the U.S. tariffs will take effect if no agreement is reached. The markets were clearly relieved that the tariff war has de-escalated, and European markets have jumped on Monday, following the lead of Asian markets. At the same time, the U.S. and China remain far apart on resolving the trade war, and the greenback will likely reverse directions unless the parties make substantial progress in the trade dispute, which has shaken the markets and threatens to derail global growth.

More from Trump regarding the weekend meeting with Xi. He said:

• "My meeting in Argentina with President Xi of China was an extraordinary one. Relations with China have taken a BIG leap forward! Very good things will happen. We are dealing from great strength, but China likewise has much to gain if and when a deal is completed. Level the field!"
• "Farmers will be a a very BIG and FAST beneficiary of our deal with China. They intend to start purchasing agricultural product immediately. We make the finest and cleanest product in the World, and that is what China wants. Farmers, I LOVE YOU!"
• "President Xi and I have a very strong and personal relationship. He and I are the only two people that can bring about massive and very positive change, on trade and far beyond, between our two great Nations. A solution for North Korea is a great thing for China and ALL!"

https://twitter.com/realDonaldTrump/status/1069575605199482881

https://twitter.com/realDonaldTrump/status/1069577273819443200

https://twitter.com/realDonaldTrump/status/1069581524180324352

The US 500 index opened higher today as it posted a positive gap, surpassing the 50- and 200-simple moving averages in the daily chart. The index is set to complete the sixth green day in a row after the rebound on the long-term ascending trend line.

Short-term oscillators support the bullish move. The RSI is standing above the neutral threshold of 50 and pointing higher, detecting accelerating positive momentum. The MACD, is still below zero line but is strengthening its movement to the upside.

Further upside pressures could drive the price towards the immediate resistance of 2820, identified by the latest highs. A break above this level could move the market towards the next resistance area of the 2863 barrier, taken from the inside swing bottom on September 7. The all-time high of 2940 could be a level for traders to look for.

On the flipside, a downside retracement could meet resistance at the moving averages, which stand around 2765. A downside break may open the way for the 2626 zone, the November 22 trough, before the October 29 bottom of 2600 comes into view.

Overall, both the short-term and long-term pictures appear positive at the moment.

• A ceasefire in the trade war is as good as it gets at the G20. It is good news for financial markets and the global economy and it paves the way for a real deal in 2019, which removes all tariffs imposed and leads to a further opening of the Chinese market.
• Trump's need for a deal with China and a strong US economy when he goes into the 2020 election campaign increases the chance of an end to the trade war in 2019.
• While we should expect bumps in the road, we continue to look for a deal next year and odds are rising it could come as early as the end of Q1.
• However, the long-term rivalry between US and China is here to stay. It is set to change from trade war to tech war and rivalry on the global scene.

The facts and initial responses

A statement released by the White House after the dinner called the meeting 'highly successful' and listed the following key features of the agreement.

• A 90-day ceasefire with no increases in tariffs or new tariffs imposed. If no agreement is reached after this period, the 10% tariff rate on USD200bn worth of Chinese goods will be raised to 25%.
• China agreeing to buy a not yet specified, but very significant, amount of US goods within agriculture, energy and industry products.
• Immediately beginning negotiations on 'structural changes with respect to forced technology transfer, intellectual property protection, non-tariff barriers, cyber intrusion and cyber theft, services and agriculture'.

In addition, Xi stated he was open to approving the previously unapproved deal between the US mobile technology company Qualcomm and Dutch NXP (a semiconductor company). Xi also agreed to designate Fentanyl as a Controlled Substance, meaning that people selling Fentanyl to the US will be subject to China's maximum penalty under the law.

Trump was quoted saying: 'This was an amazing and productive meeting with unlimited possibilities for both the United States and China'.

China's foreign minister Wang Yi, who sat next to Xi Jinping during the dinner, said afterwards that 'the discussions on economic and trade issues were very positive and constructive' and added that 'the two sides agreed to mutually open up their markets and as China advances a new round of reforms, the United States' legitimate concerns can be progressively resolved'. The word 'legitimate' is noteworthy here as it shows China acknowledges it needs to do more to open up further. Here's a China Daily overview of the agreement.

Outlook: deal likely in 2019 before Trump enters 2020 campaign

The agreement is as good as it gets at this stage and shows in our view that after Trump stating for a long time that it was not time to talk, he now wants to go into serious negotiations. After he left the negotiating table in May, it was clear he wanted to put pressure on China first by raising tariffs before he was ready to talk. Judging from his initiative to restart the trade negotiations, he believes he has added as much pressure as he can and that further tariffs could end up hurting his own hand in the trade talks. As we argued in the US-China Trade – Five reasons why we still see a 60% chance of ceasefire, 29 November 2018, a further escalation could hurt the US economy and stock markets further.

The next three months we are set to see intense negotiations between the two sides and we expect it to be a bumpy ride towards a deal. Most likely China will send a big team of officials to Washington as early as mid-December. They will be led by China's economic tsar Liu He and the US trade team will probably be led by US Treasury Secretary Stephen Mnuchin but with US Trade Representative and trade hawk Robert Lighthizer playing a central role as well. Trump and Xi also agreed to meet again soon. A meeting will most likely take place during Q1 next year.

We expect an end to the US-China trade war next year to remove a significant negative tail risk for the global economy and financial markets. The probability of moving into 'phase three' (as Trump has called it) with a further escalation has now been reduced and should thus already now be positive for market sentiment. A resolve of the trade conflict is set to help the global economy to stay robust and will not least underpin a recovery in China during the year. It is thus set to remove a significant drag from the biggest contributor to global growth, as China drives one-third of the expansion in the global economy.

Trump to face criticism as 'Made in China 2025' is not addressed

Trump is likely to face criticism from some fellow Republicans and from Democrats that a deal with China is not tackling the industrial policy 'Made in China 2025' with big investments in technology. It is not mentioned at all in the statement and it is one of China's 'red lines' in the trade war. China simply sees it as necessary to continue climbing the development ladder and not get stuck in the 'middle income trap'.

Lighthizer and ultra-hawk Peter Navarro might be unhappy about the agreement as well, as they seem to be in favour of going all the way on tariffs. However, Trump's pain threshold is probably not high enough when it comes to the economic cost domestically as he is eyeing the 2020 presidential election campaign. In our view, he aims to campaign on a China trade deal and a strong economy on top of issues such as immigration and crime. He thus needs a trade deal to be done in 2019.

Despite some criticism, we believe Trump will be able to sell it as a big win to his voters. He will point to (a) he is the first president that has really stood up to China and (b) he has secured a big increase in purchases of farm products and energy and a further opening of the Chinese market.

Long term rivalry to continue despite trade deal

While we look for a deal, possibly as early as end-Q1, we still believe we are only at the beginning of a long-term US-China rivalry, as China is rising to surpass the US economy over the next 10-15 years and by 2050 could be double the size of the US economy. However, it will move from a trade war to a tech war and increasingly be focusing on US protection of technology and big restrictions on technology exports to China. We have already seen that this year. The rivalry will also be intense on the global scene, not least in Asia with more 'Freedom of Navigation' cruises in the South China Sea and the Taiwan Strait.

Daily Pivots: (S1) 113.31; (P) 113.51; (R1) 113.69; More..

Intraday bias in USD/JPYremains neutral for the moment. On the downside, below 113.18 will target 112.30 support first. Break there will target 111.37 and possibly below. On the upside, above 114.03 will target a test on 114.54/73 key resistance zone. Overall, price actions from 114.54 are seen as a consolidation pattern. Hence, even in case of deep decline, downside should be contained by 38.2% retracement of 104.62 to 114.54 at 110.75 to bring rebound.

In the bigger picture, corrective fall from 118.65 (2016 high) should have completed with three waves down to 104.62. Decisive break of 114.73 resistance will likely resume whole rally from 98.97 (2016 low) to 100% projection of 98.97 to 118.65 from 104.62 at 124.30, which is reasonably close to 125.85 (2015 high). This will stay as the preferred case as long as 109.76 support holds. However, decisive break of 109.76 will dampen this bullish view and turns outlook mixed again.

Daily Pivots: (S1) 0.9958; (P) 0.9982; (R1) 1.0012; More...

USD/CHF is still bounded in range of 0.9908/1.0006 and intraday bias remains neutral. On the downside, break of 38.2% retracement of 0.9541 to 1.0128 at 0.9904 will resume the fall from 1.0128 to 0.9848 key support level. Break there will indicate near term reversal and target 61.8% at 0.9765. On the upside, break of 1.0006 will argue that the pull back from 1.0128 has completed. Intraday bias will be turned back to the upside for retesting 1.1028.

In the bigger picture, rise from 0.9541 could have topped at 1.0128. But as long as 0.9541 support holds, we'd still expect rise from 0.9186 to resume at a later stage. Break of 1.0128 will target 1.0342 key resistance. However, break of 0.9514 will pave the way back to 0.9186 low.

Daily Pivots: (S1) 1.1283; (P) 1.1343; (R1) 1.1380; More.....

EUR/USD is staying in range of 1.1267/1472 and intraday bias remains neutral. As long as 1.1472 resistance holds, deeper decline is expected in the pair. On the downside, break of 1.1267 will target 1.1215 low first. Firm break there will resume larger down trend from 1.2555 for 1.1186 fibonacci level next. However, considering bullish convergence condition in daily MACD, firm break of 1.1472 will be suggest medium term bottoming and turn outlook bullish for 1.1814 resistance instead.

In the bigger picture, as long as 1.1814 resistance holds, down trend down trend from 1.2555 medium term top is still in progress and should target 61.8% retracement of 1.0339 (2017 low) to 1.2555 at 1.1186 next. Sustained break there will pave the way to retest 1.0339. However, break of 1.1814 will confirm completion of such down trend and turn medium term outlook bullish.