While today's market was certainly more exciting than many had expected, first surging on the blockbuster ADP report, then plunging in the biggest intraday drop in 14 months after "some" Fed members warned stock prices are "quite high", there is a chance that it will get even more exciting tomorrow, should either Trump or Xi utter a word "out of place" during the first summit between the two world leaders at Mar-A-Lago.
How should traders approach tomorrow's key risk event? Courtesy of Bloomberg's ex-FX trader Mark Cudmore, here are some thoughts.
With fundamental trading semi-paralyzed ahead of Thursday’s Trump-Xi meeting, it’s only prices that matter for the moment.
- The summit between the Chinese and U.S. leaders could have profound implications, but it’s nearly impossible to have any bias going in to the meeting. There’s genuine potential for both positive and negative surprises.
- As a result, markets are in a holding pattern as we wait to see whether risk-aversion is really ready to step it up a notch. Key levels across assets have not yet broken, with the 2.3% line in 10-year Treasury yields being the most critical.
- The context is a global economy that’s strengthening. Excess liquidity remains in the system meaning that yield and returns will continue to be chased overall. The flip side is that there are flickers of risk-aversion in markets that are not used to volatility.
- That environment leads to an adamantly divided market. On one side are those who cite growth and liquidity as a reason to always buy the dip. On the other, those who fear calamity, citing the idea that low volatility has induced excess leverage to chase returns and a misallocation of capital.
- I have sympathy with both views and while trading each individual asset requires conviction, sensible risk management of a portfolio requires a more balanced perspective. I believe markets are vulnerable to a larger correction this month, but the structural macro story leads me to be bullish longer-term, so I don’t expect a sustained bear market.
- Thursday’s high-profile meeting may not provide any concrete outcomes, but it’s likely to at least provide sufficient excuses for markets to act, even if it is on a pre-ordained path.
Unsatisfied by Cudmore's take? Here are some more analyst opinions on what to expect tomorrow.
Citigroup Global Markets Asia (Ken Peng, investment strategist)
- “It’s more a bargaining game rather than one where punishments are doled out”
- Markets feel “comfortable” as there isn’t universal support in the Republican Party for a protectionist trade policy. Failure of the president’s health-care bill is also a factor
- Still, hard to predict how talks will pan out
Oanda Asia Pacific (Jeffrey Halley, senior market analyst)
- China will strive for market stability during the talks
- “The chances of the onshore- and offshore-traded yuan being allowed to trade materially weaker while Mr Xi is visiting the U.S. will be almost zero”
Guotai Junan Fund Management (Guo Rui, vice president)
- Don’t anticipate any news that will move markets
- “The meeting will be more likely about two leaders tentatively figuring out each others’ card hands. Trump tends to be hawkish on words, but the meeting itself signals there is common ground for cooperation”
ING (Jingyi Pan, markets strategist)
- “The market’s imagination appears to be running wild with the possibilities of the outcome from this meeting”
- That will likely make many stay on sidelines ahead of the meeting. “A pickup in volatility post event could nevertheless lure traders out”
- Trump’s past colorfulness when it comes to China’s perceived transgressions means talks could go a number of ways
ANZ (Khoon Goh, head of Asia research)
- Still a risk U.S. could take a strong line on China in the Treasury’s semi-annual currency report
- “Hopefully the Xi-Trump meeting will ease some of the tension”
- Lack of concern in markets shows traders don’t expect rhetoric over China being a currency manipulator to be followed through
Mizuho Bank (Ken Cheung, Asia currency strategist)
- Don’t expect any kind of deal out of the talks
- Don’t think China will be slapped with manipulator tag
- “We’re not looking for breaking news that would change the yuan’s outlook at the summit. The meeting will be smooth as Trump has softened his stance against China”