|23 June, 2019

No let-up in trade war likely even if tariffs are reduced

For the past 15 years, Stephen Innes has specialised in electronic pricing and trading of G10 spot Asian EM FX/Commodities and Indices as head of trading Asia for an online FX and CFD broker. He managed market exposure and electronic market-making engines in NY4 and TY3. He has participated in numerous white paper studies to prove the efficiency of exclusive order routing and the use of fewer liquidity providers to generate more efficient price streams and execution metrics. He has more than 25 years of experience trading both voice and electronic markets with top tier financial institutions. With deep-seated knowledge of G10 and Asian currency markets as well as precious metal and oil markets, he is regularly called upon by leading TV, radio and print publications to offer views on the financial markets.

Website: https://vanguardmarkets.com/

Weekly Q&A: Stephen Innes, co-founder and multi-asset trader at VM Markets Pte Ltd

Chinese and U.S. flags are set up for a meeting during a visit by U.S. Secretary of Transportation Elaine Chao at China's Ministry of Transport in Beijing, China April 27, 2018. Picture taken April 27, 2018.

Chinese and U.S. flags are set up for a meeting during a visit by U.S. Secretary of Transportation Elaine Chao at China's Ministry of Transport in Beijing, China April 27, 2018. Picture taken April 27, 2018.

REUTERS/Jason Lee

1) What is your view on oil prices in 2019?

The unease across financial markets has intensified the recent sell-off in oil markets. It's tough constructing a bullish argument amidst a constant stream of news flows pointing to a worsening global outlook as tariffs present a significant threat to growth in the United States, and in turn the health of the global economy. And to complicate matters, even if OPEC extends its supply compliance, given the burgeoning non-OPEC supply conditions as evidenced in the latest U.S. inventory reports, OPEC-plus will face a scabrous task balancing the current supply with the demand side of the equation.

I'm shocked that the considerable supply tail risk following tanker attacks faded quickly, so it's back to the market’s seemingly endless preoccupation with U.S.-China trade and the outlook for global oil demand. But I do believe the market is underpaying this risk and should at minimum provide support for oil prices

I think OPEC-plus will maintain their supply discipline supporting prices.

Finally, I think PBOC (People’s Bank of China) and FOMC (the U.S. Federal Reserve’s Open Market Committee) stimulus will boost global markets and lend much-needed support for oil prices, where I see Brent eventually settling in at around $70 per barrel this year.

But it could get worse before the central bank doves come to the rescue.

2) Do you expect Brent prices to reach $100 anytime soon?

I don't expect this to be the case any time soon as the market is far too busy with waxing recessionary fears that this will continue to weigh on risk assets and keep the oil market’s topside ambition in check.

3) Have U.S. sanctions on Iran oil exports already been priced in?

They have been fully priced into the equation, but that’s not to say President Trump might not weaponise them again to push prices lower. While very unlikely at this stage, if prices shoot up to $80 per barrel (especially if OPEC overtightens) the U.S. President could provide sanction waivers to Japan, Korea or India, countries that are not directly in his trade war crosshairs. So, we always need to keep that in the back of our mind.

4) What about oil demand? Do you expect slowing or growing demand for the remainder of the year and why?

Gloomy best sums our view. Mind you, I don’t try to reinvent the wheel on this one and pay attention to the forecasting agencies like OPEC, and especially International Energy Agency (IEA), that have a good tracking record of reading the pulse of the market. Even as tensions in the Middle East simmer, buttressing prices, in the long term the market is facing slowing demand, falling prices and a glut of oversupply, according to an IEA report released on June 14.

But when compounded with the negative effect trade tension is having on US hard economic data, it does suggest things could get much worse before improving.

5) What are the most significant risk factors for global markets in the coming weeks?

Trade war - need I say more?

 
6) Do you expect an escalation or an easing in trade tensions between the United States and China?

I do not see any let up. Even if we have a reduction in tariffs there is still the massive ideological bridge to the gap and frankly, I don’t ever see the U.S. and China seeing eye-to-eye in my lifetime. Since that fateful Presidential tweet on May 5, I’ve positioned for an escalation in the trade war via the currency markets - especially the Asia basket (USD/CNH, USD/KRW and AUD/USD, which offer the best correlation to rising US tariffs). 

7) What are your views on the U.S. dollar for the remainder of 2019?

Global recession fears will continue to peak and trough in the coming months, and I expect the USD to be highly reactive. But in terms of importance, and accounting for the F.X. market's mercurial mood swings, the most critical variable in the dollar’s positive expression is growth in the rest of the world, and particularly in China.

Moving in the opposite direction to last year's economic momentum and interest rate mosaic, the U.S. ordinals are converging with the rest of the world. Still, there has been no reversal in the dollar’s fortune, merely a slowing of last year's momentum.

The euro remains prone on several fronts, namely Brexit, China and auto tariffs.

Despite a relatively massive sell-off by today's G10 standards, I'm biased to remain short EUR due to several headwinds.

Firstly, China data should continue to weaken, which will have an outsized negative impact on the Eurozone. Secondly, President Trump #appears to be turning his vitriol back towards Europe as he considers sanctions to block Nord Stream 2 (a gas line between Russia and Germany) and even move U.S. troops based in Germany to Poland. Thirdly, auto tariffs should be on everyone’s radar, although timing Trump’s next implosion is painful to predict. Fourth, the ECB (European Central Bank) continues to express a dovish tone publicly, and finally the narrative around a weaker U.S. dollar has just about run its course.

 8) What is your view on gold prices in 2019?

From late 2018 I have been targeting $1,400. Gold should at minimum be on everyone's radar and is reclaiming its rightful status as a must-have asset in everyone's investment portfolio. And while the prospect of lower U.S. rates and dovish Fed expectations remain supportive, gold appeal goes well beyond that and is moving higher on own its accord as a safe and inexpensive hedge against the abundance of tail risks rapidly wagging.

The G20 summit will be significant for risk assets and while we don't know if tariffs will escalate from here, we do know there's a substantial risk that they could. If tariffs do escalate, it will be a potent threat to U.S. growth and so the likelihood of an aggressive Fed cut will also rise. Gold represents insurance against those risks. If you live in tornado alley, you would be crazy not to buy home insurance so with category five recessionary storms brewing, it only makes sense to purchase gold as portfolio insurance.

I'm far more worried than the market about activity in the Strait of Hormuz - probably because I traded gold through both Gulf wars, and I know how quickly browbeating can escalate.

And despite all the talk about lower U.S. rates and trade war hedges, it's the official sector that remains the consistent pillar of support. And given the move to de-dollarise reserves, this demand will likely continue - especially with a trade war and geopolitical risks abounding. The great thing about central bank demand is that Gold remains in the vault doing little more than collecting dust for a very long time. So, there is little risk for these flows to reverse anytime soon.

9) What are your expectations for Brexit? What would be the effect of a no-deal on European stocks and global markets?
Let me preface my response by suggesting the risk-reward favours being tactically long GBP for a positive surprise. And as we enter the summer respite with parliamentary recess, I continue to expect the bulk of the flow to continue to hedge for worst case scenarios. But I think a hard Brexit leadership candidate is likely to win, strictly based on polling at this stage. Also, another of the issues I see is there is not much time to negotiate when parliament resumes in September, so the reality is that no deal or a maybe a possible negotiating extension is probably the best that we can hope for. 

So all focus is on Oct 17-18 as this is the event horizon when no deal could materialise. 

No-deal Brexit will be grim as the pound will crash and inflation would soar, which is very much in line with the Bank of England’s views. I conservatively estimate the pound could collapse below 1.10 GBP/EUR and below 1.20 versus the USD.

This would trigger a massive wave of capital outflows and would be extremely damaging for both property and equity market sentiment.

© Opinion 2019

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