We'll Always Have Osaka
Just how successful was this G-20 summit in Osaka? The summit itself? Meh. If one just loves the "opaque" then one might be pleased with broadly positive looking, yet quite anonymous (and quite inconsequential) outlooks that the official communique expresses on fair trade and climate change.
Yet, observers would have to admit that this G-20 did not just barely meet, but truly far exceeded expectations. One certainly has to give credit where credit is due. Of course the headline coming out of Osaka is the fact that U.S. President Donald Trump and China's President Xi Jinping agreed to agree to release positive headlines. That much had been expected. What had not been expected, nor priced into markets, was President Trump's softening stance on the blacklisting of Chinese telecom giant Huawei, based on national security concerns.
In addition, the agreement between Saudi Arabia and Russia to extend production cuts ahead of this week's OPEC meetings has boosted crude despite a stronger dollar. Though it has little to do with Osaka, a trade agreement has finally been reached between the European Union and Mercosur (South American trading bloc that includes Brazil, Argentina, Paraguay and Uraguay) make this past weekend perhaps the most successful of its kind in recent memory.
Though these other storylines are truly significant, quite impactful, and actually "agreed upon" deals, the headline of this weekend remains the trade war truce agreed to by Presidents Trump and Xi. In short, the leaders of the planet's two largest economies will re-open negotiations aimed at finally reaching a deal on trade. The U.S. will not, for now, move ahead with the intended last tranche of tariffs to be placed on the final $300 billion worth of Chinese exports to the U.S.
The stunning news, and why global equities have reacted so positively on Monday is the relaxed stance on Huawei. President Trump stated "U.S. companies can sell their equipment to Huawei. We're talking about equipment where there's no great national security problem with it." Tariffs that are already in place remain in place. In exchange for the relaxed stance on Huawei and the suspension of further tariffs, it seems that China will start buying increased amounts of U.S. farm goods. There does appear to be some evidence of this, as China purchased 544,000 metric tons of U.S. soybeans ahead of the summit this weekend.
What does this mean to investors? Basically, all it does is roll back the calendar a month or two, in terms of the rules of the game to be played. The difference is, I believe, in the sentiment leading to the creation of this condition. Two months ago, this condition was one emblematic of a deterioration of relations, whereas now, this will be seen as constructive. While one can not underestimate the need to paint a picture of optimism, one can also not get too carried away.
There will be political push-back from hardliners on both sides of the Pacific. What kind of equipment would not carry the weight of national security? I guess Alphabet's (GOOGL) Android operating system for mobile devices might be in the clear. What about 5G? How will those trading semiconductor equities, or U.S. telecoms interpret this?
You may have noticed that President Trump referred to China as a "strategic partner." Strategic? Certainly. Partner or competitor? I think I may be a much older man by the time we figure that one out. Perhaps symbiotic might be the word, even if neither side wants to admit it.
OPEC ministers meet Monday. OPEC ministers meet with JMMC (Joint Ministerial Monitoring Committee) tomorrow (Tuesday). For those in need of a quick tutorial, OPEC meetings include just the 14 official members of the cartel, while OPEC-JMMC meetings would include member nations plus the 10 nations that have been cooperating with OPEC on controlling production levels.
High-profile sideline meetings were in vogue in Osaka. In addition to the Trump-Xi consultation, President Vladimir Putin of Russia (leader of the JMMC) and Saudi Crown Prince Mohammed bin Salman also met, and agreed to extend by six to nine months the deal that keeps the current reduction in production of 1.2 million barrels per day in place. That burden is, if you recall, shouldered two thirds by OPEC (800,000 barrels) and the remainder by the Russian-led group (400,000 barrels).
The wild cards here? How membership reacts at the meetings this week to U.S. production levels, recently up to 12.3 million barrels per day, of which 3.5 million is being exported (nobody likes to see their lunch taken), as well as Iran. Certainly there will be those among the cartel that may push for greater cuts to reduction at a time that Iran's production will be well off of levels (-50% to -75%) that had been as high as 2 million bpd.
How significant is a deal between this South American trading bloc and the EU? Think the U.S. and China have it rough? These guys have been at it for decades. The deal will eliminate 93% of all tariffs on exports from Brazil, Argentina, Paraguay and Uraguay to the EU, in return for an expected reduction of Eu4 billion a year in aggregate duties on EU exports to those nations.
Think of this as an exchange that improves markets for South American agricultural products as well as for European autos, auto parts, chemicals and textiles that comes at a time when nearly every single national manufacturing PMI survey across the planet seems to be printing in a state of contraction for the month of June.
The first thing that some of you will notice upon ripping that melon attached to your shoulders away from that fifteen-year-old pillow of yours will be equity index futures. They're hot in the early hours of Monday on the strength of global equities. Before you get too excited, the U.S. dollar is strong too, which is negative.
Crude may be reacting well to the the Russia-Saudi Arabia news, but the dollar has taken its lump of flesh out of Gold futures markets, while Treasury markets have seen some mild selling -- but nowhere near what one might look for if growth could now be priced in. That leads us to the Fed and monetary policy.
My feeling is that nothing that happened over this weekend should impact central bank thinking in Washington, especially given the state of global PMIs and the likelihood of foreign central banks to behave accordingly with the overt state of that economic erosion in mind. What could alter the Fed's thinking on forward interest rate policy is this Friday's numbers for June employment and job creation that will be released by the Bureau of Labor Statistics.
My expectation is that those numbers will either reinforce the notion that a 50 basis point reduction (Fed funds rate) will be necessary on July 31 or cement the idea that only incremental cuts of 25 basis points will be implemented as needed. Thought the latter will possibly be seen as disappointing by equity traders, either path will, in my opinion, lead to higher valuations... higher valuations that will come in quite handy as earnings growth moves in the wrong direction. Remember that Q2 and Q3 earnings will better illustrate the current regime of tariffs that are already in place. We are going to see some reduced margins.
The short-term G-20 trade that I discussed with Katherine Ross at TheStreet appears (unless something awful happens between now and the open) to have done its job. You'll recall that particular trade included short-term longs in Caterpillar (CAT) , Nvidia (NVDA) , and Apple (AAPL) , separate from my core position in Apple. This was anchored against a doubled long in The Southern Co. (SO) , while maintaining longs across Defense and Aerospace. You also may recall that the short-term AAPL long was a replacement for Boeing (BA) after Boeing ran into further delays on getting the 737 Max back into the skies.
The problem with short-term intentions is temptation. Whether you used my trade or created one of your own, it will be natural to think about letting it ride, so speak. My feeling is that I should honor my intent. Investments are investments, and trades are trades. By allowing a winning trade to become an investment, one opens the door for defeat to replace victory. Either we are decisive, or we are not.
Want to leave something in place? I can see that. I can condone leaving partials in place, but take your pound of flesh. You've earned that much through exposure to risk. Be the assassin. It is only then that you will have created some room for error.
Victory? This morning, almost all of you will have the ability to claim one. By Friday, maybe sooner, there will be doubt. Doubt creates forced profit taking. Raise that saber over your head. Let loose thy gutteral roar.
Economics (All Times Eastern)
02:15 - Fed Speaker: Federal Reserve Gov. Richard Clarida.
09:45 - Market Manufacturing PM I (June-F): Flashed 51.2.
10:00 - ISM Manufacturing Index (June): Expecting 0.1% m/m, Last 0.0% m/m.
10:00 - Construction Spending (May): Expecting -73B cf, Last -86B cf.
Note: There are no significant quarterly earnings scheduled for release today.