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Détente (For Now)

29 August 2019 by jbchevrel

China 5y CDS tightened -2bp back just 6bp above the low end of the (not so recent post GFC) range. China climbing down on tariffs was generally surprising, if judging from the price action. China’s Minister of Commerce spokesman indeed suggested that (1) there would be no immediate retaliation to the latest tariffs and (2) September talks were still likely. In FX since Tuesday, CNY has fixed (7.0858 today) considerably stronger than forecasted by the experts. Definitely another sign of goodwill from China’s camp. To not say an apparent sign of weakness. The trade war may not be finished however, but last June taught that risk rally may still rally from here, especially so close from the roll CDS. Potential caveats include no deeply fundamental change in stance (China’s latest tariff retaliation came three weeks after Trump’s announcement, fwiw…). On the other side of the Pacific Ocean, it’s now been clarified that President Trump had mentioned made up ‘high-level’ phone calls with China just to boost the US stock market. CNN indeed reported that the context of this is that Trump has become increasingly concerned about the market's inability to rise comfortably above 3,000 (!) adding to eco weakening signs… The Trump put strike is not that low. This Sunday (Sep 1st), both the US and China will impose further tariffs on each other. On Oct 1st (and China National Day…), existing 25% tariffs on $250bn Chinese imports are due to rise to 30%. Among peers, Phil and Malay both tightened -1bp, along with Indon, which could outperform given beta and the subsequent move in crude. Elsewhere it was a risk-on session except on Argentina, where 5y k500 closed around 57% our time. Funnily enough this general risk on mood was (very briefly) paused by Dutch GC member Klaas Knot. Absolutely not representative of the consensus within the GC.