Nothing significant from the Biden-Xi meeting?

Thoughts of the Day

The Presidents’ meeting yielded limited results. They agreed to work on curbing fentanyl production and restoring military communication. The US President’s remark after the press conference about President Xi being a dictator unsettled markets. Risk assets sold off, but the impact is likely temporary as ongoing dialogue signals progress despite lacking concrete results.

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Day Ahead

Nothing noteworthy on the horizon today.

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What Happened Yesterday

Market Movements as of New York Close 15 Nov 23
  • The Australian labour data showed that 55k jobs were added to the economy in October (vs 20k expected), a huge improvement from the +7.8k added in September (revised from +6.7k). The unemployment rate rose to 3.7% from 3.6% as expected while the participation rate rose to 67% (vs 66.7% expected) from 66.8% (revised from 66.7%). The AUD strengthened slightly (+0.19% from 0.6505 to 0.6517) against the USD following the data release before falling more than -0.70% from 0.6517 to trade around the 0.6470 level.
  • The UK Consumer Price Index showed that prices rose +4.6% in October on a Year-on-Year basis (vs +4.8% expected), down from +6.7% in September. The core index showed that prices rose +5.7% YoY (vs+5.8% expected) compared to 6.1% in September. The GBP slipped -0.14% immediately against the USD following the release of the data.
  • The US Producer Price Index showed that prices rose +1.3% in October on a Year-on-Year basis (vs +1.9% expected), down from +2.2% in September. The core index showed that prices rose +2.4% YoY (vs +2.7% expected and prev).
  • The US Treasury Yield curve inversion widened slightly to 0.37% as the US 2-year bond yield rose +0.10% to 4.90% while the US 10-year bond yield rose +0.09% to 4.53%.
  • The US stock futures drifted slightly higher through the Asian and London trading session with the S&P 500 futures up +0.18% before the New York session began.
  • The US stock market opened higher from Tuesday. The market then traded within a narrow range through the New York session with a slight positive drift.  Consequently, the S&P 500 closed the day higher at +0.16% (high: +0.57%, low: -0.01%), the Dow Jones rose +0.47% (high: +0.64%, low: -0.12%) while the Nasdaq was almost unchanged at +0.03% (high: +0.58%, low: -0.30%).
  • The crypto market continues to show renewed optimism with Bitcoin rising +6.49% on the day and Ether rising +4.08%.
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Headlines & Market Impact

Biden says ‘real progress’ made in talks with Xi, deals made on military, fentanyl

Notable Snippet: U.S. President Joe Biden and Chinese leader Xi Jinping agreed on Wednesday to resume military-to-military communications and cooperate on anti-drug policies, two major outcomes from their first face-to-face talks in a year.

Biden requested that both countries institutionalise the military-to-military dialogues, and U.S. Secretary of Defense Lloyd Austin will meet his Chinese counterpart when that person is named, a senior U.S. official said. U.S. and China’s militaries have had a number of near-misses and acrimonious exchanges over the past year.

Xi sought to reassure Biden about Chinese intentions toward democratic Taiwan, which China claims as its territory, saying that China has no plans for military action against Taiwan in coming years, but he did lay out conditions where the use of force could be used, the U.S. official said. Biden asked China to respect Taiwan’s electoral process, the official said.

“For two large countries like China and the United States, turning their back on each other is not an option,” he said. “It is unrealistic for one side to remodel the other, and conflict and confrontation has unbearable consequences for both sides.”

The leaders will be seeking to reduce friction but deep progress on the vast differences separating them may have to wait for another day.

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US economy cools as retail sales dip, monthly producer prices decline

Notable Snippet: U.S. retail sales fell for the first time in seven months in October as motor vehicle purchases and spending on hobbies dropped, pointing to slowing demand at the start of the fourth quarter that further strengthened expectations the Federal Reserve is done hiking interest rates.

That was supported by other data on Wednesday showing the biggest decline in producer prices in three-and-a-half years in October on the back of cheaper gasoline. The reports followed on the heels of news on Tuesday that consumer prices were unchanged last month for the first time in more than a year.

Retail sales slipped 0.1% last month, the Commerce Department’s Census Bureau said. Data for September was revised higher to show sales increasing 0.9% instead of the previously reported 0.7% rise. Economists polled by Reuters had forecast retail sales would fall 0.3%.

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The market thinks the Fed is going to start cutting rates aggressively. Investors could be in for a letdown

Notable Snippet: Indications that both consumer and wholesale inflation rates have eased considerably from their mid-2022 peaks sent traders into a frenzy, with the most recent indications on the CME Group’s FedWatch gauge pointing to a full percentage point of cuts by the end of 2024.

That may be at least a tad optimistic, particularly considering the cautious approach central bank officials have taken during their campaign to bring down prices.

Market enthusiasm this week was built on two basic supports: the belief that the Fed could start cutting rates soon, and the notion that the central bank could achieve its vaunted “soft landing” for the economy.

However, the two points are hard to square, considering that such aggressive easing of monetary policy historically has only accompanied downturns in the economy. Fed officials also seem reluctant to get too dovish, with Chicago Fed President Austan Goolsbee saying Tuesday that he sees “a way to go” before reaching the inflation target even as he holds open a possible “golden path” to avoiding a recession.

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Phan Vee Leung
CIO & Founder, TrackRecord