Gold inched down on hopes & hypes of U.S.-China Phase One trade deal

Gold (XAU/USD-spot) made a low of 1454.16 in the early U.S. session Monday amid risk trade sentiment on renewed optimism about U.S.-China trade truce. A report said that Washington and Beijing are getting ‘very close’ to reaching the Phase One trade deal. And the Chinese Foreign Ministry also stressed that it hopes the U.S. will work on an agreement based on ‘mutual respect and equality’.

On the weekend, a statement from China promising major changes to the way it protects IP rights supported the optimism that a so-called U.S.-China Phase One trade agreement could be reached before the end of the year. As per reports, China issued a guideline for enhancing IPR protection and agrees to toughen IP theft penalties, a key U.S. priority. As a reminder, Chinese telecom companies like Huawei have been accused of IP theft. The Chinese government said it will take a harsher stance on alleged IP theft on Sunday in a move that should please Trump in his cold war with China, which he has launched in the disguise of a trade war.

Chinese officials said: “China’s new guidelines would focus on strengthening the punishment of infringement and counterfeiting and ensuring effective protection of trade secrets, confidential business information and source code”.

But responding to speculations of China's IPR having any linkage with China-U.S. trade talks, a Chinese official also said China's decision to enhance IPR is an inherent demand for its development, as China is promoting innovation-driven development, and IPR is an indispensable basis. China has been stepping up efforts to shore up IPR by raising the penalty for infringement violations and shortening the reveal progress of related cases to speed up the pace of rights protection.

Also, Liu He, China's vice premier and head of the Chinese negotiating team, in an article Friday called for adherence and improvements to China's socialist economic system and called for improved IPR protection, market reforms, and fairer competition.

The U.S.-China interim trade deal optimism was further boosted by the new U.S. NSA O'Brien, who said that it was still ‘possible’ to reach a deal, but cautioned that weekend elections in Hong Kong needed to proceed without violence or interference.

The U.S. NSA O’Brien said over the weekend: “We were hoping to have (a phase one) deal done by the end of the year. I still think that’s possible. Though, at the same time, we’re not going to turn a blind eye to what’s happening in Hong Kong or what’s happening in the South China Sea, or other areas of the world where we’re concerned about China’s activity”.

As a pointer, the local polls in Hong Kong, which has been crippled by anti-China protests for the past five months, delivered a resounding victory for pro-democracy candidates, which may help Trump to get some additional concessions from Xi (China) as China may be now in the back foot after the HK election debacle. And the local election victory may also help to end the lingering protests/violence promptly.

As a recapitulation, the market is concerned amid conflicting news that the U.S.-China Phase One trade deal would slip into next year as there are still significant differences over Trump tariffs rollbacks and China’s commitment issues over U.S. farm products purchase coupled with IP protection and tech transfer (structural issues).

But on early Monday, the risk-on mood got further boost on another contradictory report by a Chinese media (GT): Contrary to negative media reports, China and the U.S. are very close to the Phase One trade deal, and China remains committed to continuing talks for a Phase Two or even a Phase Three deal with the U.S. on equal footing, experts close to the Chinese government told GT.

The GT report further said U.S. and China have basically reached ‘broad consensuses for Phase One trade deal, but the thorny issues of tariffs removals are still not resolved. The report suggested:

The two sides have basically reached broad consensus for the phase one agreement, and are still moving closer to reaching a phase one deal soon, unlike the contradictory information in the media reports. However, the issue of tariffs is still a sticking point. Although the two sides have agreed to roll back tariffs but are having differing opinions over which tariffs should be removed or to what degree the tariffs should be lowered.

A report published earlier claimed that both U.S. and Chinese officials confirmed they are not close to the phase one trade deal. As per a report Sunday, U.S.-China are having trouble striking the much-awaited Phase One deal, a follow-up for Phase Two and Three is also fading away.

The report said quoting an anonymous Trump admin official that President Trump's main priority at the moment is to ‘lock-in’ major purchases of U.S. farm products by China and turn it into one of his biggest presidential achievements during the 2020 election campaign. And once Trump has made the announcement, Trump would probably return to domestic policy and leave other major issues, such as IP theft by China, to senior aides to deal with in Phase Two talks.

As a pointer, China imported 1.15 MT of soybeans from the United States in October, meaning the figure declined by 33.5% month-on-month and reached the lowest levels in three months as reports suggested tariffs were influencing the sale of U.S. farm products in China. However, data from China's customs administration showed on Monday that soybean imports from the U.S. jumped a whopping 1617% from last October's 6.70 MT.

Meanwhile, Chinese imports of U.S. soybeans are seen as surging to as much as 8.5 MT in November after some imports that were being held at Chinese ports were released. In October, China imported most soybeans from Brazil. China is also importing a huge quantity of U.S. poultry as African swine have a devastating effect on the country’s pig/chicken farming.

As per another report late Friday, quoting senior WH official, despite Trump is optimistic on China trade deal and continue to claim that the deal is coming along very well’, his planned tariffs of additional 15% on $156B worth of Chinese imports (mostly consumer goods) is still scheduled to kick in on December 15. However, the WH official also reportedly pointed out, if U.S. and China manage to smooth out the differences and seal the phase one deal by December 15, the decision on additional levies might change.

The influential WH reporter (Fox Business) tweeted Saturday:

“Sr. White House Official says as of right now Dec 15th an additional 15% tariffs are scheduled to go into effect on Chinese imports. SAO says caveat: if there are Phase One trade deal things could change with potential goodwill & a Presidential decision”.

Meanwhile, Chinese officials said that that phase two negotiations may not start before the election in November next year, partly because China wants to see if Trump able to win for his second term in office: "It’s Trump who wants to sign these deals, not us. We can wait”. As per reports on the weekend, the ‘ambitious’ Phase One/Two deal looks increasing less likely for now.

Further, in a fresh heightening of tensions, the Chinese tech sector was dealt another blow after the U.S. FCC voted not to allow spending of federal funds for the purchase of equipment made by Chinese tech giants Huawei and ZTE.

In response, China’s Foreign Ministry spokesman  Geng warned and slammed FCC for barring China's Huawei and ZTE from supplying U.S. carriers in rural areas: “This economic bullying by the U.S. side blatantly flouts U.S.' principle of the market economy. If this principle does not need to be adhered to, other countries can also do the same to U.S. companies. The U.S. is used to suppressing specific countries and enterprises without any solid evidence”.

On Monday Geng also reiterated that the two sides (China-U.S.) have maintained close contact and China hoped ‘both sides could find a solution acceptable on the basis of equality and mutual respect’. However, Geng ducked and referred questions about the progress of phase one deal to the Ministry of Commerce.

Bottom Line:

Looking ahead, the Phase One trade deal may not be signed in Dec. But by Jan’20, Trump will decide about the China tariffs rollbacks as per his domestic political compulsion and then may go ahead with an interim trade deal in Feb, when he and Xi could meet on the sideline of a regional/global summit in Vietnam. Gold is now a barometer of Trump trade war/truce in China; i.e. the price action of Gold is now a function of Trump trade war politics rather than the economics of central bank policies. Thus despite Fed’s QT-Lite (POMO), Gold slumped almost -3.70% for the month (Nov-MTD) on hopes & hypes of U.S.-China Phase One trade deal.

Gold was also undercut by upbeat U.S. economic data and Fed’s less dovish approach/FOMC minutes as Powell may not ‘act’ in Dec. But going ahead, as the Phase One trade deal may not be signed in Dec and there will be immense uncertainty, the Fed may act again in Jan’20 to sustain the U.S. economic expansion and to fulfill Trump’s demands of another rate cut of -0.25% to roll back the cumulative rate hikes of +1.00% in 2018.

The bill-‘Hong Kong Human Rights and Democracy Act’ stipulates that the U.S. reviews Hong Kong's special trade status every year and sanctions Chinese officials found to be responsible for human rights abuses in the autonomous city. Trump may use this HK bill as leverage in trade talks, although he may not sign it immediately. Subsequently, Gold was undercut coupled with hopes for postponement in Dec proposed Trump tariffs, even if the much-awaited U.S.-China Phase One trade deal further delayed into early 2020.

Technical Outlook: Gold Spot (XAU/USD):

Technically, whatever may be the narrative, Gold now has to sustain over 1445 for a rebound to 1475*/1500-1520*/1535 and 1560*/1585-1600/1630 in the near term (under bullish case scenario).

On the flip side, sustaining below 1440, Gold may fall to 1425/1410-1400*/1390 and further 1375/1355*-1340/1310* in the near term (under bear case scenario).