Buying The Rumor

By Benjamin Picton, Senior Strategist At Rabobank

The Dow Jones closed up more than 1% on Friday, the S&P500 rose by 0.79% and stocks are set to close higher today following the release of a benign CPI inflation report and news that the USA and China have come to agreement on a new trade deal. Bitcoin caught a bid over the weekend and both the AUD and NZD are trading higher this morning as representatives from both sides indicated that progress had been made on export controls, port fees and fentanyl issues. Treasury Secretary Scott Bessent said that the 100% additional tariffs that the US was set to impose on Chinese imports from November 1st are “effectively off the table”.

Thursday will be the critical day this week for the trade negotiations. That is the day that Presidents Trump and Xi are set to meet on the sidelines of the APEC conference to sign the agreement nutted-out by their respective underlings. In an interview with CBS Bessent said that he expected China to defer its stringent export control regime on rare earths and resume buying US soybeans. He also said that the US would not be changing its export controls directed at China, which restricts the sale of high-end AI chips, software applications and certain aerospace components.

Bessent also said that Trump and Xi are planning to discuss a global peace plan, where Trump hopes to gain support from Xi to end Russia’s war in Ukraine. That would be quite the development because peace in Europe would allow the United States to focus its efforts on containing China in the Western Pacific, and so would seemingly run counter to China’s own vital strategic interests. If China does indeed agree to loosen controls on the export of rare earths and pressure Russia to end the war in Ukraine, without extracting commitments from the US to lift its own export controls, it will look like capitulation on the part of the Chinese. In market parlance that would be XACO, not TACO.

Over the weekend Trump also ‘Truthed’ that the USA will be applying an additional 10% tariff to imports from Canada in retaliation for a TV advertisement run by the Province of Ontario that used audio from former President Ronald Reagan to criticise the use of tariffs in trade policy. The additional tariff follows an announcement from Trump earlier last week that he was terminating trade negotiations with Canada over the advertisement.

Trump claimed that the advertisement was “fraudulent”, quoting criticism from the Reagan Foundation that claimed the ad was selectively edited and misrepresented Reagan’s views. PBS fact-check disagrees with that assessment, but leaving accuracy to one side the decision to criticise the country that buys 75% of Canada’s merchandise exports (and who has a notoriously thin-skinned leader) in the middle of the World Series is a masterclass in the impolitic. CAD is this morning underperforming other high beta currencies and Toronto stock futures are conspicuous in their restraint as Canada cops the fallout of what market parlance might politely term the MAFO (mess around and find out) trade.

In geopolitics news, Argentina appears to have handed a ringing endorsement to the laissez-faire policies of President Javier Milei in midterm elections. With 92% of the vote counted the Wall Street Journal reports that Milei’s Freedom Advances party has won almost 41% of the national vote and will likely more than double its representation in Congress to win approximately 30% of the seats. That result exceeds the predictions of most polls and likely shores up deals with Washington for the USA to provide a $20bn USD currency swap facility and an additional $20bn in private loans. Trump had earlier tied that support to Milei’s prospects in the elections by saying “if he wins, we’re staying with him. And if he doesn’t win, we’re gone.”

Pundits regularly call the Trump style “transactional”, and the transaction here is monetary support in exchange for support of the US’s Monroe Doctrine foreign policy goals in South America. A huge part of that is supporting the role of the Dollar as the global reserve currency – highlighting the geopolitical importance of US Dollar swaplines in ensuring that Argentina trades in Dollars and not in… something else.

While the USA seeks to bolster its own influence in what it sees as its geopolitical backyard, Beijing has been busy trying to internationalize the role of the Renminbi by converting Dollar-denominated development loans into CNY. Reuters details a recent refinancing where a $3.5bn railway infrastructure loan to Kenya was converted to CNY, saving Kenya about $215m/year in interest repayments due to the lower yields associated with CNY lending. Bloomberg reports that Ethiopia is considering a similar move to convert up to $5.38bn of Dollar-denominated loans into CNY to reduce financing costs.

Of course, there is no free lunch here and Beijing is effectively accepting debt haircuts in order to expand the CNY’s role in global trade and settlement. The end game is to erode the global role of the Dollar, and reduce the US’s ability to exert influence via sanctions, the freezing of central bank assets or the extension/withdraw of Dollar swaplines. China’s comparatively low interest rates give it an advantage in convincing other countries to borrow in its currency rather than Dollars.

As it happens, there is a FOMC meeting scheduled for this week. A 25bp cut to the Fed Funds rate is now fully priced, as is a follow up cut in December (our full preview available here). With capital markets now clearly an open front in the geopolitical competition between the USA and China, you can bet your bottom Dollar that the Administration will be lobbying Powell and Co to go harder on cutting Dollar financing costs. Inflation is a secondary concern.