Sat, Jan 18, 2020 @ 09:43 GMT

ECB de Guindos: Challenges remain in the form of low trend growth

    ECB Vice President Luis de Guindos said in a speech that Eurozone economy is “continuing to grow” and the growth is “broad-based across countries and sectors”. He added that “during this recovery, the countries that were most affected by the crisis have regained competitiveness thanks to a combination of accommodative monetary policy, fiscal consolidation and structural reforms.”

    However, de Guindos warned that “challenges remain in the form of low trend growth compared with other advanced economies, and persistently high public and private debt levels in a number of euro area countries.”. He urged further efforts to “strengthen productivity growth and boost productive investments to lift long-term potential growth.”

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    China to open up banking and insurance sectors as new round of trade negotiation with US starts

      New round of US-China trade negotiations started in Beijing today. US Treasury Secretary Steven Mnuchin said he had a “nice working dinner” yesterday and “it’s good to be back here” in Beijing. It widely known that while progress has been made two key sticky points remained unresolved, an enforcement mechanism and the timelines for lifting imposed additional tariffs.

      Meanwhile, China Banking and Insurance Regulatory Commission said it will further open up the banking an insurance sectors. And it plans to issue 12 new measures soon. The measures include dropping the USD 10B asset requirements for foreign companies to set up a legal entity in the country. The USD 20B asset requirements for foreign banks to set up a branch will also be removed. Approval procedures for foreign banks to conduct Yuan businesses will be removed.

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      RBNZ Bascand: The economy is somewhere near a turning point

        RBNZ Deputy Governor Geoff Bascand said in an interview that “we actually think the economy is somewhere near a turning point.” He admitted the economy is “definitely going through a weaker stage” and “near-term risks “are probably more on the downside, but it’s a question of how long they persist,”

        However, he added, “we’ve put a lot of stimulus in. We’ve got a bit longer to see how it’s transmitting. There’s time to see how that plays out and make a call in February if needed.”

        The central bank surprised the markets by keeping the OCR unchanged at 1.00% yesterday. Governor Adrian Orr described the decision as a “tough one”, and the monetary policy committee had debated whether to “take one more insurance cut.”

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        UK got vague assurances from EU over Irish backstop

          The assurances that UK Prime Minister Theresa May got from the EU were rather vague and they unlikely to appease the MPs. But at the time same, it’s reported that May has been vague in her requests too. It caused some griefs from European Commission President Jean-Claude Juncker. He said at a press conference that “I do find it uncomfortable that there is an impression perhaps in the UK that it is for the EU to propose solutions”. And, “It is the UK leaving the EU. And I would have thought it was rather more up to the British Government to tell us exactly what they want.”

          After yesterday’s EU summit, EU27 leaders concluded their positions on Brexit in a five point statement. Firstly, it’s “not open for renegotiation”. Secondly EU wishes to “establish as close as possible a partnership” with the UK in the future. Thirdly, the backstop is intended as an “insurance policy” to prevent hard Irish border. And EU has “firm determination to work speedily on a subsequent agreement” so that “the backstop will not need to be triggered”. Fourthly, if the backstop were triggered, “it would apply temporarily, unless and until it is superseded by a subsequent agreement that ensures that a hard border is avoided.” Fifthly, EU calls for preparedness for all possible Brexit outcome.

          Full European Council statement here.

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          German retail sales rose 0.5%, below expectations

            German retail sales rose 0.5% mom in August, below expectation of 0.6% mom. Over the year, retail sales rose 3.2% yoy. Unemployment dropped -10k in September versus expectation of 5k. Unemployment rate was unchanged at 5.0% in September, matched expectations.

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            Fed chair Jerome Powell press conference live stream

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              Euro higher as Italy Tria rules out Euro exit

                Euro open the week higher as lifted by comments from Italian Economy Minister Giovanni Tria as he ruled out Euro exit.

                Tria said in interview by Corriere della Sera newspaper that “the position of the government is clear and unanimous” and “there is no question of leaving the euro.” And, “the government is determined to prevent in any way the market conditions that would lead to an exit materializing”.

                He added that “it’s not just that we do not want to leave, we will act in such a way that the conditions do not get anywhere near to a position where they might challenge our presence in the euro.”

                Regarding economic fiscal policies, Tria said “our goal is growth and employment. But we do not plan on reviving growth through deficit spending.” And he emphasized that “these will be fully coherent with the objective of continuing on the path of lowering the debt/GDP ratio.”

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                Into US session: Sterling weakest despite solid job data, Euro follows

                  Entering into US session, Sterling is the weakest one for today despite solid employment data. UK unemployment rate stayed at 45-year low while wage growth accelerated. But that’s overshadowed by renewing no-deal Brexit fear. Both runners Boris Johnson and Jeremy Hunt rejected Irish backstop in any part of Brexit deal. Such position will make Brexit negotiations very tough ahead. Euro is the second weakest as German ZEW Economic Sentiment deteriorated further in July.

                  On the other hand, New Zealand Dollar is the strongest one as CPI accelerated in Q2 as expected. Dollar follows as the second strongest. However, the greenback will face tests from retail sales and industrial production data.

                  In Europe, currently:

                  • FTSE is up 0.43%.
                  • DAX is up 0.19%.
                  • CAC is up 0.51%.
                  • German 10-year yield is down -0.013 at -0.265.

                  Earlier in Asia:

                  • Nikkei dropped -0.69%.
                  • Hong Kong HSI rose 0.23%.
                  • China Shanghai SSE dropped -0.16%.
                  • Singapore Strait Times rose 0.36%.
                  • Japan 10-year JGB yield dropped -0.0071 to -0.121.
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                  Into US session: Yen strong again as Turkish Lira drops 5%, Chinese stocks hit new low

                    Entering into US session, Yen is now back trading as the strongest one as markets seem to have turned back to risk off-mode. More time is needed to confirm this but sentiments are once again looking shaky.

                    At the time of writing, FTSE is trading down -0.17%, DAX down -0.42% and CAC down -0.14%.

                    Turkish Lira comes back to spotlight with another -5% decline. The trigger is concerns of mores sanction from the US if American pastor Andrew Brunson is not released. The question for us is, in today’s world, whether economic war is considered war. And if yes, then are tariffs and sanctions considered weapons? If the POTUS needs to go through a process, with check and balance, to hit the nuclear button, what does he need to go through to fire an “economic missile”? So far, it seems there is no mechanism to control a dictator in the US to attack another country, even a NATO ally, in the economic sense and cause massive damages and casualties. It’s a big threat to the world. Anyways.

                    Weakness in Chinese stocks is another concerns for investors. Asian markets closed generally up today. Nikkei gained 0.35%, Hong Kong HSI rose 0.42%. However, the Shanghai SSE closed down -1.35% at 2668.97. The SSE has indeed broke July’s low at 2691.02, and it’s on course for 2638.30 (2016 low). There is no sign of bottoming by market force, nor there is any sign of government intervention. And more importantly, the selloff happened despite news of resumption of US-China trade talks. This highlights underlying vulnerable in the Chinese stocks markets. A break of 2638.30 could trigger some downside acceleration and spread to other parts markets, at least to Asia.

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                    Canada employment dropped -1.1k, missed expectation, USD/CAD slightly higher

                      Canadian employment market contracted -1.1k in April, much worse than expectation of 20.5k. Unemployment rate was unchanged at 5.8%, in line with consensus.

                      From US, import price index rose 0.3% mom in April, below expectation of 0.50%.

                      USD/CAD recovers in reaction to the release, but there is no follow through buying yet. It has to overcome a minor support at 1.2813 before forming a temporary bottom. For now, further decline is still expected in the pair before the weekly close.

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                      Italy Tria: 2.1% deficit represented a more than prudent fiscal policy

                        According to a prepared speech for delivery today, Italian Economy Minister Giovanni Tria said “for a zero growth economy like Italy” a 2.1% deficit represented “a more than prudent fiscal policy”.

                        He added that the country is targeting to keep deficit low in the coming years. And the government will continue to lower its debt through reducing spending. Thus, “on this basis, we feel that Italy is substantially compliant with European fiscal rules.” Tria is also confidence of reaching an agreement over its budget with the EU.

                        EU leaders are expected to approve the so-called Excessive Deficit Procedure on July 8-9 summit, which would lead to penalty to Italy over its budget. It’s reported that European Commission would give Italy until January to make necessary budget corrections.

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                        France PMI manfacutring dropped to 49.6, 32-month low, underlying slowdown in demand remains evident

                          France PMI manufacturing dropped to 49.6 in April, down from 49.7 and missed expectation of 50.0. That’s the lowest level in 32 months. PMI services, on the other hand, improved to 50.5, up from 49.1 and beat expectation of 49.8. PMI composite rose to 50.0, up from 48.9.

                          Commenting on the Flash PMI data, Eliot Kerr, Economist at IHS Markit said:

                          “The stabilisation of output in April is further evidence of the dwindling economic impact of the ‘gilets jaunes’ demonstrations. Protestor numbers have fallen to approximately 10% of their peak and the remaining disruption has been limited.

                          “However, protests aside, an underlying slowdown in demand remains evident in the French PMI data. New orders fell for the fifth month in a row during April, partly driven by a sixth consecutive contraction in exports. Although the rate of deterioration in new business eased, many panellists mentioned a decline in activity at their clients.

                          “More positively, firms were able to brush aside recruitment difficulties and increase staff numbers at a faster pace than in March. Although a mismatch between skills and open vacancies remains apparent, businesses continue to demonstrate the ability to overcome the adverse conditions.”

                          Full release here.

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                          GBP/CHF resuming medium term up trend quietly as traders focus on trade war

                            NZD and AUD are trading among the strongest ones today, with the help of recovery in US stocks. While DOW did suffer at initial trading, there ain’t no crash. CAD, however doesn’t share the same fortune as markets are back in concern over NAFTA renegotiation. CHF follows as the second weakest one.

                            A quick glance at the action bias tables for each currency reveals that CHF is trading with rather broad based downside bias.

                            GBP/CHF is a clear example with upside Action Bias across time frames. The patterns suggests that it has just finished a near term consolidation and is ready for further rally.

                            GBP/CHF has indeed taken out 1.3194 key near term resistance today and is resuming the medium term up trend. Next target will now be 61.8% projection of 1.2219 to 1.3419 from 1.2861 at 1.3647.

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                            RBNZ to stand pat this week, likely throughout 2018 too

                              RBNZ is expected to keep the official cash rate unchanged at 1.75%.

                              According to a Reuters poll, all 16 economists surveyed expected RBNZ to stand pat this week. 14 economists expected RBNZ to hold throughout 2018. 8 forecasts RBNZ to hike by the end of Q3 2019.

                              Sluggish inflation is a key factor giving RBNZ room for not acting. CPI slowed deeply to 1.1% yoy in Q1, sitting near the lower end of the target band.

                              RBNZ Governor Adrian Orr also said after the release that “very benign inflation going forward without doubt, as we’ve forecast.”

                              He added that “what really matters is the confidence and expectation and belief that we are aiming for that midpoint of 2 percent all of the time.” And he pledged that “we are doggedly determined to aim for two percent, but the accuracy around…that is very limited.”

                               

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                              Into European session: Trade optimism fails to lift sentiments, Sterling stuck in range

                                The financial markets are generally mixed today. News regarding US-China trade negotiation are generally positive with even speculations that a Trump-Xi summit could be announced as soon as today. But they provide no additional lift to market sentiments. Meanwhile, the meeting between UK Prime Minister Theresa May yielded no conclusive results. Meanwhile, it should be noted that economic data have been rather bad so far. For example, just released, German factory orders dropped sharply by -4.2% mom in February. Sentiments could turn sour again if more data disappointment come in.

                                In the currency markets, Sterling is broadly higher today so far. But again, the Pound is just staying in familiar range against Dollar, Euro and Yen, and there is no sign of a breakout yet. New Zealand Dollar and Yen are the next strongest. Canadian Dollar is currently the weakest one for today, followed by Dollar.

                                In Asia:

                                • Nikkei closed up 0.05.
                                • Hong Kong HSI is down -0.53%.
                                • China Shanghai SSE is up 0.65%.
                                • Singapore Strait Times is up 0.14%.
                                • Japan 10-year JGB yield is up 0.0073 at -0.043, staying negative.

                                Overnight:

                                • DOW rose 0.15%.
                                • S&P 500 rose 0.21%.
                                • NASDAQ rose 0.60%.
                                • 10-year yield rose 0.036 to 2.517, back above 2.5 handle.
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                                Yen and Dollar strong on trade war, Chinese stocks lost another -2%

                                  Yen and Dollar are so far the biggest winner today on concerns of US-China trade war. Australian Dollar and New Zealand Dollar lead the way down.

                                  Trump’s administration formally announced the intention to impose 25% on USD 200B in Chinese imports yesterday, more than double of the 10% rate in the original plan.

                                  China is surprisingly quiet on the topic today.  Chinese Foreign Ministry spokesman Geng Shuang just made “two statement” regarding the news in a regular press conference. Firstly, “we would advise the United States to correct its attitude and not try to engage in blackmail. This won’t work on China.” Secondly, “we would advise the U.S. side to return to reason, and not blindly let emotions affect their decisions, because in the end this will harm themselves.”

                                  That’s it, not even any elaboration.

                                  Nonetheless, the reactions in China stocks are loud and clear. The Shanghai SSE composite closed down -2.0% at 2768.02. The breach of 2753.83 support affirmed our view that rebound from 2691.02 has completed at 2915.29, ahead of 55 day EMA and key well inside medium term falling channel. The index should revisit the key support zone between 2016 low of 2638.30 and 2700. This is an area which could prompt serious government intervention. Let’s seen if the Chinese national team would do anything there.

                                  The USD/CNH (offshore Yuan). Rises to as high as 6.876 so far today and the Yuan’s downtrend extends. We’ve argued here that Yuan’s weakness is primarily due to economic weakness and loosening policies. Adding the severe impact of a full blown trade war with the US, the momentum of depreciation in Yuan doesn’t seem right. We’d urge US Treasurer Steven Mnuchin to look into whether China is doing anything to slow Yuan’s decline. If there is, Mnuchin should openly ask China not to perform such manipulations.

                                  Also, remember that there was a report saying that Mnuchin is in private talks with Chinese Vice Premier Liu He on going back to the negotiation table? Hours later, there was another report regarding the 25% tariffs, which was formally announced within 24 hours. Who leaked the story to the media or it’s a made up? If the unnamed source was from the Chinese side, the US response was quick and clear, no negotiation before concession. If the unnamed source was from the US side, whose team would he be in? Or does it signal that Mnuchin was once again isolated by the trade hawks?

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                                  Fed Brainard: Mounting tailwinds tip the balance of considerations.

                                    Fed Governor Lael Brainard:

                                    • Economic headwinds are shifting to tailwinds
                                    • There will be “substantial” boost from tax cuts and public spending
                                    • “In the earlier period, strong headwinds sapped the momentum of the recovery and weighed down the path of policy.
                                    • “Mounting tailwinds at a time of full employment and above-trend growth tip the balance of considerations.”
                                    • “With greater confidence in achieving the inflation target, continued gradual increases in the federal funds rate are likely to be appropriate.”
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                                    Mid-US update: 10-year and 30-year yields break significant resistance, DOW hit records, Dollar strong

                                      The strong rally in US treasury yields, followed record ISM non-manufacturing composite data, is the key development in US session today. At the time of writing. 30-year yield is up 0.80 % at 3.287, 10-yearyield up 0.075 at 3.131, 5-year yield up 0.065 at 3.009. Again, yield is stronger at the long end.

                                      10 year yield (TNX) break of 3.115 resistance indicates resumption of medium term up trend from 1.336 (2016 low). More importantly, we’re now seeing the chance of firm break of multi-decade trend line resistance, which will be a very bullish signal.

                                      30 year yield (TYX) also breaks key resistance level at 3.255/60. Medium term rise from 2.102 (2016 low) is resuming and could possibly target next key resistance at 3.976. At the same time, TYX could also be heading for a break of multi decade trend line resistance too.

                                      It would take some more time to confirm the underlying bullish momentum in both TNX and TYX. That’s nevertheless very significant development if realized as mentioned above.

                                      Of course, DOW’s record run is also worth a mention as it hit new record high at 26951.81. DOW is currently up 0.58% at 26927. S&P is up 0.38% and is not far from another record. NASDAQ lags behind but it’s still up 0.49%.

                                      In the currency markets, Sterling remains the strongest one for today as somehow no news is good news. At least, there is no drama from PM May’s speech at the Conservatives conference. But the pound could easily be overtaken by Dollar should it’s consolidation finish. Canadian Dollar is the third strongest one for now. Australian and New Zealand Dollar are the weakest while Yen is the third. Monetary policy divergence plays a key role in the movements.

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                                      Trump to hold high-stake meeting to decide on China tariffs on Thursday

                                        While there were rumors flying around regarding US delay of the December 15 tranche of tariffs on China, nothing has been confirmed by any named official so far. It’s reported that President Donald Trump is going to hold a high-stake meeting on Thursday with all his trade advisers to make the final decision.

                                        Officials are seen as rather split on the issue. It’s believed that China hawks like Peter Navarro would most likely prefer to hit the button on new tariffs. On the other hand, Treasury Secretary Steven Mnuchin could prefer a hold. Trade Representative Robert Lighthizer’s position is relatively unclear.

                                        The political implication of the situation is rather significant though. It’s rather clear now that Trump’s administration hasn’t seen enough commitments from China to justify at least a delay without debate. The ball is suddenly back on the US’s court. A tariff delay without sufficient concessions from China would in no doubt weaken Trump’s hand for the next phase of trade talks, or even the closure of phase one.

                                        On the other hand, the impact of tariffs imposed so far could be seen by some as relatively muted, or at least not as disastrous as some claimed. Trump’s team could instead go for more tariffs while emphasizing to the public that they won’t be painful. Either way, the decision would be know rather soon.

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                                        UK PM May insisted her Brexit plan’s the right one, ready to see through leadership challenge

                                          Sterling recovers mildly today but remains the weakest one for the week on political turmoil in the UK. Four ministers, including Brexit Minister Dominic Raab resigned in protest to Prime Minister Theresa May’s draft Brexit agreement. But May insisted in a press briefing that “I believe with every fibre of my being that the course I have set out is the right one for our country and all our people.” She added that “I am going to do my job of getting the best deal for Britain and I’m going to do my job of getting a deal that is in the national interest.”

                                          ERG leader Jacob Rees-Mogg has formally requested a no-confidence vote on May. And for now, at least 14 Conservative MPs had openly said they had joined in the call. Four-eight letters are needed to trigger a leadership challenge. May’s response regarding the challenge was “Am I going to see this through? Yes.”

                                          Even if May can survive the leadership contest, it remains very doubtful if she can get enough votes through the parliament. Conservative Brexit-supporting MP Mark Francois, put it this way. “It is … mathematically impossible to get this deal through the House of Commons. The stark reality is that it was dead on arrival.”

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