Tue, Jul 23, 2019 @ 07:47 GMT

Euro jumps in delayed reaction to ECB talks

    Euro trades broadly higher today as buying picks up in early European session. It could be seen as late reaction to reports regarding ECB. Markets are fully pricing in a 10bps hike to the deposit rate only in December 2019. Odds of a September 2019 hike is at around 80%. And it’s reported that some ECB policy makers are unhappy with it.

    A sticky point is that ECB is clear with its communication that rates will remain at present level at least through the end of summer of 2019. That left markets with some rooms for interpretation on whether it means the end of “September.

    But, we’d like to highlight one thing. Fed is clear with its projection of two more hikes this year. And fed funds futures are pricing in only around 50% chance for that. So, in our view, there’s nothing special for ECB officials to be unhappy about.

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    Into US session: Euro loses some ground, ECB press conference awaited

      Entering into US session, Euro trades mildly softer after ECB left interest rates unchanged as widely expected. Main refinancing rate is held at 0.00%, marginal lending facility rate at 0.25%, deposit facility rate at -0.40%. Yen remains the strongest one as supported by strength in JGB yields. 10 year JGB yield hit as high as 0.099 before closing at 0.09. Australian Dollar and New Zealand reversed earlier gain and turn broadly lower. On the other hand, Dollar is regaining some ground for today.

      But for the week, Canadian Dollar remains the strongest one, followed by Yen. Euro and Dollar are taking turn to be the weakest. ECB President Mario Draghi holds the key to unlock a direction in EUR/USD. But he’s likely hold it to his chest in today’s press conference.

      In other markets, stocks are mixed. Germany responds very well to the EU Juncker’s assessment and Trump’s concessions. At the timing of writing, DAX is up 1.38%, CAC is up 0.35%. FTSE, on the other hand, is flat. Risk aversion was dominant in Asia though. China Shanghai SSE closed down -0.74%, Hong Kong HSI down -0.48%. Nikkei also lost -0.12%.

      The offshore Chinese yuan continues to stabilize against dollar today. USD/CNH once dipped to as low as 6.733 earlier today but recovered to above 6.78. For now, there is no clear sign of a trend reversal yet. That is Yuan is still technically in a near term down trend. But at least, it’s past the climax of selloff. And we’d likely see more consolidation below 6.85.

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      ECB uncertain if US-China trade truce would lead to significant de-escalation of trade tensions

        In the Monthly Bulletin released today, ECB warned that “signs of moderating momentum are emerging” in the global economy. And “activity is expected to decelerate in 2019 and remain steady thereafter.” And that “reflects the projected cyclical slowdown across advanced economies and in China.”

        The central bank also noted that “The intensification of trade tensions between the United States and China should weigh on activity in both countries. While the global impact is still judged to be relatively limited, heightened uncertainty about future trade relations may adversely affect confidence and investment.”

        ECB added that “While the temporary truce between the United States and China sent a positive signal, there remains considerable uncertainty as to whether the talks will lead to a significant de-escalation of US-China trade tensions.”

        For Eurozone economy, ECB noted the slowdown in 2018 has been “driven largely by external factors, in particular the weakness in external demand.” And, “much like the strengthening of growth in 2017, the slowdown in 2018 has been driven by net exports. Trade dynamics have been normalising as global growth has fallen back towards potential levels.

        Nevertheless, ECB also said “All in all, the recent slowdown in growth has not, thus far, called into question the fundamentals of the current economic expansion.”

        Full ECB monthly bulletin here.

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        New Zealand BusinessNZ PMI rose to 51.3, but employment worsened

          New Zealand BusinessNZ Performance of Manufacturing Index rose to 51.3 in June, up from 50.4. BusinessNZ’s executive director for manufacturing Catherine Beard said that while the sector avoided further deterioration in activity from May, there were still a number of concerns about manufacturing’s current state of play.

          She said: “The key sub-indexes of production (51.0) and new orders (52.8) recovered from May, which ensured the sector didn’t fall into contraction for June.  However,  employment (48.0) worsened to its lowest level since August 2016, while deliveries of raw materials (48.9) also fell into negative territory for the first time since December 2017, and its lowest result since September 2012.

          Full release here.

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          Into US session: Euro down as Turkish Lira loses another 3%, Sterling and Dollar firmer

            Entering into US session, Euro suffers some heavy selling and is trading as the second weakest one for today, just next to Australian Dollar. ON the other hand Sterling leads the way higher, followed by Dollar. The renewed selloff in Turkish Lira is seen by us as the main driver of the forex markets today. Dollar and Sterling has suffered some selling against Euro and today’s moves are just reversing these selloffs. Canadian Dollar is also trading a touch softer as focus is now on day 2 of Canada-US trade negotiations.

            In other markets, European indices are mixed with FTSE down -0.32% at the time of writing, DA is up 0.17% and CAC is up 0.26%. German 10 year bund extends this week’s rally and is currently up 0.015 at 0.396. 0.4 handle is back in sight. Earlier today, Asian markets were mixed with Nikkei and HSI up 0.15% and 0.23% respectively. But China SSA and Singapore Strait Times were down -0.31% and -0.11% respectively.

            USD/TRY is rising another 3% today and hits as high as 6.4732. Break of 6.346 minor resistance confirms resumption of rebound from 5.6919. Further rise would be seen to 61.8% retracement to of 7.2068 to 5.6919 at 6.6281. Firm break there will put 7.000 handle back into focus. And such development could weigh on Euro again.

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            DOW gaps lower as Trump is ready to start trade war, USD/JPY pressing 105.24 support

              DOW gaps lower today and selling then intensifies in the second hour. The index is now trading down -1.5% at the time of writing. Worry on trade war is seen as a major bearish factor for stocks. And risk aversion also a major reason for Yen’s broad based strength for today. Trump is set to announce his tariffs targeted at China today. Testifying to Senate finance committee, Trade Representative Robert Lighthizer said the US has done a study on Intellectual Property theft problem of China. And the trade department is looking into at building a better fairer system.

              For DOW, it’s on course for support zone between 23.6% retracement of 26616.71 to 23360.29 at 24128.80 and 24217.76. This zone will be key to determine DOW’s near term direction. Rebound from there will change the prior triangle like pattern into a sideway range. And there would then be prospect of revisiting 25000 and above soon. However, sustained break of this support zone will argue that it’s now in the third wave of the pattern from 26616.71 and should have a test on 23360.29 support and below. For the moment, we’re favoring the latter scenario.

              USD/JPY is at a tricky point close to 105.24 support now. 4 hour MACD suggests that it’s on verge of breakout. And, firm break there will at least extend recent decline to medium term projection level of 100% projection of 118.65 to 108.12 from 114.73 at 104.20.

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              Swiss SECO raised 2019 growth forecasts to 1.2%, still below average

                Swiss State Secretariat for Economic Affairs expects growth to remain “below average” this year on subdued outlook and high uncertainty. But growth forecasts for 2019 was revised slightly up to 1.2%, from 1.1%. For 2020, growth projection was kept unchanged at 1.7%.

                SECO noted that “declining momentum in the international economy, the development of world trade is weak and demand for Swiss products is flattening out, slowing down the export economy.” And, “downside risks continue to predominate for the global economy”.

                It warned that with the recent tariff increases between US and China, the trade dispute has taken an “unfavourable turn”. Swiss economy would “cool off more strongly” if situation were to intensify further, particularly if EU and Germany were to be significantly affected. Meanwhile, “political uncertainty remains high in Europe”, including Brexit and Italy.

                Full release here.

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                Brexit parliamentary vote to be held on Jan 15

                  BBC reported that the Commons will vote on Prime Minister Theresa May’s Brexit deal on Tuesday January 15. And May will give her last efforts to give further assurances that the controversial Irish backstop solution is only temporary. MPs are invited to meet with May tomorrow.

                  Over 200 MPs had signed a letter to May urging her to rule out a no-deal Brexit. However, former foreign minister Boris Johnson wrote in Daily Telegraph arguing that no-deal Brexit, “otherwise known as coming out on World Trade terms” is “closest to what people actually voted for” in the 2016 EU referendum.

                  Separately, a YouGov poll published on Sunday should that if a referendum were held immediately, 46% of Britons would vote to remain in the EU, 39% would vote to leave. Removing those undecided or refused to answer, the split was 54-46 in favor of remaining.

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                  Trump in no rush to complete trade deal with China, still expecting a summit with Xi

                    Trump insisted that the trade negotiations with China is “going along well”. But he told reports at the White House that “”I’m in no rush. I want the deal to be right. … I am not in a rush whatsoever. It’s got to be the right deal. It’s got to be a good deal for us and if it’s not, we’re not going to make that deal.”

                    At the same time, Trump also acknowledged that Xi may be wary of going to a summit in the US without an agreement in hand. He said “I think President Xi saw that I’m somebody that believes in walking when the deal is not done, and you know there’s always a chance it could happen and he probably wouldn’t want that,”
                    Though, he’s still expecting a meeting with Chinese President Xi Jinping but “we’ll just see what the date is”. He is also open to complete the trade agreement before or after the summit. He added that “we could do it either way. We could have the deal completed and come and sign, or we could get the deal almost completed and negotiate some of the final points. I would prefer that.”

                    For now, Beijing made no reference to a Trump-Xi summit at the Mar-a-Lago Such summit is unlikely to happen this month. Tariffs imposed from both sides since last year are continuing to drag on the global economy with no end in sight. And there is nothing done that stops China from IP theft, forced technology transfer and market distortion through state-owned enterprises.

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                    China PMI manufacturing dropped to first contraction reading since 2016

                      The official China PMI manufacturing dropped to 49.4 in December, down from 50.0 and missed expectation of 50.0. It’s also the first contractionary reading since July 2016, and the lowest since February 2016.

                      In the release, CLFP noted that China-US trade frictions are starting to direct and indirect impacts on the economy. Both domestic and external demand weakened. In particular, new orders dropped -0.7 to 49.7. New export orders dipped deeper into contraction by -0.4% to 46.6, lowest since 2016. Also, downward pressure on the economy increased in the second half as seen by the persistent decline in the PMI reading.

                      Also from China, PMI services rose to 53.8, up from 53.4, and beat expectation of 53.2.

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                      Dollar rebounds as Trump tweaks the meaing of his own tweet

                        Dollar rebounds after Trump backed down from his initial tough/high pressure position again. This time is about Syria. In his usual morning tweet, Trump said: “Never said when an attack on Syria would take place. Could be very soon or not so soon at all! In any event, the United States, under my Administration, has done a great job of ridding the region of ISIS. Where is our ‘Thank you America?'”

                        At around the same time just yesterday, Trump tweeted “Russia vows to shoot down any and all missiles fired at Syria. Get ready Russia, because they will be coming, nice and new and ‘smart!’ You shouldn’t be partners with a Gas Killing Animal who kills his people and enjoys it!”

                        These tweets reminded me of an old friend. We’re supposed to meet at a certain time but he’s not around past 30 mins or so. I called and asked, “hey are you coming?” And he said “yeah, I’m coming!”. After waiting for an hour, I called again and asked “hey you said you’re coming, didn’t you?” Then he answered, “yeah I’m coming. But I could come soon or not so soon at all!” Well, we’re never friends again since then.

                        Anyway, from the 4H heatmap, USD’s strength is centered against EUR, JPY and, CHF and NZD. EUR/USD looks safe for the momentum as it’s holding well above 1.2303 minor support. USD/JPY is at around the mid-point of range of 106.61/107.48. The more imminent move could be find in USD/CHF considering that EUR/CHF also resumed the medium term up trend yesterday.

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                        NIESR on no-deal Brexit: BoE to hike to above 2.5% on surge in inflation, but sharp slowdown in growth

                          The UK National Institute of Economic and Social Research (NIESR) said the UK economy has “recently gained momentum” with Q3 GDP growth at 0.7%. Under the main forecasts scenario, based on “soft” Brexit, 2019 growth forecasts were revised up to 1.9%, reflecting the stronger momentum. However, NIESR also warned that here is “an enormous amount of uncertainty” around the forecasts.

                          Under a no-deal Brexit scenario which UK has to revert to trade under WTO rule, growth is projected to slow sharply down to just 0.3% in 2019. Unemployment rate will jump to 5.8% in 2020. Inflation will surge above BoE’s target range in 2019, forcing BoE to raise interest rate to above 2.5% in 2019, next year.

                          The summary of new forecasts show, under a soft Brexit scenario, GDP to grow 1.4% in 2018, 1.9% in 2019 and than slow to 1.6% in 2020. CPI is expected to slow from 2.3% in 2018 to 1.9% in 2019 and then climb back to 2.1% in 2020. Unemployment is projected to drop from 4.1% to 4.0% in 2019 then rise back to 4.5% in 2020. BoE interest rate will rise from 0.8% to 1.3% in 2019 and then 1.8% in 2020.

                          However, under a no-deal Brexit, GDP growth will slow sharply from 1.4% to 0.3% in 2019, and 0.3% in 2020. Inflation will surge to 3.2% in 2019 before falling back to 2.6% in 2020. Unemployment rate will jump to 5.3% in 2019 and rise further to 5.8% in 2020. BoE will have to raise interest rate much faster to 2.6% in 2019 before dropping to 2.5% in 2020.

                          Full forecast will be published later on October 31.

                          NIESR’s release here.

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                          Trump blasts EU, China and Fed again

                            Trump continues to blast the EU, China and even Fed (well of course not Russia, nor North Korea) with his tweets today

                            For those who’re new to the markets, the 2007-2008 global financial crisis started with the bursting of the subprime mortgage bubbles in the US. Fed cut policy rate to 0-0.25% in December 2008. And in late November that year, Fed started QE1. In 2011, Fed started QE2. And in 2012, Fed started QE3.

                            ECB cut the main policy rate to 0.25% much later in 2013 and then subsequently to 0.00% in 2016. While ECB used the Securities Markets Programme since 2010, QE is seen as formally started in 2015.

                            The current situation of US rasing interest rate is a result of the US leading the way in loosening monetary policy to counter the problem of theirs.

                            And, would Kudlow or Navarro or give him a lesson that Fed’s rate hikes are still not tightening, but policy normalization, or removal of accommodations. The US economy has been enjoying the privileges of ultra loose monetary policy and it’s time to treat it as it should be treated.

                            And if the Fed doesn’t normalize its policies during a time when the economy is doing so well, what is left for Fed is save the economy when the next crisis comes?

                            The above are some common sense indeed. But for those who choose to ignore, our response is like someone who said this week — “where do we start?”

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                            GBP pares gains as PM office dismissed staying in customs union

                              GBP was knocked down by a Reuters report that the Prime Minister’s office dismissed the news the UK is ready to stay in the EU customs union beyond 2021.

                              An unnamed source was quoted saying that “we agreed in December and in March to a backstop but the proposal put forward by the EU is completely unacceptable.”

                              “It would mean a border down the Irish sea and we could never agree to that. Negotiations are taking place on what a workable backstop might be.”

                              “The PM and the government are absolutely clear once the implementation period is over in December 2020 we will be able to not only negotiate and sign trade deals with the rest of the world but also implement them.”

                              For now GBP/USD is holding above 1.3450 temporary low, GBP/JPY well above 148.16 minor support. No panic selling in GBP yet. Hopefulling the UK government will come out and say something to answer the question, to stay or not to stay.!

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                              Into US session: Recession fears intensify, US yield curve inversion, German benchmark yield turns negtaive

                                Entering into US session, Euro is overwhelmingly the weakest one today after shockingly poor German PMI manufacturing, which dropped to 71-month low at 44.7. Australian Dollar follows closely as second on risk aversion while Canadian is the third weakest.

                                For the same reasons, Yen is the strongest one for today. Sterling is the second strongest after EU granted UK more weeks to get the Brexit deal through the parliament, until April 12. Dollar is the third weakest.

                                Development in the bond markets are particularly worth nothing. Firstly, German 10-year bund yield hit at low as -0.01, turned negative for the first time since 2016. Secondly, the most accurate indicator of recession in US, yield curve between 3-month and 10-year, inverts. US 10-year yield is down -0.064 at 2.469 now. 3-month yield is at 2.474.

                                In Europe:

                                • FTSE is down -1.32%.
                                • DAX is down -0.72%.
                                • CAC is down -1.19%.

                                Earlier in Asia:

                                • Nikkei rose 0.09%.
                                • Hong Kong HSI rose 0.14%.
                                • Singapore Strait Times dropped -0.05%.
                                • Japan 10-year JGB yield dropped -0.037 to -0.072.
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                                EU Juncker reiterates no re-negotiation, UK May to request short Brexit delay

                                  European Commission President Jean-Claude Juncker reiterated the EU’s stance on Brexit with Germany’s Deutschlandfunk radio. He said “there will be no re-negotiations, no new negotiations, no additional guarantees in addition to those already given”. He added “we have intensively moved towards Britain, there can be no more.”

                                  Juncker also hinted at another EU summit next week and said “my view this morning at quarter past 8 is that we will not get this through this week and we will have to meet again next week”.

                                  Separately, both BBC and Sky reported that UK Prime Minister Theresa May will request only a short delay to Brexit in her letter to European Council President Donald Tusk today. But the actual length will only be confirmed when the letter is published.

                                  Education Secretary Damian Hinds also said “I don’t see how a long delay gives certainty. Actually we’ve had long time already… People are a bit tired of waiting for parliament to get our act together and get the deal passed… Unless and until a deal is finalized, there remains the prospect of the risk of no deal.”

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                                  UK Foreign Minister Hunt said China offered talks on post Brexit FTA

                                    New UK Foreign Minister Jeremy Hunt met with China’s Foreign Minister Wang Yi in Beijing today. After the meeting, Hunt said China made an offer to “to open discussions about a possible free trade deal done between Britain and China post Brexit”. And he added that “that’s something that we welcome and we said that we will explore.” Wang didn’t mention the free trade talks directly. But he said both countries had “agreed to proactively join up each others’ development strategies, and expand the scale of trade and mutual investment”.

                                    Separately, Wang said that “the responsibility for the trade imbalance between China and the United States lies not with China.” And he cited the global role of the US Dollar, low saving rates, high level of consumption and US restrictions on high tech exports as some of the reasons for the imbalances. He also reiterated the stance that “China does not want to fight a trade war, but in the face of this aggressive attitude from the United States and violation of rights, we cannot but and must take countermeasures.”

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                                    Trump: China trade deal in four weeks, or maybe less, maybe more

                                      While there seems to be progress made in US-China trade negotiations, they’ve yet reached a concluding stage. No Trump-Xi summit was announced at the meeting in the Oval Office with Chinese Vice Premier Liu He. Trump said: “We’re getting very close to making a deal. That doesn’t mean a deal is made, because it’s not, but we’re certainly getting a lot closer.”

                                      At the time same, he repeated his vague languages regarding the timing of a deal. “And I would think with, oh, within the next four weeks or maybe less, maybe more, whatever it takes, something very monumental could be announced.

                                      Trump added that “some of the toughest things have been agreed to”, and “we’ve agreed to far more than we have left to agree to”. “We have to make sure there’s enforcement. I think we’ll get that done. We’ve discussed it at length,” he added..

                                      It’s equally vague on the Chinese side. President Xi Jinping told Trump, through Liu, that “I hope the two sides’ trade teams can continue working in the spirit of mutual respect, equality, and mutual benefit to resolve each other’s concerns, and finish negotiations on the text of the China-U.S. trade agreement soon.” Yet, there was no indication on how “soon” is being soon.

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                                      Italy PM Conte: European Commission has no ground to question our forecasts, we’re not a problem to EU

                                        Italian Prime Minister Giuseppe Conte issued a formal statement in response to European Commission’s new forecasts published today.

                                        Conte criticized that the 2019 growth forecasts for Italy “underestimate the positive impact of our economic maneuver and our structural reforms.” He emphasized that with the government’s estimate, growth will increase while debt and deficit will decrease. And there is “no grounds for questioning the validity and sustainability of our forecasts.”

                                        He also said “Italy is not at all a problem for the Eurozone and European Union, but rather will contribute to the growth of the whole continent.” And, the structural reforms will “give greater impetus to the growth compared to the EU Commission.”

                                        Conte’s full statement in Italian here.

                                        As a reminder, in EU’s warning letter dated October 10, European commission has already criticized that “the macroeconomic forecast underlying Italy’s budgetary plans has not been endorsed by the Parliamentary Budget Office (PBO), Italy’s independent fiscal monitoring institution. At first sight, this appears not to respect the explicit provision of Regulation 473/2013 (Article 4(4)) calling for the macroeconomic forecast to be produced or endorsed by an independent body.”

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                                        Dollar and yield rebounded as Fed Powell talked down rate cuts

                                          Dollar and treasury yields rebounded overnight after Fed Chair Jerome Powell talked down the chance of a rate cut after Fed kept interest rate unchanged at 2.25-2.50% as widely expected. In particular, 10-year yield hit as low as 2.455 earlier in the day but closed up 0.002 at 2.511, regained 2.5 handle. DOW closed down -0.61%, S&P 500 lost -0.75% and NASDAQ dropped -0.57%.

                                          In the post meeting press conference, Powell noted that “our policy stance is appropriate at the moment” and emphasized “we don’t see a strong case for moving it in either direction. Fed acknowledged that both headline and core inflation were running below targets. But Powell said that’s mostly due to transient factors. He predicted inflation to pick rise back to 2% target ahead.

                                          Here are some suggested readings on FOMC:

                                          10-year yield recovered strongly after breaching 2.463 key near term support. But still, risk will stay on the downside as long as 2.614 resistance holds. Rebound from 2.356 is likely completed after hitting 55 day EMA. Sustained break of 2.463 should resume larger down trend from 3.248.

                                          S&P 500 edged to historical intraday high at 2954.13 but reversed to close down -0.75% at 2923.73. SPX continued to lose upside momentum as seen in daily MACD. We maintain the view that it’s not resuming long term up trend despite breaching 2940.91 key resistance. Thus, near term reversal should be around the corner and break of 2891.90 support should at least confirm short term topping. Nevertheless, for sure, sustain trading above 2940.91 will prove our view wrong.

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