Sun, Jul 21, 2019 @ 22:44 GMT

BoJ Kuroda: Must consider positive and side effects of loose monetary policy in balanced manner

    BoJ Governor Haruhiko Kuroda said today that the central bank is now at a stage that the benefits and side-effects of the ultra-loose monetary policy must be considered in a “balanced manner”. He pointed to strengthening in the recovery and pickup in wages and prices. But he also echoed the July meeting minutes that it takes more time than expected to achieve the 2% inflation target.

    Kuroda added that “under such a fairly complex economic and price situation, monetary policy must take into account various developments in a comprehensive manner”. And, “this means that, in continuing with powerful monetary easing, we now need to consider both its positive effects and side-effects in a balanced manner.”

    Meanwhile, he maintained the pledge that “BOJ will continue to make its utmost efforts to firmly support corporate activity, taking into account economic, price and financial developments.”

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    BoJ July minutes: Sentiments could worsen if US-China trade friction intensifies

      The minutes of July 30-31 BoJ meeting showed that the board members expected Japan’s economy to grow above potential in fiscal 2018. For 2019 and 2020, growth would likely continue “partly supported by external demand”. However, the pace would decelerate “due to a slowdown in domestic demand. On prices, most members agreed that CPI would likely increase increase gradually towards 2% as “firms’ stance gradually would shift toward further raising wages and prices”. But these members agreed that “it would take more time than expected to achieve 2 percent inflation”. Thus, the inflation projection in the July Outlook Report was lowered from April’s.

      The minutes also noted that the global financial markets had temporarily become unstable through early July, “mainly against the background of uncertainties over trade policy, especially between the United States and China”. And, many members warned that “risk sentiment could worsen again if trade friction between the United States and China intensified.” Also, one member added that ” if the Chinese yuan depreciated further, due mainly to concerns over the possible negative impact on the Chinese economy, there was a risk of this having a negative impact on investors’ sentiment regarding emerging markets in Asia.”

      Full minutes here.

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      US and South Korea signed trade agreement, Japan trade talk postponed

        South Korean President Moon Jae-in and Trump formally signed a new bilateral trade agreement yesterday, as sideline of a UN summit in New York. Under the agreement, South Korea will exempt up to 50,000 US cars from safety requirements, doubling the current amount. It also agreed on improvements in customs procedures and amendments in drug pricing policies. The 25% US tariffs against South Korean Trucks are extended from 2021 to 2041. On the other hand, the US exempt a certain amount of South Korean steel from the tariffs announced back in Mach, equivalent to 70% of the country’s import.

        On the other hand, the meeting between Japanese Economy Minister Toshimitsu Motegi and US Trade Representative Robert Lighthizer was postponed from Monday to Tuesday due to scheduling issue. Japanese Chief Cabinet Secretary Yoshihide Suga said the talks “will focus on further expanding trade and investment between Japan and the U.S. to bring benefits to both nations”.

        Japanese Prime Minister Shinzo Abe had a dinner with Trump on Sunday and he said they had a “very constructive discussion on trade and investment”. Before the dinner Trump continued with his bullying tactic and tweeted “We have done much to help Japan, would like to see more of a reciprocal relationship. It will all work out!”

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        Position trading update: Entered GBP/USD short

          As planned in our weekly report, we entered GBP/USD short today at 1.3150, as the pair recovered to 1.3166. Stop is placed at 1.3300, slightly above 1.3297 resistance.

          Our view is unchanged that corrective rise from 1.2661 has completed with three waves up to 1.3297, just ahead of 38.2% retracement of 1.4376 to 1.2661 at 1.3316. Another fall is expected through 1.3042 support to retest 1.2661 low.

          There is prospect of resuming whole decline from 1.4376. Hence, if the trade turns out as expected, we’ll monitor downside momentum to decide whether to exit at around 1.2661, or hold through it.

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          Euro surges as ECB Draghi said domestic price pressures are strengthening and broadening

            Euro surges as ECB President Mario Draghi sounds rather upbeat in his European Parliament ECON committee hearing. On growth he noted “an ongoing broad-based expansion of the euro area economy”, with “high levels of capacity utilisation”. Also, “labour markets are tightening with signs of labour shortages in some countries and sectors” And “higher income supports private consumption”.

            More important, Draghi noted “domestic price pressures are strengthening and broadening”. And, “underlying inflation is expected to increase further over the coming months as the tightening labour market is pushing up wage growth.”

            Overall guidance on monetary policy is unchanged though. That is, subject today, ECB will end the asset purchase program after December. And interest rates will stay at current level “through the summer of 2019”. Draghi said the guidance firstly incorporated a “calendar-based element” which tells the market when the first hike could come. Secondly, there is a “state-dependent component” indicating that rate could still stay unchanged if necessary, and for as long as needed.

            Full introductory statement in the hearing here.

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            Into US session: Sterling pares losses, Aussie weakest

              Entering into US session, Sterling is trading as the strongest one for today, reversing much last last week’s losses. It’s followed by Euro and then Dollar. On the other hand, commodity currencies are generally lower, as led by Australian Dollar. There were a lot of comments on Brexit from UK and EU, but there were just nothing more than words. UK Prime Minister Theresa May’s cabinet will meet on Brexit today and the result out the there would be watched.

              Meanwhile, new round of US-China tariffs are set to kick in today. Ahead of that, China’s State Council released a 36k white paper on its position, criticizing US “bullying” and pledged to defend it’s own interests. It doesn’t matter much on how much truth the white paper tells, as what China says is always doubtful. Most important thing is that China is not going to back down from trade war. That’s a factor weighing down Aussie and Kiwi.

              In other markets, European stocks are generally lower today. FTSE is down -0.24% at the time of writing, DAX down -0.38%, CAC down -0.21%. China and Japan are on holiday. Hong Kong HSI closed down -1.62%, Singapore Strait Times closed up 0.05%. WTI crude oil was lifted by OPEC decision to stick with its production plan and is up 1.65% at 71.95. Gold is hovering around 1200.

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              Sterling recovers as UK PM May’s cabinet meets on Brexit

                Sterling appears to be lifted by reports that German European affairs minister Michael Roth said Brexit deal is still possible by November. And he also warned that a no-deal Brexit would be the worst case scenario for all parties. However, Roth also emphasized that “we will not undo the single market or create special rules which could result in competitive disadvantages for our companies.” Also, he added that Germany fully support chief negotiator Michel Barnier. There is no softening on Germany’s stance indeed.

                Separately, French President Emmanuel Macron’s office also said he expected the UK to put forward new proposals in October. And he preferred not to drag on. His office said that “It’s a way of raising pressure, … It’s not necessarily ‘take it or leave it’, it’s really to say there’s a lot of work to be done by November, we must do it, and not let this thing drag on.”

                UK Prime Minister Theresa May’s spokesman said the cabinet is due to discuss Brexit negotiations today. And he emphasized “the cabinet gave its full support to the white paper (Chequers plan), and that continues to be the case.”

                However, Jacob Rees-Mogg, chairman of the European Research Group of anti-EU lawmakers in May’s ruling Conservative party, said “the prime minister is a lady of singular wisdom and therefore is likely to recognize the reality that Chequers does not have much support either in this country or abroad.”

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                China released 36k-word white paper showing it’s not backing down on trade war with US

                  China’s State Council release a “White Paper on China-US Economic and Trade Frictions and China’s Position” today. This 36000 words paper consists of six sections, detailing the benefits of the bilateral trade, the economic and trade relations, US protectionism and trade hegemonism, the threat of US practice to world economy and China’s own position.

                  In particular, the paper condemns the under the “America First” bandwagon, the new US government “abandoned the basic norms of international exchanges such as mutual respect and equal consultation, and implemented unilateralism, protectionism and economic hegemonism.”And the US used different means to “carry out economic intimidation, and impose extreme pressure its own interests impose its own interests on China.” The paper also detailed the new protectionist measures of the US. These include measures that discriminate products of other countries, abused national security investigations, subsidies on local industries.

                  China’s own position include defending the “dignity and core interests of the country”, “promote healthy trade relationship with the US”, “promote and improve multilateral trade system”, “protect property and intellectual property rights”, “protect rights of foreign businesses in China”, “continue deepening reforms on opening the markets”, work on win-win relationships with developed and developing countries”, etc.

                  All-in-all, the main message is that China is not going to back down in the trade conflicts. That’s what we get. Below are the links to the details as reported by the official Xinhua (in simplified Chinese). Look like they’re pretty serious.

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                  UK Raab: Stubborn tone of EU just blips blown a little out of proportion

                    UK Brexit Minister Dominic Rob said today “we keep on negotiating in good faith, we try and get the best deal we can, but we are ready for all eventualities.” He also urged not to overreact to the “stubborn” tone of the EU. He emphasized “these blips in the world, they’re blown a little bit out of proportion, but we double down, we don’t throw our toys out the pram, hold our nerve, keep our cool.”

                    However, Rob also pointed out “at the same we need to be ready for the possibility … that the ambitions that we are bringing to these negotiations to try and get a win-win deal isn’t matched by the other side and it does take two to tango.”

                    He added “what they need to see is some unity of purpose from the UK which is why all this Labour nonsense about a second referendum is not only undemocratic but it’s the last thing we should be doing right now with our EU partners because it encourages them to offer us a lousy deal which makes a no deal more likely.”  Raab also said “the vast majority, the silent majority in this country just want us to get on with it and that’s what we’re doing.”

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                    German Ifo dropped to 103.7, economy remains robust

                      German Ifo Business Climate Index dropped -0.1 to 103.7 in September but beat expectation of 103.2. Business Expectations index dropped -0.2 to 101.0, above consensus of 100.5. But Current Assessment Index was unchanged at 106.4, above expectation of 106.0.

                      Ifo President Clemens Fuest noted in the release “firms’ assessments of their current business situation deteriorated marginally, but remain at a high level. Companies also scaled back their business expectations somewhat. Despite growing uncertainty, the German economy remains robust.”

                      Full release here.

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                      WTI oil breaks 71 as OPEC ignores Trump and sticks with its own plan

                        Oil trades higher today as OPEC decided to ignore request by Trump and stick with it’s June agreement on production. The committed said in a statement that it was satisfied “regarding the current oil market outlook, with an overall healthy balance between supply and demand”. Also, it urged “countries with spare capacity to work with customers to meet their demand during the remaining month of 2018”.

                        “The markets are adequately supplied. I don’t know of any refiner in the world who is looking for oil and is not able to get it,” Saudi Energy Minister Khalid al-Falih told reporters as OPEC and non-OPEC energy ministers gathered in Algiers. And, “given the numbers we saw today, that (an output increase in 2019) is highly unlikely unless we have surprises on the supply and demand.”

                        Russian Energy Minister Alexander Novak also said no immediate output increase was necessary. He added “oil demand will be declining in the fourth quarter of this year and the first quarter of next year. So far, we have decided to stick to our June agreements.”

                        WTI crude oil is currently up 1.09% at 71.55.

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                        China-US trade talk cancelled as Trump showed no sincerity and goodwill

                          Hong Kong’s South China Morning Post reported that it’s confirmed by unnamed source, China canceled the planned visit by Vice-Premier Liu He to the US on trade. This was on the ground that, as the Foreign Ministry said on Friday, “everything the US does hasn’t given any impression of sincerity and goodwill”.

                          Further, Trump said in a rally in Missouri last Friday that “we have far more bullets … We’re going to go US$200 billion and 25 per cent Chinese made goods. And we will come back with more … If they retaliate, we have a lot more to come back with. And they want to make a deal, and let’s see if we can make a deal.”

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                          NAFTA talks to continue … informally, ahead of US imposed deadline

                            NAFTA talks will continue this week but only in informal way. Both Canadian Foreign Minister Chrystia Freeland and US Trade Representative Robert Lighthizer will be in United Nations General Assembly in New York on Monday and Tuesday. Canadian Prime Minister Justin Trudeau said “certainly the fact that many of our negotiators, many of our teams, will be in New York at the same time (means) it’s very likely that conversations continue in a constructive but less formal way.” There is no other formal arrangement known at this time.

                            At the same time, Trudeau didn’t sound he would be obliged to the US-imposed deadline of October 1. He reiterated that he would not sign a bad NAFTA deal. And Canadian negotiation team won’t be rushed. On the other hand, White House economic adviser Kevin Hassett said on Friday that the US is getting “very, very close” to move forward on a trade deal with Mexico without Canada. Mexican president-elect Andres Manuel Lopez Obrador said on Friday that “in the event that the governments of the United States and Canada do not come to an agreement … we would have to maintain the bilateral deal with the United States and seek a similar deal with Canada.”

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                            Sterling dives as UK PM May delcares Brexit negotiation an impasse

                              Sterling tumbles broadly as UK Prime Minister Theresa May declares that the Brexit negotiation with the EU is “at an impasse”. And urged the nation to prepare for a no-deal scenario.

                              May talked about the two options the EU has offered. She criticized the Norway way as “would make a mockery” of the Brexit referendum. And, the second one, a border in the Irish Sea was already rejected by the parliament. Further she said if EU thinks she’s going to budge on an Irish Sea border, they’re making a serious mistake.

                              Additionally, May also criticized that there is no counter-proposal from the EU after rejecting her Chequers plan. While EU could say it has softened its stance on the Irish border, May said they cannot offer anything more generous.

                              Clear reacitons are seen in Sterling pairs after May’s statement.

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                              Into US session: Swiss Franc stays stronges, but dollar is having a comeback

                                Entering into US session, Swiss Franc is trading as the strongest one. It’s followed by Dollar as the second strongest as the greenback is trying to stage a rebound before weekly close. New Zealand Dollar is the third strongest. On the other hand, Sterling seems to be troubled by EU’s rejection of UK Prime Minister Theresa May’s Chequers Brexit proposals. It’s followed by Yen, which is the second weakest, on strong global risk appetite. Euro’s rally is losing some momentum after mixed PMI data.

                                Major European stock indices extend this week’s rebound. At the time of writing, FTSE is up 0.89%, DAX up 0.42%, CAC up 0.65%. German 10 year bund yield is dropping back -0.0065, back at 0.465. Yesterday’s break of 0.5 handle was possibly a false dawn. Earlier today, Nikkei closed up 0.82%, Hong Kong HSI gained 2.50%. Singapore Strait Times rose 1.17%. China Shanghai SSE added 2.50% to 2797.48. 2800 handle is now within touching distance for the SSE.

                                Nikkei’s rally is rather impressive this week, partly helped by the selloff in Yen. Immediate focus will be on 24129.34 high next week. Based on current upside acceleration, it’s likely that this handle is taken out firmly to resume the long term up trend.

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                                UK PM May bashed by British media for failure at EU summit

                                  UK media generally bashed Prime Minister Theresa May’s performance at the informal EU summit in Austria. There are headlines today like “May humiliated,” “Humiliation for May,” “Embarrassing rebuff for PM in Salzburg,” “Your Brexit’s broken,”etc. It’s rather common for UK politicians to get the harshest words back at home. Comments from the EU were so far rather gentle.

                                  House Minister James Brokenshire defended her in a BBC radio interview, saying ” the prime minister is getting the right deal for our country. She is sticking up for Britain, sticking up what will work for country. These are tough negotiations.”

                                  However, Scottish First Minister Nicola Sturgeon said, “Now that the EU has explicitly rejected it, the Chequers pretence has to stop. At the very least, single market/customs union membership must be back on the table and the Article 50 clock stopped to avoid a cliff edge”.

                                  Separately, European Commission President Jean-Claude Juncker urge EU and UK to be like “two loving hedgehogs”. And, “when two hedgehogs hug each other, you have to be careful that there will be no scratches.”

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                                  Eurozone PMIs: Slowdown limited to manufacturing.

                                    Eurozone PMI manufacturing dropped to 53.3 in September, down from 54.4 and missed expectation of 54.5. That’s also the lowest reading in 28 months. PMI services rose to 54.7, up from 54.5 and beat expectation of 54.5. PMI composite dropped to 54.2, down from 54.5.

                                    Commenting on the flash PMI data, Chris Williamson, Chief Business Economist at IHS Markit said:

                                    “A near stagnation of exports contributed to one of the worst months for the Eurozone economy for almost two years. Trade wars, Brexit, waning global demand (notably in the auto industry), growing risk aversion, destocking and rising political uncertainty both within the Eurozone and further afield all fuelled the slowdown in business activity.

                                    “Thankfully, the slowdown was limited to manufacturing. A buoyant service sector, boosted in part by domestic demand being supported by strong job gains, means the survey data are running at a level indicative of the economy growing by a solid 0.5% in the third quarter.

                                    “However, with new orders and backlogs of work rising at much reduced rates compared to earlier in the year, export growth evaporating and future expectations remaining close to two-year lows, the risks to future growth appear tilted to the downside.”

                                    Full release here.

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                                    German PMIs: Manufacturers’ confidence took a big hit

                                      Germany PMI manufacturing dropped to 53.7 in September, down from 55.9 and missed expectation of 55.8. That’s also lowest in 25 months PMI services rose to 56.5, up from 55.0 and beat expectation of 55.1. PMI composite dropped to 55.3, down from 55.6 and hit 2-month low.

                                      Commenting on the flash PMI data, Phil Smith, Principal Economist at IHS Markit said:

                                      “The service sector was left to do most of the heavy lifting in September, as manufacturing put in its worst overall performance since August 2016. Service providers enjoyed the biggest boost to new business in over seven years in a further sign of strong domestic demand. Manufacturing new orders, however, were broadly flat as export sales declined for the first time in more than three years.

                                      “Manufacturers’ confidence took a big hit in September, deteriorating to its lowest for almost four years. Goods producers foresee output barely rising over the next 12 months and have cited growing uncertainty towards the outlook.

                                      “The September flash data meanwhile showed another solid gain in private sector employment, the one area where manufacturing and services both made strong positive contributions during the month. Falling backlogs of work in the manufacturing sector suggests that capacity may have finally caught up with demand, so there’s a good chance the pace of factory job creation will lose momentum in coming months.”

                                      Full release here.

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                                      France PMI composite dropped to 53.6, 21-month low

                                        France PMI manufacturing dropped to 52.5 in September, down from 55.3, missed expectation of 53.3. {MI services dropped to 54.3, down from 55.4, missed expectation of 55.4. PMI composite dropped to 53.6, down from 54.9 and hit a 21-month low.

                                        Commenting on the Flash PMI data, Sam Teague, Economist at IHS Markit said:

                                        “Output growth across the French private sector slipped to its lowest since December 2016 during the latest survey period, with data indicating a broad-based slowdown across both the manufacturing and service sectors. Manufacturing businesses frequently reported a deterioration in the automotive sector. Moreover, the survey data saw a general slowdown in new business across the whole private sector, with growth reaching a near two-year low in September.

                                        “Input price pressures sharpened at a faster pace in the latest survey, reflecting higher wage and fuel bills. Nonetheless, despite higher cost burdens, optimism among French businesses improved during September, evidenced by a further marked improvement in job creation.”

                                        Full release here.

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                                        Canada demand US dropping auto tariff threats. It’s not a stupid nation

                                          A new deadlock emerged in Canada-US NAFTA negotiation as Canada demanded the withdrawal of auto tariff threat before making a deal. Canadian Foreign Minister Chrystia Freeland said “we discussed some tough issues today,” after meeting USTR Robert Lighthizer yesterday, without giving any details. Freeland also ignored the US imposed deadline of October 1 and insisted on getting a deal that was good for Canadians.

                                          The request to drop auto tariffs threat based on national security is supported within the Canadian business world. Jerry Dias, president of Unifor, Canada’s largest private-sector union said “Why would Canada sign a trade agreement with the United States … and then have Donald Trump impose a 25 percent tariff on automobiles?” He added, “That for us is a deal breaker. It doesn’t make a stitch of sense. … We are a small nation, we’re not a stupid nation.”

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