Tue, Jun 25, 2019 @ 03:38 GMT

Into US session: Stock rally lifts Australian Dollar, Sterling cheers Davis resignation

    Entering into US session, Australian Dollar is trading as the strongest one for today, as helped by easing risk aversion/return of risk appetite. China Shanghai SSE rose 2.47% to close at 2815.11 and it looks like 2700 key psychological level is now defended well. Nikkei closed up 1.21%, Hong Kong HSI up 1.32% Singapore Strait Times rose 1.16%. European Indices are also solid. At the time of writing, DAX is up 0.2%, CAC up 0.5%, FTSE up 0.4%.

    Sterling is trading as the second strongest and markets seemed to be cheering the resignation of Brexit Minister David Davis. Former Minister of State for Housing Dominic Raab is appointed as the new Brexit Minister. Davis’ departure is probably the best for him and PM Theresa May.

    Meanwhile, Dollar is trading as the weakest one, followed by the Japanese Yen.

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    Eurozone Sentix Investor Confidence rose to 12.1 in technical counter-movement

      Eurozone Sentix Investor Confidence rose to 12.1 in July, up from 9.3 and beat expectation of 9.0. Sentix noted in the release that Eurozone expectations may “stabilize slightly” after the sharp fall in June. But that seems more of a “technical counter-movement”. It noted that the Economic Index for Germany had dropped for the sixth time in a row to just 16.2.

      Also, the next of of trade dispute between the US and the rest of the world “has been reached and countermeasures by the EU and China are under way. Sentix noted if Trump now targets the European car industry, the “trade dispute could lead to more than a slowdown in economic sentiment.” At the same time, central banks, at the path of stimulus remove, are “unlikely to play a support role”.

      Sentix added that the global environment is also showing more and more signs of an economic slowdown. For Japan, for example, we are recording the sixth consecutive decline in the overall index and economic expectations for Asia ex Japan are slumping by more than 10 points. US economic expectations are also falling to their lowest level since August 2012.

      Full Sentix Economic Index release here.

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      All nine BoJ regions reported rosy economic assessment

        According to BoJ’s Regional Economy Report, six regions (Hokuriku, Kanto-Koshinetsu, Tokai, Kinki, Chugoku, and Kyushu-Okinawa) reported that their economy had been expanding or expanding moderately. Three regions (Hokkaido, Tohoku, and Shikoku) noted that the economy had continued to recover moderately. That’s unchanged from previous assessment in April 2018.

        BoJ Governor Haruhiko also said in the meeting of the regional branch manager that “Japan’s economy is expected to continue expanding moderately.” But ultra-loose monetary policy would be maintained until inflation hits target. Nonetheless, Yasuhiro Yamada, manager of the BOJ’s Osaka branch, warned that “Many companies in the region say (protectionism) is the number one risk. They are worried about the huge uncertainty over the trade outlook.”

        Full report here.

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        Davis: May is good PM but the Brexit plan is a dangerous strategy

          Ex-Brexit Minister David Davis told BBC Radio that PM Theresa May’s Brexit plan had a “number of weaknesses” and gives away “too much” to the EU. He called that a “dangerous strategy”. And he said he was clear after Friday’s that that he was the “odd man out”.

          Nonetheless, Davis also said he “won’t be encouraging people” to mount a leader change in the UK and added that “I like Theresa May, i think she is a good PM”. And he didn’t expect others ministers to follow him to resign. He said “the simple truth is people can only make these decisions of conscience, decisions of principle by themselves, in their own minds,”and you can’t make the decision for somebody else and you can’t offload it on somebody else.”

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          China foreign currency reserves rose 0.05% in June

            China’s foreign currency reserves rose USD 1.5B in June to USD 3.1121T, up 0.05%. The State Administration of Foreign Exchange spokesperson said that the China’s foreign exchange market was “generally stable”. Due to strength in the US Dollar and change in asset pricing, the overall currency reserve rose slightly.

            SAFE also noted that since the start of the year, China’s economy has “maintained a steady trend”. But there were “divergence” in global recovery, heightened trade friction, capital out-flow and currency depreciation pressure in emerging markets. Though, China’s cross-border capital flowed remained stable.

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            Sterling spiked on Brexit plan but reversed after Davis’s resignation

              UK Prime Minister Theresa May appeared to have united her cabinet on the Brexit plan after the locked-up meeting at the Chequer last Friday. A key element of the plan is to establish a UK-EU free trade area with a common rule book for industrial goods and agricultural products. And the UK would commit by treaty to ongoing harmonization with EU rules on goods. However, on services, the UK will strike different arrangements for regulatory flexibility. And for financial services, the UK will seek arrangements that preserve the mutual benefits of integrated markets and protect financial stability. And, with the plan, the UK believed that the problem of Irish border would be avoided an a backstop plan won’t be needed. The full document is expected to be published this week.

              Environment Secretary Michael Gove, on the the highest-profile Brexit campaigners, endorsed the plan. He told BBC that “One of the things about politics is that you mustn’t, you shouldn’t, make the perfect the enemy of the good. And one of the things about this compromise is that it unites the cabinet.” And he urged that “All those of us who believe that we want to execute a proper Brexit, and one that is the best deal for Britain, have an opportunity now to get behind the Prime Minister in order to negotiate that deal.”

              However, the situation is complicated today as Brexit Minister David Davis resigned as he was not willing to be a “reluctant conscript” to the plan. He complained that “the general direction of policy will leave us in at best a weak negotiating position, and possibly an inescapable one.” And the so called “common rule book” with the EU will hand “control of large swathes of our economy to the EU and is certainly not returning control of our laws”. Separately, it’s reported that Steve Baker, a minister in the Brexit department has also resigned.

              Sterling spiked higher earlier today and reversed on Davis’s resignation.

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              UK Brexit Minister David Davis’s resignation letter to PM May

                The following is David Davis’s resignation letter to Prime Minister Theresa May.

                Dear Prime Minister,

                As you know there have been a significant number of occasions in the last year or so on which I have disagreed with the Number 10 policy line, ranging from accepting the Commission’s sequencing of negotiations through to the language on Northern Ireland in the December Joint Report. At each stage I have accepted collective responsibility because it is part of my task to find workable compromises, and because I considered it was still possible to deliver on the mandate of the referendum, and on our manifesto commitment to leave the Customs Union and the Single Market.

                I am afraid that I think the current trend of policy and tactics is making that look less and less likely. Whether it is the progressive dilution of what I thought was a firm Chequers agreement in February on right to diverge, or the unnecessary delays of the start of the White Paper, or the presentation of a backstop proposal that omitted the strict conditions that I requested and believed that we had agreed, the general direction of policy will leave us in at best a weak negotiating position, and possibly an inescapable one.

                The Cabinet decision on Friday crystallized this problem. In my view the inevitable consequence of the proposed policies will be to make the supposed control by Parliament illusory rather than real. As I said at Cabinet, the common rule book policy hands control of large swathes of our economy to the EU and is certainly not returning control of our laws in any real sense.

                I am also unpersuaded that our negotiating approach will not just lead to further demands for concessions.

                Of course this is a complex area of judgment and it is possible that you are right and I am wrong. However, even in that event it seems to me that the national interest requires a Secretary of State in my Department that is an enthusiastic believer in your approach, and not merely a reluctant conscript. While I have been grateful to you for the opportunity to serve, it is with great regret that I tender my resignation from the Cabinet with immediate effect.

                Yours ever,


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                BCC pushes for clarify and Brexit hedge

                  According to the Quarterly Economic Survey of the British Chambers of Commerce (BCC), the UK economic conditions “remain sluggish” despite modest improvement in Q2. The survey showed that the economy is in a “holding pattern” and the annual growth this year is set to be the “lowest since the financial crisis.” It called for a push to “fix the fundamentals” to create a “Brexit hedge”. And the government should provide clarity on the “real-world questions” after Brexit to give businesses a clear path that would enable them to invest and grow.

                  Adam Marshall, Director General of the BCC also noted in the release that “amid growing international uncertainty, from escalating trade disputes to oil price rises, the UK economy continues to grow at a sluggish rate. Brexit is a key factor – but long-standing structural issues are also holding companies’ growth back.” And he emphasized again that
                  “Business needs clarity on Brexit, and a strong domestic agenda that creates a ‘Brexit hedge’ as we navigate turbulence over the next few years.”

                  Full report here.

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                  BoJ Kuroda to maintain ultra loose policy until inflation hits target

                    BoJ Governor Haruhiko Kuroda said at a quarterly meeting of regional branch managers that the central bank would maintain its ultra-loose monetary policy until inflation hits 2% target. He added that the economy is expanding moderately and is expected to continue with it. Consumer inflation, however, is moving between 0.5% to 1.0%.

                    BoJ will continue to pursue current policy under the yield curve control framework for as long as needed. The monetary policy will be adjusted when necessary to maintain economic momentum.

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                    ECB Coeure: Europe United to respond to US shift from hegemonia to arkhe

                      ECB Executive Board Member Benoit Coeure the recent developments in trade war “doesn’t have the potential to derail the recovery” of the Eurozone. Just after ECB announced to end the asset purchase program in December, the risks of US-China trade war has turned from rhetorics into reality. And the US is threatening tariffs on European Union autos. But Coeure said that the June monetary policy decision “already takes the risks into account” and there is “no reason to change policy expectations” right now. He added the the impact of trade tensions on business confidence is so far “limited” and “the backdrop is very strong resilient growth in the Eurozone”.

                      Coeure also delivered a speech titled “Asserting Europe’s Leadership” and shared his view on the current global development. He noted that over the past seven decades, American leadership in the world was of the “legitimate” type, that “builds on trust and common identities”. That’s called “hegemonia” in ancient Greece. Such leadership was “largely unchallenged because it was built on shared fundamental values … of human rights, freedom, democracy, equality and the rule of law.”

                      However, Coeure pointed out that “putting one’s country first marks a departure from the sort of prudent and vigilant policy that leadership by a legitimate hegemon would entail.” And, “he transactional nature of such an approach arguably belongs much more to arkhe – hard power – where policies and doctrines are imposed on others, without their consent and regardless of the consequences. International agreements are repealed, the international rule of law is questioned and other nations are challenged.”

                      He also said that solutions offered to solve the problems of globalization are too often “simplistic and short-sighted”. For example, “raising tariffs and withdrawing within national borders will deprive people of the economic benefits of trade and integration.” And he pointed to ECB staff estimates that if US raises tariffs of all goods by 10% while others retaliate the same, US GDP could drop up to -2.5% in the first year alone.

                      Coeure said EU’s response, as seen with ancient Greeks, were alliances against arkhe. That is, “Europe united” against “America first”. In particular, he stressed the importance of “completing the euro area’s architecture” as it’s necessary for Europe to attain other objectives on fostering cooperation on security and defence, speak with one voice on international affairs and to complete the Single Market.

                      Full speech here.

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                      Non-farm Payrolls rose 213k, beat expectations. But unemployment rate and wage growth miss

                        Dollar trades notably lower in early US session despite stronger than expected headline NFP number. Non-farm payroll report showed 213k growth in June, above expectation of 190k. Prior month’s figure was revised up from 223k to 244k. Unemployment rate rose to 4.0%, up from 3.8%. But that’s mainly thanks to rise in participation rate from 62.7% to 62.9%. Wage growth was a miss though as average hourly earnings rose 0.2% mom versus expectation of 0.3% mom. Also from the US, trade deficit narrowed slightly to USD -43.1B in May.

                        From Canada, the employment market rose 31.8k in June, above expectation of 24.0k. Unemployment rate rose to 6.0%, up from 5.8%. Also, that’s due to rise in participation rate from 65.3% to 65.5%. Trade deficit widened to CAD -2.8B in May.

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                        Chinese Premier Li: Trade war is never a solution

                          In response to the start of US section 301 tariffs on USD 34B in Chinese import, Chinese Foreign Ministry spokesman Lu Kang said in a daily media briefing that “after the United States unfairly raised tariffs against China, China immediately put into effect raised tariffs on some U.S. goods.” Lu also reiterated that “On the specifics of the trade issue, from the start China’s position has been very clear and consistent. The United States at all levels is very clear on China’s position,”

                          Commenting on the issue, Chinese Premier Li Keqiang said in Bulgaria that trade war is “never a solution” and there will be no winner. And, “it benefits no one and it would undermine the multilateral free trade process,” he said. “If one insists on waging a trade war it would hurt others and themselves.”

                          He reiterated that China is committed to further opening up its markets. But, “if any party resorts to increase of tariffs, china would take measures in response to protect china development interests and safeguard multilateral trade regime and rules.”

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                          Japan cabinet revised down fiscal 2018 growth forecast

                            Japan Cabinet Office presented new economic projections at the Council on Economic Fiscal Policy today.

                            For current fiscal 2018, the economy is projected to grow 1.5% in real term. That’s a downgrade from prior projection of 1.8%, down at the start of the year. In nominal terms, the economy is projected to grow 1.7%, sharply lower from prior forecast of 2.5%, due partly to slowdown in property investment.

                            The office forecasts the economy to grow 1.5% in the fiscal-2019, in price adjusted real terms. That’s after adjustment to the planned sales tax hike in October 2019. In nominal term, GDP is projected to grow 2.8%.

                            For the current fiscal 2018, overall CPI is projected to be at 1.1%, unchanged from prior estimate. Overall price CPI is forecast to rise 1.5% in fiscal 2019. With adjustment on the sales tax hike, overall CPI is projected to slow to 1.0%.

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                            UK May and ministers to work on the Brexit blueprint in the Chequers

                              UK Prime Minister Theresa May is set to have a “sleepover” meeting with her cabinet in the Chequers to straighten out all issues on post Brexit relationship with EU. Supposedly, another white paper will be published on July 9 as the government finally agrees on a unified position, as the blueprint for further negotiations with the EU. The pressing issue is how the UK would likely to replace the membership of the EU’s customs union which still provides “frictionless trade”. The border of Irelands is another sticky issue that hasn’t been solved.

                              Ahead of the meeting, May said “we want a deal that allows us to deliver the benefits of Brexit – taking control of our borders, laws and money and by signing ambitious new trade deals with countries like the US, Australia and New Zealand.” And, “this is about agreeing an approach that delivers decisively on the verdict of the British people – an approach that is in the best interests of the UK and the EU, and crucially, one that commands the support of the public and parliament.”

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                              Dollar recovers mildly ahead of Non-farm payrolls, reactions likely temporary

                                Dollar trades mildly higher today but stays mixed for the week ahead of US non-farm payroll report.

                                Markets are expecting 190k growth in non-farm payrolls in June, down from May’s 223k. Unemployment rate is expected to be unchanged at 3.8%. Average hourly earnings are expected to have another month of 0.3% mom growth.

                                Overall, other employment indicators pointed persistently healthy job markets in the US, even though momentum might have slowed a little bit. ADP private employment came in slightly weaker than expected at 177k versus expectation of 180k. Employment component of ISM manufacturing dropped -0.3 to 56.0. Employment component of ISM non-manufacturing dropped -0.5 to 53.6. Initial jobless claims averaged 221.25k in June, staying a ultra-low level historically. Conference board consumer confidence dropped from 128.8 to 126.4 in June but stayed high.

                                Barring any large surprise that deviate drastically from expectation, reactions to NFP should be temporary. Fed is on course for two more rate hikes this year. And, a month or two of data are not going to alter that path.

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                                FOMC Minutes: Slope of yield curve to be monitored

                                  The minutes of the June FOMC meeting provided little inspirations to the markets overnight. It’s noted that job gains had been strong, unemployment rate hade decline, growth of household spending had picked up, business fixed investment continued to grow strongly, headline and core inflation have moved close to 2%, long term-inflation expectations were little changed. “Members viewed the recent data as consistent with a strong economy that was evolving about as they had expected.”

                                  Flattening of the yield curve was a topic discussed during the meeting as that “might signal about economic activity going forward”. A numbers of factors were brought forward, including “reduction in investors’ estimates of the longer-run neutral real interest rate; lower longer-term inflation expectations; or a lower level of term premiums in recent years relative to historical experience reflecting, in part, central bank asset purchases.” And that could ” temper the reliability of the slope of the yield curve as an indicator of future economic activity.” A number of the meeting participants said that “it would be important to continue to monitor the slope of the yield curve.”

                                  The minutes also noted that escalating trade tensions have already started hurting investments. The minutes pointed out that “many district contacts expressed concern about the possible adverse effects of tariffs and other proposed trade restrictions, both domestically and abroad, on future investment activity.” And, “contacts in some districts indicated that plans for capital spending had been scaled back or postponed as a result of uncertainty over trade policy.” And, most policymakers noted that “uncertainty and risks associated with trade policy had intensified and were concerned that such uncertainty and risks eventually could have negative effects”.

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                                  Trump threatens tariffs on USD 500B of Chinese goods as section 301 tariffs ready to go

                                    US Section 301 tariffs on USD 34B of Chinese imports are going to take effect at 12:01 Eastern time Friday, that is, just hours away. Ahead of that, Trump raised his threat again and warned of tariffs on up to USD 500B of Chinese goods. He told reports that “you have another 16 (billion dollars) in two weeks, and then, as you know, we have $200 billion in abeyance and then after the $200 billion, we have $300 billion in abeyance. Ok? So we have 50 plus 200 plus almost 300.”

                                    China Foreign Minister Wang Yi, also State Councilor, slammed trade protectionism as “short-sighted” behavior that could harm all sides. And he reiterated China’s position that unilateral acts would go against the rules of the WTO and pose damages to the multilateral global trading system. China said earlier that its retaliation will start once the US tariffs kick in.

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                                    ISM non-manufacturing rose to 59.1, employment dropped 0.5 to 53.6

                                      US ISM non-manufacturing composite rose to 59.1 in June, up from 58.6 and beat expectation of 58.0. Business activity rose 2.6 to 63.9. Employment, however, dropped 0.5 to 53.6.

                                      Some quotes from respondents:

                                      “Tariffs, freight [issues] and labor shortages continue to have an inflationary influence on costs.” (Construction)

                                      “Crude prices are causing concern, as it is a driver in newsprint inks. Tariffs on paper and aluminum are causing apprehension about future pricing. Suppliers are posturing and threatening price increases, and we are doing our best to reject increases.” (Information)

                                      “Trade tariffs are creating price uncertainty.” (Management of Companies & Support Services)

                                      “Domestically, we are still experiencing a shortage of transportation providers that is getting worse each month when retiring drivers or drivers moving into other opportunities are not being replaced. Internationally, there is a shortage of flat racks [that] has caused late shipments. The tariffs on steel and aluminum have also had some negative effects on our supply of material, but we have applied for exemptions.” (Other Services)

                                      Full release of ISM non-manufacturing.

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                                      Dollar decline continues after ADP and jobless claims misses

                                        Dollar stays weak and suffers some additional selling after slightly worse than expected employment data.

                                        ADP report showed 177k growth in private non-farm jobs, below expectation of 180k. Prior month’s figure, though, was revised up from178k to 189k.

                                        Initial jobless claims rose 3k to 231k in the week ended June 30, higher than expectation of 221k. The four week-moving average of initial claims rose 2.25k to 224.5k. Continuing claims rose 32k to 1.74m in the week ended June 23.

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                                        German Merkel supports lowering car tariffs, but not only for US

                                          German Chancellor Angela Merkel said today that she would back lowering tariffs on US auto imports. But she also emphasized that “When we want to negotiate tariffs, on cars for example, we need a common European position and we are still working on it.”

                                          Nonetheless, she added that “I would be ready to support negotiations on reducing tariffs but we would not be able to do this only with the U.S.”

                                          It sounds like Merkel is keeping her stance to push for “plurilateral agreement” with US, Japan and South Korea.

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