Wed, Sep 18, 2019 @ 15:42 GMT

Limited loss in Yuan and Chinese stocks as trade war escalation shrugged

    The financial markets reactions to new round of US tariffs on China are so far rather muted. Nikkei is actually rising over 1% at the time of writing. Hong Kong HSI is down -0.72%, Singapore Strait Times is down -0.55%. China’s Shanghai SSE dipped to 2644.30 but recovered. It’s now trading down -0.12% only at 2648.5, still kept above 2638 key support level (2016 low).

    In the currency markets, Dollar turns soft again after a brief lift from the trade war news. It’s trading as the weakest one together with Yen for now. Australian Dollar and New Zealand Dollar are the strongest ones.

    USD/CNH (offshore Yuan) edged higher to 6.8930 earlier today but there is no follow through buying to push it through 6.8959 minor resistance yet.

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    RBA minutes reiterated no strong case for near term rate move

      The minutes of September 4 RBA meeting provided practically no surprise at all. most importantly, RBA reiterated that “the next move in the cash rate would more likely be an increase than a decrease.” However, “there was no strong case for a near-term adjustment in monetary policy.”

      RBA also noted that a few global central banks including the Fed were expected to continuing rate hikes. This had been reflected in the markets, “most notably a broad-based appreciation of the US dollar” that “raised risks” for some, especially for “fragile emerging” markets. However, “the modest depreciation of the Australian dollar was helpful for domestic economic growth.”

      The central bank also noted that there were “still significant tensions around global trade policy” that represented a “material risk” to the global outlook.

      Full minutes here.

      Also from Australia, house price index dropped -0.7% qoq in Q2, matched expectations.

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      Canada Trudeau on NAFTA: Might be days or weeks away … it might not be

        Canadian Foreign Minister Chrystia Freeland said yesterday that she will go to Washington again for more NAFTA talks this week. But the data is not fixed yet. She told reporters “we agreed we would continue to talk in Washington later this week … there are some conversations it’s better to have face-to-face and I think it’s absolutely the right thing for us to meet this week.” But no details were given.

        Prime Minister Justin Trudeau indicated again that he’s prepared if NAFTA talks breaks down. He said “We’re not there yet … we might be days or weeks away now, it might not be.” And he insisted in protecting “supply management” which is one of the deadlock in the negotiations. The so-called supply management system of import tariffs and production limits that ensure high prices for dairy, egg and poultry product in Canada.

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        Responses on tariffs: Trump did not heed American warnings

          Here are some responses from the industry on Trump’s tariffs on China:

          The U.S. Chamber of Commerce president and CEO Thomas Donohue said in a statement, “today’s decision makes clear that the administration did not heed the numerous warnings from American consumers and businesses about rising costs and lost jobs on Main Street, in factories, and on farms and ranches across the country. ”

          Dean Garfield, president of the Information Technology Industry Council said in a statement, “President Trump’s decision to impose an additional $200 billion is reckless and will create lasting harm to communities across the country.”

          Hun Quach, the Retail Industry Leaders Association’s s vice president for international trade said in a statement, “we are extremely discouraged by the Administration’s announcement to levy tariffs on millions of products American consumers buy every day.” “We are disappointed to see that warnings from importers and exporters representing every sector of the U.S. economy have not been heeded with no time for mitigation.”

          Jay Timmons, National Association of Manufacturers (NAM) President and CEO, said in a statement “more U.S. tariffs and Chinese retaliation risk undoing that progress and moving our economy in the wrong direction.” “Now is the time for talks—not just tariffs”.

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          Trump’s full statement on tariffs on USD 200B of Chinese goods

            Here is Trump’s own statement:

            Today, following seven weeks of public notice, hearings, and extensive opportunities for comment, I directed the United States Trade Representative (USTR) to proceed with placing additional tariffs on roughly $200 billion of imports from China. The tariffs will take effect on September 24, 2018, and be set at a level of 10 percent until the end of the year. On January 1, the tariffs will rise to 25 percent. Further, if China takes retaliatory action against our farmers or other industries, we will immediately pursue phase three, which is tariffs on approximately $267 billion of additional imports.

            We are taking this action today as a result of the Section 301 process that the USTR has been leading for more than 12 months. After a thorough study, the USTR concluded that China is engaged in numerous unfair policies and practices relating to United States technology and intellectual property – such as forcing United States companies to transfer technology to Chinese counterparts. These practices plainly constitute a grave threat to the long-term health and prosperity of the United States economy.

            For months, we have urged China to change these unfair practices, and give fair and reciprocal treatment to American companies. We have been very clear about the type of changes that need to be made, and we have given China every opportunity to treat us more fairly. But, so far, China has been unwilling to change its practices. To counter China’s unfair practices, on June 15, I announced that the United States would impose tariffs of 25 percent on $50 billion worth of Chinese imports. China, however, still refuses to change its practices – and indeed recently imposed new tariffs in an effort to hurt the United States economy.

            As President, it is my duty to protect the interests of working men and women, farmers, ranchers, businesses, and our country itself. My Administration will not remain idle when those interests are under attack.

            China has had many opportunities to fully address our concerns. Once again, I urge China’s leaders to take swift action to end their country’s unfair trade practices. Hopefully, this trade situation will be resolved, in the end, by myself and President Xi of China, for whom I have great respect and affection.

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            USTR announced 10% tarrifs on Chinese imports, to increase to 25% on Jan 1 2019

              US Trade Representative finally announced the tariffs on USD 200B of Chinese imports, effective September 24, 2018. The initial tariff rate is 10%. Staring January 1, 2019, the tariff rate will be increased to 25%. The list of products covers 5745 lines of the original 6031 lines proposed back in July 10. 297 lines were fully or partially removed from the list. Products include consumer electronics, certain chemical inputs for manufactured goods, textiles and agriculture; certain health and safety products such as bicycle helmets, and child safety furniture such as car seats and playpens.

              The tariffs were part of the follow-up actions on Section 301 investigations. China’s unfair trade practices were repeated in the statement. These include, forced technology transfer, depriving UA companies to set market based terms in negotiations, unfairly facilitating systematic investment in acquisition of US technology companies, and cyber intrusions to US commercial computer networks for valuable business information.

              Trump warned in a statement that new round of tariffs on around USD 267B of additional imports will be pursued if China retaliates. He added that “we have been very clear about the type of changes that need to be made, and we have given China every opportunity to treat us more fairly.” “But, so far, China has been unwilling to change its practices.”

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              Mid-US update: Dollar weak as Trump delivers nothing on tariffs yet, but a hollow tweet

                Dollar and Yen remain the weakest one for today at the time of writing. Markets are anticipating some sort of announcement from the US on tariffs on Chinese goods. But, other than a hollow tweet from Trump, nothing happened so far. European majors are the strongest one, led by Sterling, while New Zealand slipped in the second place. A lot of headlines flow through regarding Brexit but they’re generally positive ones. After all, the picture could change a lot if the tariff announcement finally comes.

                Technically, USD/CHF, GBP/USD and GBP/JPY have already resumed recent move. That is, USD/CHF is extending the fall from 1.0067. GBP/USD and GBP/JPY are extending recent rise from 1.2661 and 139.88 respectively. Euro is left behind with EUR/USD and EUR/JPY stuck in range.

                In other markets, US indices are trading mildly softer. NASDAQ is down -0.79% at the time of writing. But S&P 500 is down -0.27% and DOW is down -0.09% only. European indices closed slightly lower with FTSE down -0.03%, CAC down -0.07%. DAX was the biggest loser but it closed down merely -0.23%. Gold is back above 1200 but is kept well below 1214.30 near term resistance. Nonetheless, as it rebounds off 1187.58 support, near term outlook is kept bullish.

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                Into US session: Trade war risks ignored, Europeans strong, Dollar and Yen Weak

                  Entering into US session, Dollar and Yen are trading as the weakest ones. Europeans are the strongest ones. Reactions to the possibility of new tariffs on China are relatively muted so far. Asian stocks were down but losses were limited. Forex markets looked like they shrugged off the news. There are two possible explanations. Firstly, traders may be waiting for the news to be confirmed before acting. Secondly, the rumored 10% tariffs are much less severe than the original proposed 25%. Now, focus is immediately back on last week’s low of Dollar and Yen against Europeans. In particular, the closest levels are 0.9633 in USD/CHF, 1.3142 in GBP/USD and 147.00 in GBP/JPY.

                  Major European indices are trading slightly softer at the time of writing. FTSE is down -0.13%, DAX down -0.32%, CAC down -0.05%. Earlier today, Hong Kong HSI closed down -1.3% and Singapore Strait Times lost -0.63%. Nikkei was on holiday.

                  In particular, China’s Shanghai SSE dropped -1.11% to 2651.79, lowest in nearly four years. Key support level at 2638.30 looks more vulnerable than ever. However, it’s unsure whether downside momentum will pick up again when this key support is broken.

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                  Bundesbank: Germany just went through temporary period of weakness

                    Bundesbank’s monthly economic report noted that the economic growth in Germany remains fundamentally intact. Slowdown during the summer was mainly due to car makers. And, “as soon as the conversion problems in the automotive industry have been solved, the pace of macroeconomic expansion should pick up again significantly”

                    It also said “continued positive mood of businesses, which according to the Ifo Institute’s surveys has recently also improved in industry, points to a temporary period of weakness.”

                    Both Bundesbank and the Economy Ministry expect manufacturing to shift to a higher gear in the common months.

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                    IMF: Disruptive Brexit could lead to a significantly worse outcome

                      In an IMF report on UK, the organization expect growth to remain “moderate in the near term”, averaging around 1.5% in 2018 and 2019. However, it wanted that ” A more disruptive departure from the EU could lead to a significantly worse outcome, especially if it were to occur without an implementation period. “. On the other hand, “an agreement featuring fewer impediments to trade than currently expected could buoy business and consumer confidence, leading to faster growth.”.

                      IMF Managing Director Christine Lagarde also said, “compared with today’s smooth single market, all the likely Brexit scenarios will have costs for the economy and to a lesser extent as well for the EU.” And she warned that “The larger the impediments to trade in the new relationship, the costlier it will be. This should be fairly obvious, but it seems that sometimes it is not.”

                      In addition to Brexit, UK also faces a range of other economic challenges. These include “persistently lackluster productivity growth, large public debt, and the wide current account deficit.” Nonetheless, UK’s “sound macroeconomic framework, regulatory environment, and deep capital and flexible labor markets will be advantages in implementing reforms to address them.”

                      Full report here.

                      UK Chancellor of Exchequer Philip Hammond urged the government to listen to the “clear warnings” of the IMF of no-deal Brexit. Though, he also noted that no-deal outcome is unlikely even though it’s not impossible.

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                      ECB Coeure wants more clarity on pace of rate hike when conditions warrant

                        ECB Executive Board member Benoit Coeure urged the central to give more details in the forward guidance, regarding the pace of rate hike when it starts. He said, “should economic conditions warrant, there might be a case for the Governing Council to go beyond the timing to lift-off (rates) in further clarifying the pace at which it expects to remove policy accommodation.”

                        And, “a further clarification of our reaction function might help market participants and the broader public to better anticipate the likely future path of short-term interest rates.”

                        Currently, ECB’s plan is to half the monthly asset purchase to EUR 15B starting October, and stop it after December. Interest rates would stay at present levels through the summer of 2019.

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                        Eurozone CPI finalized at 2.0%, Core CPI at 1.0%

                          Eurozone CPI was finalized at 2.0% in August, down from 2.1% in July. That was still notably higher than 1.5% back in August 2017. Core CPI was finalized at 1.0% yoy. EU CPI was finalized at 2.1%, down from July’s 2.2%.

                          Highest contribution to Eurozone CPI was from energy (0.87%), followed by services (0.59%), food, alcohol & tobacco (0.48%) and non-energy industrial goods (0.09%).

                          Full release here.

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                          UK PM May believes parliament will vote for her Brexit deal with EU

                            UK Prime Minister Theresa May expressed her confidence that the parliament will vote for any Brexit deals that she strikes with the EU. She added that “parliament will vote for a deal because people will see the importance of a deal that maintains a good trading relationship with the EU … but gives us the freedom to take the benefits and opportunities of Brexit.”

                            Also regarding the possibility of being rejected by the Parliament, she said “do we really think … we’ve been through this negotiation we get to the point where we’ve agreed a deal that if parliaments was to say no go back and get a better one, do you really think the European Union is going to give a better deal at that point.” And, “the alternative to that will be having no deal.”

                            Separately, Austrian Chancellor Sebastian Kurz said EU should “do everything possible to avoid a hard Brexit”. French President Emmanuel Macron said “it’s indispensable that we reach an agreement and that European Union rules be fully maintained.”

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                            ECB Makuch: Unguided missile Trump is the biggest threat to Eurozone economy

                              ECB Governing Council member Jozef Makuch said risks to the Eurozone are broadly balanced and the central bank’s stance was correct. He added policy makers were “not underestimating the risks” but “analyzing them”. And, “based on what we know now, the development is stable, risks are balanced, with some downside risks to GDP growth.” He also noted there is no reason to “spread gloomy mood or panic”.

                              Makuch also pointed out that Trump is like an “unguided missile” and the unpredictably of his policies is the biggest risks of the Eurozone economy. He noted that the erratic nature of Trump as “he says something and in the end something else happens”. Meanwhile, he played down risks from emerging markets and said the governing council sees no signs of spillover.

                              Meanwhile, Makuch is considering stepping down early as head of Slovakia’s central bank. He’s term supposedly end in 2021. He noted that the elections in spring 2020 would be highly divisive. That could lead to the post being vacant for an extended period. To him, Finance Minister Peter Kazimir would be a “good governor” to replace him. He hailed that Kazimir “Ecofin deals with all important monetary issues”, so the lack of experience in central banking is not a problem.

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                              BCC downgraded UK growth forecasts, economy to grow at a snail’s pace

                                The British Chambers of Commerce downgraded UK growth forecasts, citing “weaker outlook for trade and investment” as main reasons. Key points in the new forecasts:

                                • 2018 GDP growth at 1.1%, down from 1.3%. 2019 GDP growth at 1.3%, down from 1.4%. 2020 GDP growth at 1.6%, unchanged.
                                • 2018 exports growth at 1.7% only, down from 2.8% in prior forecast.
                                • 2018 total investment growth at 1.4%, down from 1.8%. 2019 at 1.4% and 2020 at 1.5%.
                                • BoE expected to hike in Q1 2019 and Q2 2020. Bank rate to hit 1.25% by the end of the forecast period.

                                Quote from Dr Adam Marshall, Director General of the British Chambers of Commerce (BCC):

                                “UK economy as a whole is set to grow at a snail’s pace. Brexit uncertainty continues to weigh heavily on many firms, as most of the practical questions facing trading businesses remain unanswered. The lack of precision on the nature of the UK’s future relationship with the EU is lowering expectations for both business investment and export growth.”

                                “The drag effect on investment and trade would intensify in the event of a ‘messy’ and disorderly Brexit”

                                “A deal with Brussels won’t deliver stronger UK growth on its own. The Prime Minister and the Chancellor must now pull out all the stops here at home to bolster business confidence, slash costs, and crowd in investment.”

                                Full release here.

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                                China may reject trade talk if new tariffs are imposed

                                  The WSJ reported that Chinese government may reject to re-start trade talks with the US if Trump imposes new tariffs. An unnamed Chinese official was quoted saying the country would not negotiation “with a gun pointed to its head”. In addition, other unnamed officials said China could impose export retraints on some supplies needed by US businesses, to disrupt their supply chain.

                                  The news followed shortly after report that Trump is going to kick start new tariffs (10% rather than 25%) on USD 200B in Chinese imports, as soon as Monday. Last week, Treasury Secretary Steven Mnuchin proposed to have a meeting involving Chinese Vice Premier Liu He on around September 20. It doesn’t matter if the new round of tariffs are imposed before or after the meeting. As long as they are imposed, anything agreed during the meeting will not take effect for sure.

                                  Separately, the PBoC surprisingly injected CNY 265B in liquidity to the markets via its one-year medium-term lending facility (MLF) today. Interest rate was unchanged at 3.30%. It’s an unexpected move because no MLF loans were due to expire today.

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                                  Trump to announce new tariffs on China as soon as Monday, 10% instead of 25%

                                    Reuters reported that, based on unnamed source, Trump is ready to announce the next round of tariffs on USD 200B in Chinese goods, as soon as on Monday. However, the tariff rate could be at 10%, which is much lower than the 25% rate Trump intended to impose. There is no comment from the White House on the news yet. At the same time, Treasury Secretary Steven Mnuchin is restarting trade talks with China, involving Vice Premier Liu He. But there is no detail the meeting, not even a date yet.

                                    In the middle of last week, before the news that Mnuchin sent an invitation letter to China for talks, a massive new campaign against Trump’s tariffs was launched. The Americans for Free Trade campaign rode on the Farmers for Free Trade campaign. The multi-industry coalition consists of over 80 of the US leading trade associations, representing thousands of businesses and workers. It’s backed by a multi-million dollar campaign called Tariffs Hurt the Heartland.

                                    The campaign include highlighting opposition to current and new tariffs through:

                                    • Events in congressional districts across the country that bring together farmers, business owners and factory workers to discuss how tariffs are directly hurting them;
                                    • Paid TV, radio and online advertisements highlighting how tariffs are affecting families, farmers, factory workers and businesses of all sizes;
                                    • A rapid response “war room” that will fact check and respond to tariff announcements;
                                    • Op-eds, blogs and statements from Americans bearing the brunt of tariffs;
                                    • A digital media campaign explaining the economic harm of tariffs to a wide online audience; and
                                    • Direct outreach to key members of Congress on behalf of grassroots voices from across the nation.

                                    And it will kick off with events in Chicago, Nashville, Pennsylvania and Ohio.

                                    Here are some links for your reference:

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                                    U of Michigan consumer sentiment rose to 100.8, second highest since 2004

                                      U of Michigan consumer sentiment rose to 100.8 in September, up from 96.2 and beat expectation of 96.9. That’s the second highest level since 2004.

                                      Surveys of Consumers chief economist, Richard Curtin: Consumer sentiment posted a robust rise in early September, reaching 100.8, the second highest level since 2004-only behind the March 2018 reading of 101.4. Importantly, the gains were widespread across all major socioeconomic subgroups. The Expectations Index reached its highest level since July 2004, largely due to more favorable prospects for jobs and income. Despite a lessening of expected gains in nominal incomes in September, inflation expectations also declined, acting to offset concerns about declining living standards. Consumers anticipated continued growth in the economy that would produce more jobs and an even lower unemployment rate during the year ahead. While consumers were somewhat more likely to anticipate that the economic expansion would continue uninterrupted over the next five years, nearly as many expected another downturn sometime in the next five years. The largest problem cited on the economic horizon involved the anticipated negative impact from tariffs. Concerns about the negative impact of tariffs on the domestic economy were spontaneously mentioned by nearly one-third of all consumers in the past three months, up from one-in-five in the prior four months.

                                      Full release here.

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                                      Chicago Fed Evans: Normal to hike interest rate to restrictive given unemployment rate falls below natural rate

                                        In a speech titled “Monetary Policy: The Road Ahead“, Chicago Fed President Charles Evans said the economy is now “approaching the tenth year of the expansion” and “fundamentals for growth are solid”. He expected unemployment rate to drop further to around 3.5% by the end of 2020, a full percent point below “natural rate”. Evans also expected inflation to “rise a bit further” over the next few years. And he added ” I expect tighter labor markets to lead to higher wage growth before too long.”

                                        On monetary policy, he noted that most FOMC members put neutral rate somewhere between 2.5 – 3.0%. The 3-3.5% projected for 2019 and 2020 is “mildly restrictive”. Evans noted that “given an unemployment rate forecast below the natural rate, such a policy stance would be quite normal and consistent with some moderation in growth and a gradual return of employment to its longer-run sustainable level.”

                                        Nonetheless, he also pointed out there may be need to tighten further is the “currently unexpected tailwinds emerge that push the economy too far beyond sustainable growth and employment levels, potentially leading to unacceptably high inflation beyond our symmetric 2 percent objective. ” On the other hand, Fed may need a “shallower policy path if expected headwinds emerge”, such as trade tensions.

                                        Evans also said it’s premature to read a signal into flattening yield curve. He noted that long-term borrowing costs have been declining for a while. And all other signals suggest a strong economy.

                                        Overall, Evans just repeated what he said before. He was one of the few who openly said recently that interest rate may need to enter into restrictive region.

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                                        UK Raab: Substantive differences remain with EU and Brexit agreement

                                          UK Brexit Minister Dominic Raab held a phone call with EU chief negotiator Michel Barnier. After that, Raab said “while there remain some substantive differences we need to resolve, it is clear our teams are closing in on workable solutions to the outstanding issues in the Withdrawal Agreement, and are having productive discussions in the right spirit on the future relationship.”

                                          Raab added that “we agreed to review the state of play in the negotiations following the informal meeting of heads of state or government of the European Union in Salzburg next Thursday, and we reiterated our willingness to devote the necessary time and energy to bring these negotiations to a successful conclusion.”

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