Sat, Aug 15, 2020 @ 13:50 GMT

Trump: China trade deal happening fast, dangerous Huawei can be included

    Trump sounded upbeat on US-China trade negotiation again even though, for now, there is still no more meeting scheduled. He said a the White House, “it’s happening, it’s happening fast and I think things probably are going to happen with China fast because I cannot imagine that they can be thrilled with thousands of companies leaving their shores for other places.”

    He also said Huawei is “very dangerous” if “you look at what they’ve done from a security standpoint, from a military standpoint”. But even though it’s that dangerous Trump said “If we made a deal, I could imagine Huawei being possibly included in some form or some part of it”.

    But separately, the Commerce Department laid out a proposal in a Federal Register notice yesterday, on punishing currency manipulating countries with tariffs. Commerce Secretary Wilbur Ross said “this change puts foreign exporters on notice that the Department of Commerce can countervail currency subsidies that harm US industries” And, “foreign nations would no longer be able to use currency policies to the disadvantage of American workers and businesses.”

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    Fed officials expressed concerns over persisting trade tensions

      Some Fed officials expressed their concerns over trade tensions and the impact on confidence and the economy at a Dallas Fed conference yesterday.

      Dallas Fed President Robert Kaplan said “I’m watching very carefully how these trade tensions unfold because I have a concern.. whether that could cause some deceleration in the rate of growth.” And, “new development over the last month has been increased trade tensions and more business uncertainty, and it’s going to take a little while to sort out how that might unfold, or how long that might last.”

      San Francisco Fed President Mary Daly said for now “the data is good, but the mood is teetering”. The economy’s momentum would be an upside risk to growth ” if we get a relaxation or a reduction in the uncertainty”. However, she warned that if uncertainties persist, “that’s a downside to the economy, because the uncertainty has real effects, but it also has effects on confidence, and that confidence feeds back into investment.”

      Richmond Fed President Thomas Barkin and Atlanta Fed President Raphael Bostic also warned that uncertainties around trade could hurt growth.

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      UK PM May said to announce exit date today, Sterling decline slowing but no bottoming

        It’s widely reported that UK Prime Minister Theresa May will finally announce her exit date on Friday. The resignation as Conservative Leader could take effect on June 10, paving the way for leadership contest. May could stay on as caretaker Prime Minister until a new one is elected, which may take up to six week’s time.

        At this point, Boris Johnson is the favorite among pro-Brexit Conservatives, for winning back support that swung to Nigel Farage’s Brexit party. But there are also deep concerns with centrist and pro-EU party members that Johnson will eventually take UK into a no-deal Brexit that he prefers.

        Other possible candidates include Michael Gove, Foreign Minister Jeremy Hubnt, former Leader of the House of Commons Andrea Leadsom, former Brexit Minister Dominica Raab.

        Sterling’s decline slowed a little bit today but there is no clear sign of bottoming yet. We’d expect more downside in the Pound until at least it becomes clear who’ll be the next Prime Minister.

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        Free fall in treasury yields drag down Dollar

          After brief rally on risk aversion in early US session, Dollar quickly reversed as dragged down by free fall in treasury yields. Dollar is currently the second weakest for the day. 10-year yield is currently down -0.069 at 2.324. It’s on track for 2.292 fib level as noted here. Canadian Dollar is the worst performer on free fall in oil prices.

          EUR/USD breached 1.1111 low to 1.1107 but recovers strongly. Medium term down trend from 1.2555 is not ready to resume yet. Consolidation from 1.1111 is going to extend with another rising leg. But we don’t expect a break of 1.1263 resistance before down trend resumption.

          USD/CHF’s near term decline from 1.0237 resumes by taking out 1.0050. Next stop is 61.8% retracement of 0.9879 to 1.0237 at 1.0016. We’d look for bottoming signal below there.

          USD/JPY’s break of 109.81 minor support suggest that corrective recovery from 109.02 has completed at 110.67. Retest of 109.02 should be seen next and break will resume the decline from 112.40, towards 104.69 low.

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          10-year yield resume medium term down trend, 2.292 fib level next

            US 10-year yield opens sharply lower today and hits as low as 2.352 so far. Breach of 2.356 short term bottom suggests that recent down trend from 3.248 is ready to resume.

            Outlook is rather bearish too as TNX was rejected twice by falling 55 day EMA. Next target is 50% retracement of 1.336 to 3.248 at 2.292.

            In the bigger picture, current fall is so far, seen as a correction to the up trend from 1.336 (2016 low). Rejection by long term channel support suggests it’s far from over. We’d expect a test on 61.8% retracement at 2.066 before forming a bottom for sustainable rebound.

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            US PMI manufacturing dropped to 50.6, 116-month low, spreading to services

              In May, US PMI manufacturing dropped sharply to 50.6, down from 52.6, missed expectation of 52.7. It’s also the lowest level in 116 months. PMI services dropped to 50.9, down from 53.0 and missed expectation of 53.5. it’s the lowest level in 39 months. PMI Composite dropped to 50.9, down from 53.0, a 36-month low.

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

              “Growth of business activity slowed sharply in May as trade war worries and increased uncertainty dealt a further blow to order book growth and business confidence.

              “A decline in the headline ‘flash’ PMI to its lowest for three years pushes the survey data down to a level historically consistent with GDP growing at an annualised rate of just 1.2% in May. Worse may be to come, as inflows of new business showed the smallest rise seen this side of the global financial crisis. Business confidence has meanwhile slumped to its lowest since at least 2012, causing firms to tighten their belts, notably in respect to hiring. Jobs growth in May was the weakest seen for over two years.

              “The slowdown has been led by manufacturing, but shows increasing signs of spreading to services. The survey data have been consistent with falling manufacturing output since February, but suggest that the sector’s woes intensified in May to mean factories will therefore likely act as an increasing drag on the economy in the second quarter. Trade wars remained top of the list of concerns among manufacturers, alongside signs of slower sales and weaker economic growth both at home and in key export markets.

              “However, an additional concern is the spreading of the malaise to the service sector, growth of which slumped in May to one of the weakest since the global financial crisis. With the service sector’s performance being a key gauge of the health of domestic demand, this broadening-out of the slowdown poses downside risks to the outlook.”

              Full release here.

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              IMF: New US-China tariffs will subtract about 0.3% of global GDP in short term

                In blog post published today, IMF noted that US-China trade tensions have “negatively affected consumers as well as many producers in both countries.” It pointed out while tariffs have reduced trade between the two countries, “bilateral trade deficit remains broadly unchanged”. It also warned that “latest escalation could significantly dent business and financial market sentiment, disrupt global supply chains, and jeopardize the projected recovery in global growth in 2019.”

                In the global level, recently announced measures and envisaged new US-China tariffs will “subtract about 0.3 percent of global GDP in the short term, with half stemming from business and market confidence effects.” Furthermore, ” failure to resolve trade differences and further escalation in other areas, such as the auto industry, which would cover several countries, could further dent business and financial market sentiment, negatively impact emerging market bond spreads and currencies, and slow investment and trade.”

                In addition, “higher trade barriers would disrupt global supply chains and slow the spread of new technologies, ultimately lowering global productivity and welfare. More import restrictions would also make tradable consumer goods less affordable, harming low-income households disproportionately.”

                Full article “The Impact of US-China Trade Tensions

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                US initial jobless claims dropped slightly to 211k, below expectations

                  US initial jobless claims dropped -1k to 211k in the week ending May 18, below expectation of 215k. Four-week moving average of initial claims dropped -4.75k to 220.25k.

                  Continuing claims rose 12k to 1.676M in the week ending May 11. Four-week moving average of continuing claims rose 5.5k to 1.674M.

                  Full release here.

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                  Into US session: Risk off as China said no more negotiations unless US correct their wrong actions

                    Entering into US session, Yen and Swiss Franc are the strongest ones today as risk aversion seems to be intensifying. On the one hand, Huawei was given another blow after ARM is said to cut ties with the Chinese telecom giant. On the other hand, China is stepping up hard line rhetoric on trade with US. Asian markets closed broadly lower while European indices are in deep red. DOW futures is down more than -200 pts at the time of writing. German 10-year yield is back pressing -0.1 handle. US 10-year yield is down -0.025 at 2.361. Outlook in the financial markets are rather bad.

                    Chinese Commerce Ministry spokesman Gao Feng warned: “If the United States wants to continue trade talks, they should show sincerity and correct their wrong actions. Negotiations can only continue on the basis of equality and mutual respect… We will closely monitor relevant developments and prepare necessary responses.” Foreign Ministry spokesman Lu Kang said “relevant U.S. actions obviously do not create a good atmosphere or environment for consultations.” It’s pretty clear there is no case to resume trade negotiations any time soon. US-China trade war will at least drag into US elections next year, with possibility of much more serious escalations.

                    In Europe, currently:

                    • FTSE is down -1.21%.
                    • DAX is down -1.63%.
                    • CAC is down -1.58%.
                    • German 10-year yield is down -0.0148 at -0.099.

                    Earlier in Asia:

                    • Nikkei dropped -0.62%.
                    • Hong Kong HSI dropped -1.58%.
                    • China Shanghai SSE dropped -1.36%.
                    • Singapore Strait Times dropped -0.70%.
                    • Japan 10-year JGB yield dropped -0.0104 at -0.061.
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                    ECB minutes: Less confidence in baseline growth scenario, range of possibilities widened

                      Minutes of ECB’s April 9-10 meeting showed that policy makers were getting less confident on Eurozone recovery. The minutes noted “it was acknowledged that some recent data had turned out even weaker than expected”. And, “there was now somewhat less confidence in the baseline scenario and that the range of other possible outcomes had widened.”

                      Also, “the global outlook remained subject to the continued risk of an escalation of trade conflicts and the uncertainty surrounding the withdrawal of the United Kingdom from the EU.”

                      Regarding the new TLTROs, “some arguments were put forward in favor of pricing the new operations so they would primarily serve as a backstop, providing insurance in times of elevated uncertainty.” Also, “other arguments supported the view that the TLTRO-III operations should be seen as a potential tool for adjusting the monetary policy stance.”

                      Full monetary policy accounts here.

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                      German Ifo Business climate dropped to 97.9, deterioration spreading to services

                        In May, Germany Ifo Business Climate dropped to 97.9, down from 99.2 and missed expectation of 99.1. Current Assessment index dropped to 100.6, down from 103.3 and missed expectation of 103.5. Expectations Index rose to 95.3, up from 95.2 and beat expectation of 95.0.

                        Ifo President Clemens Fuest said “the German economy is still lacking in momentum.” Manufacturing index dropped “slightly” but expectations rose for the first time since September 2018. However, Also, “in the services, the business climate took a substantial hit. Not since April 2013 has the indicator of current sentiment fallen as far as it did this month. Optimism with regard to the coming months also declined.”

                        Full release here.

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                        Eurozone PMIs suggests just 0.2% GDP growth in Q2, renewed deterioration in optimism

                          In May, Eurozone PMI manufacturing dropped to 47.7, down from 47.9 and missed expectation of 48.1. PMI services dropped to 52.5, down from 52.8 and missed expectation of 53.0. PMI Composite rose to 51.6, slightly up from 51.5. Markit noted that “the weak reading puts growth in the second quarter so far on a par with the lacklustre gain seen in the first quarter and is among the lowest recorded since mid-2013.”

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

                          “The eurozone economy remained becalmed in the doldrums in May, adding to signs that only modest growth will be achieved in the second quarter. At current levels the PMI is so far indicating GDP growth of only 0.2% in the second quarter.

                          “A renewed deterioration in optimism about the year ahead suggests that the business situation could deteriorate further in coming months. Worries reflected concerns over lower economic growth forecasts, signs of weaker sales and rising geopolitical uncertainty, with escalating trade wars and auto sector woes commonly cited as specific causes for concern.

                          “Sector divergences remain marked, with manufacturing still in decline and the region therefore reliant on the service sector to support growth.

                          “While some encouragement can be gained from the manufacturing sector showing signs of its downturn having bottomed out in March, the concern is that the slowdown is spreading to the service sector, where new business growth has slipped to one of the weakest seen since 2014.

                          “Germany is on course for a 0.2% expansion of GDP in the second quarter while the survey for data France point to a meagre 0.1% gain. However, the bigger concern is for the rest of the region, which collectively saw growth falter amid the first fall in orders for almost six years.”

                          Full release here.

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                          Germany PMI manufacturing dropped to 44.3, manufacturers remain the most downbeat

                            In May, Germany PMI manufacturing dropped to 44.3, down from 44.4 and missed expectation of 44.8. It’s the second weakest reading in nearly seven years. PMI services dropped to 55.0, down from 55.7 and missed expectation of 55.4. PMI Composite rose to 52.4, up from 52.2.

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

                            “At 52.4, the headline Germany PMI remains in modest growth territory in May, indicating that the economy is course to see sustained expansion in Q2 following the rebound of GDP in the opening three months of the year.

                            “May data for the service sector were slightly less punchy than in recent months, with business activity, new orders and employment all rising more slowly. Thankfully, the manufacturing indicators for output, orders book and export sales have all picked up further from their low points in the first quarter, albeit remaining among the weakest since 2012. However, goods producers’ increased efforts to streamline workforces means that factory job numbers are now falling at the steepest rate in over six years.

                            “It is manufacturers who remain the most downbeat about the outlook amid lingering global trade tensions, though the survey highlights that fears of a slowdown may have started to spread to services, where confidence is now at its joint-lowest since 2014.”

                            Full release here.

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                            France PMI composite rose to 6-month high, sustained rise in activity ahead

                              In May, France PMI manufacturing rose to 50.6, up from 50.0, and beat expectation of 50.0. That’s also a 3-month high. PMI services rose to 51.7, up from 50.0, beat expectation of 50.8. it’s a 6-month high. PMI composite rose to 51.3, up from 50.1, a 6-month high.

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

                              “The latest PMI results pointed to an improved performance by the French private sector. Although growth remained subdued compared to 2017 and 2018, the fastest rise in business activity for six months comes as welcome news, following a period of weakness since disruptions began last November.

                              “Moreover, a further recovery in new orders and business expectations point to a sustained rise in activity. Such growth would help to drive improving labour market conditions, and further build upon the recently achieved 10-year low for unemployment.”

                              Full release here.

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                              Japan PMI manufacturing dropped to 49.6, re-escalation of US-China trade frictions heightened concern

                                Japan PMI manufacturing dropped to 49.6 in May, down from 50.2 and missed expectation of 50.5. The reading is also back in contraction territory. Markit noted that output and new orders decrease for fifth successive month. Businesses cast pessimistic outlook towards the coming year for the first time in six-and-a-half year.

                                Commenting on the Japanese Manufacturing PMI survey data, Joe Hayes, Economist at IHS Markit, which compiles the survey, said:

                                “Following some tentative signs that the downturn in Japan’s manufacturing sector had softened in April, flash data for May revealed these were short-lived, as output and export orders fell at stronger rates. The re-escalation of US-China trade frictions has heightened concern among Japanese goods producers. Underlying growth weakness across much of Asia led to struggling exports, which fell at the sharpest rate in four months. Difficulties on the international front merely add to uncertainties domestically, with upcoming upper house elections in July, and the impending sales tax hike later this year. Subsequently, sentiment turned negative in May for the first time in six-and-a-half years.”

                                Full release here.

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                                FOMC minutes show no urgency to cut interest rate

                                  Dollar is steady after minutes of May 1 FOMC meeting showed that Fed is in no rush to move interest rates, up or down. The minutes noted that “members observed that a patient approach…would likely remain appropriate for some time”. The tone regarding the economy was also upbeat, due to upside surprise in Q1 growth. GDP was forecast to “expand at a rate above the staff’s estimate of potential output growth in 2019 and 2020 and then slow to a pace below potential output growth in 2021”. Recent weak inflation was also viewed by many participants “as likely to be transitory.”

                                  However, firstly, there was increasing concerns over persistence of low inflation. “Several participants commented that if inflation did not show signs of moving up over coming quarters, there was a risk that inflation expectations could become anchored at levels below those consistent with the committee’s symmetric 2% objective.” Secondly, the meeting was held before current round of escalation in US-China trade war. It is possible that the Fed would turn more cautious over the economic outlook at the June meeting, when the members take into account the effects of recent re-escalation of US-China trade war.

                                  For now, comments from Fed officials are generally inline with the minutes. But as more data come in, upcoming rhetorics leading to June FOMC meeting would reveal if there would be a shift in the board.

                                  Suggested readings on FOMC minutes:

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                                  Brexit crisis deepens as Leadsom resigns on second referendum

                                    Brexit crisis in UK deepened further after a key Cabinet Minister resigned in opposition to Prime Minister Theresa May’s inclusion of a second referendum in the new Brexit plan.

                                    Andrea Leadsom Leader of the House of Commons, said “I no longer believe that our approach will deliver on the referendum result”. And, “I do not believe that we will be a truly sovereign United Kingdom through the deal that is now proposed”.

                                    Leadsom went further and said “I have always maintained that a second referendum would be dangerously divisive and I do not support the government willingly facilitating such a concession.”

                                    May’s spokesman just praised Leadsom and expressed disappointment at her decision, but added: “The prime minister remains focused on delivering the Brexit people voted for.”

                                    There is practically no chance for May to get her Brexit deal through the Commons. The question now is who will take her place and lead Brexit after she steps down as promised. Sterling remains the weakest one for the week as markets are pricing in the chance of a pro-Brexit hardliner leading UK to a no-deal Brexit.

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                                    WTI oil tumbles on surprised inventory build, heading to 57 fibonacci level

                                      WTI crude oil drops sharply today as crude inventory unexpectedly rose 4.74M barrels in the week ending May 17, versus expectation of -1.2M barrels decline. Current development suggests that recovery from 60.03 has completed at 63.90 already. And the fall from 66.49 might be ready to resume.

                                      Deeper decline should be seen to 60.03 first. Break will confirm this bearish case and target 100% projection of 66.49 to 60.03 from 63.90 at 57.44.

                                      Nevertheless, fall from 66.49 is seen as a corrective move so far. Downside should be contained by 38.2% retracement of 42.05 to 66.49 at 57.15 to bring rebound.

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                                      Fed Williams: Interest rates in the right place with essentially nonexistent inflation pressures

                                        New York Fed President John Williams said the current interest rates in US are in the right place with “essentially nonexistent” inflation pressures. Additionally, some downside risks to global growth have receded. US economy is also strong and is on track to growth above potential at above 2% this year.

                                        The downtick of inflation is expected to reverse this year even though there is a risk that inflation gets stuck. However, Williams noted that Fed is not at a point to respond to low inflation by changing monetary policy yet. And he doesn’t expect that to be the case in the near term neither.

                                        Separately, Boston Fed President Eric Rosengren said Fed currently assumes the US and China to eventually reach a trade agreement. However, if trade war drags on, uncertainty will weigh on the economy. He reiterated that tariffs are one of the biggest risks to the US economy.

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                                        US Mnuchin indicates new tariffs on China probably just a month away

                                          US Treasury Secretary Steven Mnuchin reminded the House Financial Services Committee that new tariffs on USD 300B in Chinese imports are probably just a month or so away. He said, “there won’t be any decision probably for another 30 to 45 days.” Meanwhile, there is no plan to travel to China to resume trade negotiations yet.

                                          On Walmart’s claims that tariffs will push up retail prices, he said “that’s something I can assure you the president will be focused on before we make any decisions.” However, he also talked down the threat of higher prices for consumers. He said “my expectation is that a lot of this business will be moved from China to other places in the region so that there will not be a cost.”

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