Fri, Nov 22, 2019 @ 15:51 GMT

Into US session: Dollar fails to hold gains, Yen stays firm

    Entering into US session, Dollar turned weak earlier today and failed to sustain gains. On the other hand, the Japanese Yen is holding broadly firm. Australian Dollar and New Zealand Dollar turned the corner. Much focus will be on US treasury yields and some solid gain there is needed to give the greenback some support. Otherwise, recent correction will likely continue with some more downside potential in the greenback.

    In other markets, Europe indices are trading generally higher, with DAX up 1.34%, CAC up 0.81% and FTSE up 0.81% at the time of writing. That follows the strong rally in Asian equities. China Shanghai Composite jumped 1.61% to 2905.56 as boosted by the governments stimulus policies. While the announce measures are just fine-tunings and are hardly anything dramatic, that’s seen as a sign of the director where the Chinese government is heading towards. That is do more to support growth.

    The SSE’s rebound is set to extend to 55 day EMA (now at 2944.64) and above. But for now, we’re seeing no reason for it to regain 3000 handle.

    Nikkei also rose 0.51% to close at 22510.48 and pared back much of Monday’s loss. However, the day high was seen at the open at 22555.05 and there was no follow through momentum back then. Overall strength of support from the 55 day EMA is rather weak. We’ll keep monitor this level, which will decide whether Nikkei would head for test on 21462.94 support before an upside breakout.

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    Global business activity expectations dropped decade low, marked deterioration in US

      Markit Global Business Outlook Survey dropped from 24 in February to 18 in in July, hitting the lowest since data were first collected in 2009. The survey was carried out three times per year, and if shows net balance of global firms predicting rising output in the coming year.

      US has seen the biggest slide in business optimism apart from Brazil, down to 16. Confidence ticked higher in Eurozone to 27, but remained closed to six-year lows. UK also improved slightly 32, joint second-weakest since 2009. Japan’s reading dropped to three-year low at 11.

      Commenting on the survey, Chris Williamson, Chief Business Economist at IHS Markit, said:

      “The global business mood has darkened to the gloomiest since the height of the financial crisis in 2009. Escalating trade tensions have fuelled the downturn in optimism, exacerbating wider worries about slowing economic growth in key markets.

      “Not only does the survey indicate a further weakening of global economic growth in the second half of 2019, but companies are expecting profits to be especially hard hit, which is leading to a pull-back in both hiring and business investment around the world. This in turn adds to the risk of the downturn becoming more entrenched in coming months, absent renewed policy stimulus measures.

      “The big change since earlier in the year has been a marked deterioration of optimism among US companies, alongside a slide in business optimism in China, indicating how trade war tensions are hurting both economies. In contrast, sentiment picked up slightly in the eurozone and UK, albeit remaining worryingly subdued.”

      Full release here.

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      China PMI manufacturing dropped to 49.2, new export orders hit decade low

        The official China PMI manufacturing dropped to 49.2 in February, down from 49.5 and missed expectation of 49.5. That’s the third straight month of sub-50 reading. Looking at the details new export orders index dropped -1.7 to 45.2, its lowest level in 10 years, suggesting trade war with the US continues to have an impact on exports. Production dropped -1.4 to 49.5. Employment dropped -0.3 to 47.5. PMI services dropped to 54.3, down from 54.7, missed expectation of 54.5.

        However, analyst Zhang Liqun tried to talk down the deterioration in the statement. He noted that the decline in PMI was mainly due to Lunar New Year factor. He pointed to the significant decline in the production, the purchase volume, and the raw material inventory as indications.

        Also from Asia, Japan industrial production dropped -3.7% mom in January versus expectation of -2.5% yoy. Japan retail sales rose 0.6% yoy in January, below expectation of 1.5% yoy.

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        Sterling selloff accelerates as CPI unchanged at 2.4%, core CPI slowed to 1.9%

          Sterling drops sharply as consumer inflation missed market expectations.

          Headline CPI was unchanged at 2.4% yoy in June, below expectation of 2.6% yoy.

          Core CPI slowed to 1.9% yoy, down from 2.1% and missed expectation of 2.2%.

          RPI accelerated to 3.4% yoy, up from 3.3% yoy but missed expectation of 3.5% yoy.

          Also from UK:

          PPI input rose to 10.2% yoy, up from 9.6% yoy and above expectation of 10.2% yoy.

          PPI output rose to 3.1% yoy, up from 3.0% yoy but missed expectation of 3.2% yoy.

          PPI output core was unchanged at 2.1%, below expectation of 2.3%.

          BoE policymaker are likely disappointed by the lack of pick up in inflation. Is an August rate hike still on the table? This is now a question to consider.

          GBP/USD breaks 1.3048 low and it’s now on course for 1.2874 fibonacci level.

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          FOMC minutes expected to affirm Fed’s neutral stance

            Minutes of October 29-30 FOMC minutes will be a major focus later in the US session. Markets would look for clues to solidify the expectation that Fed is currently done with the mid-cycle adjustment already. Indeed, fed fund futures are pricing in over 99% chance of Fed standing pat in December.

            The messages of the minute would likely echo Fed chair Jerome Powell’s testimony last week. There he hailed that “the U.S. economy is the star economy these days.” Also, the expansion is “on a sustainable footing”. “There is no reason why it can’t last, at the risk of jinxing us, in principle there is no reason to think that I can see that the probability of a downturn is at all elevated”. Monetary policy is also “in a good place”.

            New York Fed President John Williams also noted that “we’ve gotten the adjustment that we need, at least right now. My outlook really is one of continued good growth, strong labor markets, inflation around 2%. Assuming that comes true, which is the baseline forecast, I think we have monetary policy in the right place.”

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            Fed Williams: Decline decline in r* means limited policy space in future downturns

              In prepared remarks, New York Fed President John Williams said the global shifts in demographics and productivity have two important implications for the economy and monetary policy. Firstly, “slower population and productivity growth translate directly into slower trend economic growth”. Secondly, “these trends have contributed to dramatic declines in the longer-term normal or ‘neutral’ real rate of interest, or r-star.”

              And, the global decline in r-star will continue to pose “significant challenges” for monetary policy. There will be “limited policy space” for rate cuts in future downturns. Hence, “recoveries will be slow and inflation below target”. Also, the limitation in the ability of central banks to offset downturns results in an “adverse feedback loop”. That is “expectations of low future inflation drag down current inflation and further reduce available policy space”.

              Separately, Williams told Bloomberg TV that “as tariffs get larger, assuming that happens, the effects will be bigger, boosting inflation in the next year and probably having negative effects on growth.” “We could probably get a couple tenths or two tenths on the inflation rate over the next year based on what has already been announced. If there (is) further escalation in terms of tariffs, those effects would get even larger”, he added.

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              Italy Tria: With Germany at 0.8% growth, Italy will be close to 0%

                Italy Economy Minister Giovanni Tria said on Sunday that “Italy has been growing in the last 10 years by 1 percentage point less than its European peers, and we are going close to zero as Germany will post a 0.7-0.8 percent increase”.

                And for Italy, he said “it would be absurd to implement restrictive measures; for sure we don’t have space for any expansive fiscal measures.”

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                Empire State manufacturing dropped to lowest well over a year

                  Empire State manufacturing index dropped sharply to 3.9 in January, down from 10.9, and missed expectation of 11.6. That’s also the lowest level in “well over a year” since mid-2017. Also, the headline index has already fallen a cumulative 18 pts since November. Additionally, firms were “less optimistic about the six-month outlook than in recent months.”The index for future business conditions fell thirteen points to 17.8, and the indexes for future new orders and shipments also declined.

                  Full release here.

                  Also from the US, in December, headline PPI dropped -0.2% mom rose 2.5% yoy, versus expectation of 0.0% mom, 2.5% yoy. PPI core dropped -0.1% om, rose 2.7%, versus expectation of 0.2% mom, 2.7% yoy.

                  Full PPI release here.

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                  Trump blasts allies again, to escape from G6+1 summit early

                    The White House announced yesterday that Trump will leave the G6+1 summit in Canada earlier than anticipated, right after Saturday’s morning session, on June 9. Then he will fly straight to Singapore for the highly anticipated Kim-Trump summit on June 12. G7 Sherpa and Deputy Assistant to the President for International Economic Affairs Everett Eissenstat will stay for the remaining session.

                    Ahead of the expected confrontation with other G7 members, Trump continued to blast Canada and EU with his tweets.

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                    Yen rises as Japan’s consumption-led GDP growth beat expectation

                      The Japanese Yen appears to be lifted by stronger than expected GDP data today. Japan economy grew 0.5% qoq, 1.9% annualized in Q2. That’s way stronger than expectation of 0.3% qoq, 1.4% annualized. It’s also a strong rebound from prior quarter’s -0.2% qoq, -0.6% annualized contraction. Q1 was an unexpected interruption in the best run in the economy since 1980s. In Q2, GDP deflator rose 0.1% yoy, also beat expectation of -0.2% yoy fall.

                      Private consumption, which accounts for 60% of the economy, grew an impressive 0.7%. The solid growth could be an indication of finally a changing “social mood” in the country. And people are more willing to spend based on the expectation that wages will eventually rise. Getting out of such “social mood” is important for Japan to beat the persistent trend of sluggish low inflation. Such development should be very welcomed by BoJ Meanwhile, Capital expenditure rose 1.3%, strongest since Q4 2016.

                      Also from Japan, Domestic CGPI rose 3.1% yoy in July versus expectation of 2.9% yoy. Tertiary industry index, however, dropped -0.5% mom in June versus expectation of -0.2% mom.

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                      US-Mexico migration meeting ended with insufficient progress, double downgrade for Mexico

                        The high-level meeting between US and Mexico on migration ended with insufficient progress. Trump tweeted that “Progress is being made, but not nearly enough!” He threatened again “If no agreement is reached, Tariffs at the 5% level will begin on Monday, with monthly increases as per schedule. The higher the Tariffs go, the higher the number of companies that will move back to the USA!”

                        Vice President Mike Pence, who chaired the meeting including Secretary of State Michael Pompeo and Mexican Foreign Minister Marcelo Ebrard, also echoed Trump’s comments. He tweeted “Progress was made but as @POTUS said “not nearly enough.” @SecPompe, @DHSMcAleenan, & I made clear: Mexico must do more to address the urgent crisis at our Southern Border.”

                        Ebrard said after the meeting that there was no discussions on tariffs. “The dialogue was focused on migration flows and what Mexico is doing or is proposing to the United States, our concern about the Central American situation.” He noted “what the US government is looking for are measures in the short-term and medium-term”. Instead, Mexico is promoting long term fix involving a development deal for Central America which would eventually slow migration.

                        Meeting will continue on Thursday and if no agreement is made, US will starting imposing 5% tariffs on all Mexican imports on June 10. That rate would “gradually” go up to 25% on October 1.

                        Fitch cut Mexico’s rating from BBB+ to BBB and cited that “growth continues to underperform, and downside risks are magnified by threats by U.S. President Trump.” Moody’s downgraded Mexico’s outlook from stable to negative and noted “further evidence that medium-term growth is in decline, whether as a result of policies that actively undermine growth or because of continued policy unpredictability, would put downward pressure.”

                        USD/MXN has a rough ride but is generally kept inside this week’s range.

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                        European update: Dollar overwhelmingly weak on elections, Australian Dollar strongest

                          Dollar is overwhelmingly the weakest one today. Democrats have already won over 218 seats in House in the mid-term election to regain majority after eight years. Republicans, on the other hand, retained majority in Senate. There are talks that the gridlock in the Congress would limit Trump’s ability to push through more fiscal stimulus. Yet, there is another theory that the stocks markets were usually bullish with a split Congress. DOW futures are now pointing to higher open with triple digit gains. Major European indices are generally higher. So it seems that the latter is more true. And thus, a split Congress is unlikely the reason for Dollar’s weakness. Staying in the currency markets, Canadian Dollar is now the second weakest, followed by Japanese Yen. On the other hand, Australian Dollar is the strongest one, followed by New Zealand Dollar and then Swiss Franc.

                          In Europe, at the time of writing:

                          • FTSE is up 1.17%
                          • DAX is up 1.03%
                          • CAC is up 1.36%
                          • German 10 year yield is up 0.015 at 0.452
                          • Italian 10 year yield is down -0.076 at 3.330

                          Earlier in Asia

                          • Nikkei dropped -0.28% to close at 22085.80
                          • Hong Kong HSI rose 0.1% to 26147.69
                          • China Shanghai SSE dropped -0.68% to 2641.34
                          • Singapore Strait Times rose 0.1% to 3065.36
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                          White House Navarro insists Mexico should share their responsibility and take asylum seekers

                            Mexican Foreign Secretary Marcelo Ebrard will meet US Vice President Mike Pence at 1900 GMT today on the issue of tariffs and migration flow. The Mexican delegation is expected to use their every efforts to convince the US to avert the tariffs that Trump threatened to impose starting on June 10.

                            Ahead of the meeting White House economic adviser Peter Navarro said that it’s important to get the US-Mexico border issue solved. And he insisted that the Mexican government must bear their share of the responsibility. And the most important thing is for the Mexican government to take the asylum seekers.

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                            Canada Ivey PMI Feb: 59.6, US factory orders Jan: -1.4%

                              Canada Ivey PMI Feb: 59.6 vs exp 56.3, prior 55.2

                              US factory orders Jan: -1.4% vs exp -1.3% prior 1.8% (revised from 1.7%)

                              USD/CAD dips sharply on broad based dollar weakest today. A temporary top is formed at 1.3000. Deeper pull back would be seen in the session. Strong support could be seen around 4 hour 55 EMA at 1.2794, close to near term channel support.

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                              Trump said EU is as bad as China, just smaller

                                Trump continued his attack on the EU as hie told Fox News on Sunday that “The EU is possibly as bad as China, just smaller, okay. It’s terrible what they do to us.” He added that “take a look at the car situation, they send their Mercedes in, we can’t send our cars in. And, “look what they do to our farmers, they don’t want our farm products. In all fairness they have their farmers so they want to protect their farmers. But we don’t protect ours and they protect theirs.”

                                He also noted that “they made, last year, $151bn in trade surplus. We had a deficit with the EU.” And, “on top of that, we spend a fortune on NATO to protect them.” Trump also confirmed he will sanction European companies if they do business with Iran, in spite of requests for exemption from EU.

                                Separately, US ambassador to Estonia James D. Melville Jr. said in his own private facebook post that he’s retiring earlier due to Trump’s behavior and comments. That came less that two weeks ahead of NATO summit in Brussels on July 11, 12.

                                Melville wrote in the post that “A Foreign Service Officer’s DNA is programmed to support policy and we’re schooled right from the start, that if there ever comes a point where one can no longer do so, particularly if one is in a position of leadership, the honorable course is to resign. Having served under six presidents and 11 secretaries of state, I never really thought it would reach that point for me.”

                                And, “For the President to say the EU was ‘set up to take advantage of the United States, to attack our piggy bank,’ or that ‘NATO is as bad as NAFTA’ is not only factually wrong, but proves to me that it’s time to go.”

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

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

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

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

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                                  Atlanta Fed Bostic could move away from four hikes as trade spat worsens

                                    While Fed is projecting four rate hikes in total this year, Atlanta Fed President Raphael Bostic said there is “some likelihood I will be moving away from four as a real possibility” due to the development of US trade policy. He commented on the “progresses the way it has been the last couple of days” regarding the trade threats of Trump’s administration to trading partners. And Bostic noted that “the more it progresses in this more contentious way, the more it leads me to feel the risks are on the downside for the broader economy.”

                                    He added that “the disruption that comes from this type of trade war is not going to be good for the cost basis for businesses and it makes me a bit concerned how robust the economy will perform moving forward.”

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                                    BoJ Kuroda: Allowing JGB yield to move strengthens effect of monetary easing

                                      BoJ Governor Haruhiko Kuroda said today the measures taken in July, allowing 10 year JGB yield to move between -0.1% and 0.1%, “would strengthen the effect of monetary easing as a whole”. It’s because, it “would allow us to continue powerful monetary easing.” And he’s optimistic that “the steps will help accelerate inflation to 2 percent at the earliest date possible, while ensuring financial market stability.”

                                      Meanwhile, Kuroda also warned that “we need to be vigilant of the potential impact of recent protectionist moves, though the economy is likely to sustain a moderate expansion”.

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                                      EU to start retaliation on EUR 2.8B US imports on June 22, EUR 3.6B to come later

                                        European Commission formally announced retaliation to US steel and aluminum tariffs today. The total EU exports to the US affected by the US measures is at EUR 6.4B. For now, EU will target US products in EUR 2.8B worth first, effective on Friday June 22. Duties on the remaining EUR 3.6B in US goods will take place at a later stage, “in three years’ time or after a positive finding in WTO dispute settlements.

                                        Commissioner for Trade Cecilia Malmström said: “We did not want to be in this position. However, the unilateral and unjustified decision of the US to impose steel and aluminium tariffs on the EU means that we are left with no other choice. The rules of international trade, which we have developed over the years hand in hand with our American partners, cannot be violated without a reaction from our side. Our response is measured, proportionate and fully in line with WTO rules. Needless to say, if the US removes its tariffs, our measures will also be removed.”

                                        Here is the full release.

                                        This is the list of products for rebalancing.

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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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