Fri, Feb 28, 2020 @ 21:11 GMT

Italian cabinet approved budget, drama with EU begins

    Italian cabinet approved the 2019 budget that would boost budget deficit from the current 1.8% of GDP to 2.4% next year. The key measures include basic income for the poor and tax cuts for the self-employed. Retirement age was also lowered and there is partial amnesty offered to settle tax disputes. Prime Minister Giuseppe Conte hailed after the cabinet meeting that “this budget keeps the government’s promises while keeping public accounts in order.” Economy Minister Giovanni Tria also talked down the potential clash with the EU and said “the idea that this budget can blow up Europe is totally unfounded.”

    But no matter what Italy says, the drama with EU will now formally begin. After formally receiving the budget, European Commission will have a week, by October 22, to identify “particularly serious non-compliance with the budgetary policy obligations” of a state. By October 29, the Commission will have to decide whether to reject the draft budget as non-compliant, with written explanations. The showdown will come on November 5 in the Eurogroup of finance ministers meeting. And Italy is expected to submit a revised budget on November 19.

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    UK May: Not far apart with EU; EU Tusk: No-deal Brexit more likely than ever

      UK Prime Minister Theresa May told the parliament yesterday that they’re not “far apart” with the EU. And she urged not to let the disagreement on Irish backstop “derail the prospects of a good deal” and leave the UK with no-deal Brexit. But at the same time, she insisted that Northern Ireland must not be treated differently from the rest of the UK.

      European Council President Donald Tusk, however, warned that the remaining 27 states “must prepare the EU for a no-deal scenario, which is more likely than ever before.” And he added the Brexit negotiation has “proven to be more complicated than some may have expected.”

      May will meet other EU leaders in Brussels at the summit on Wednesday and hopes to resolve a few “critical issues”. EU leaders will then listen to the recommendation by chief negotiator Michel Barnier for the way forward.

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      Dollar drops further on retail sales miss, Empire state manufacturing index improved

        Dollar weakens notably against European majors in early US session after mixed economic data releases. Headline retail sales rose 0.1% in September versus expectation of 0.7% rise. Ex-auto sales even contracted -0.1% versus expectation of 0.5% rise.

        On the other hand, Empire state manufacturing index rose to 21.1, up from 19.0 and beat expectation of 20.4.

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        UK PM May to publish statement on Brexit, EU intensifying no-deal preparations

          Brexit negotiation is one of the key theme today after the Irish border deadlock came up unresolved after the meeting between UK and EU in Brussels over the weekend. UK Prime Minister Theresa May’s spokesman insisted that “there are a number of means of achieving what we want to achieve,” referring to the issue. May is expected to publish a statement to the parliament later today regarding the failure of the weekend talks.

          European Commission spokesman Margaritis Schinas said in a regular new conference that “while we are working hard for a deal, our preparedness and contingency work is continuing and intensifying.” German government spokesman Steffen Seibert also said the cabinet will committee on Brexit will discuss the country’s preparedness for a no-deal scenario.

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          Dollar suffers renewed selling, Gold breaks 1230

            While resurfaced Brexit uncertainty keeps Sterling generally weak today, Dollar is trying to take over and fresh selling is seen in early European session. In particular, USD/JPY took out 111.82 minor support and resumed recent pull back from 114.54. Deeper fall should now be seen to 110.75 fibonacci level. AUD/USD also breaks last week’s high and reaches 0.7143 so far. Swiss Franc and Yen are the strongest ones.

            European markets is indeed mixed only. At the time of writing, DAX is up 0.07%, CAC down -0.32% and FTSE down -0.06%. German 10 year bund yield drops below 0.5 handle to 0.496. Italian 10 year yield is relatively stead at 3.573. Asian markets were troubled by risk aversion though. Nikkei closed down -1.87%, Singapore Strait Times down -0.76%, Hong Kong HSI down -1.38% and China Shanghai SSE down -1.49%

            Gold’s rally resumed by taking out last week’s high and reaches 1233.30 so far. For now, we’re still seeing rebound from 1160.36 low as a correction. Thus, strong resistance should be seen 1235.24/1236.99 cluster resistance zone (38.2% retracement of 1365.24 to 1160.36 at 1238.62, 100% projection of 1160.36 to 1214.30 from 1183.05 at 1236.99). to limit upside. However, firm break of this zone will invalidate our view and target 61.8% retracement at 1286.97 and above.

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            DUP Wilson: No-deal Brexit inevitable as EU is cornering Theresa May

              Sammy Wilson, the DUP spokesperson on Brexit, told Belfast newsletter that a no-deal Brexit was “probably inevitable.” He said that “Given the way in which the EU has behaved and the corner they’ve put Theresa May into, there’s no deal which I can see at present which will command a majority in the House of Commons.”

              He added that “anybody looking at it objectively would say that what is on offer from the EU is a far worse deal than a no deal, and therefore she’d be mad to be railroaded into accepting it.” In his view, UK Prime Minister Theresa May will not get what EU are demanding through the House of Commons.

              Though, he also said, “No deal doesn’t mean there will be nothing agreed”. And, “it probably means there will be a lot of mini agreements on things which are essential, to keep planes flying, lorries moving, that sort of thing.” “There will be no overall deal but that doesn’t mean there will be nothing agreed at all because certain essential things are required, both on the EU side and on our side.”

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              BoJ Kuroda: Rise of protectionism and tightening of financial conditions call for vigilance

                BoJ Governor Haruhiko Kuroda warned that “recent rise of protectionist moves and tightening of financial conditions in some economies remind policymakers of the importance of being vigilant at all times:. And he urged to “pay more attention to protectionist moves, as global economies have become increasingly interdependent through global value chains.”

                Domestically, Kuroda said “when 2 percent inflation target is met or is close to be met, of course we can change the target, the monetary operating target of interest rate.” But he also reiterated that “at this moment, inflation is only 1 percent, so we will continue the current yield curve control at the current level of interest.”

                Kuroda also talked down the impact of the planned sales tax hike in 2019 and said “at this stage, there would not be any major negative impact on the economy”. He expected to impact of growth would be “much, much smaller” than from an increase in 2014.

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                PBoC Yi: Yuan volatility is normal, rate at reasonable and equilibrium level

                  China’s PBoC Governor Yi Gang tried to talk down recent Yuan depreciation despite having USD/CNH nearing the psychological important 7 level. Yi insisted that “the Yuan’s volatility is normal” and its rate is at a “reasonable and equilibrium level”. And, in spite of recent measures in stabilizing the markets, Yi also insisted that PBoC is having a “neutral” monetary policy stance. He said “So if you look at the broad money, if you look at the interest rate and you look at monetary conditions, basically you can have the conclusion that we have a prudent and neutral stance monetary policy.”

                  Regarding trade war, Yi said “downside risks from trade tensions are significant.” But he’s confidence that the PBoC has “plenty of monetary instruments in terms of interest rate policy, in terms of required reserve ratio.” And, PBoC has “plenty of room for adjustment, in case we need it”. Besides, he’s also confidence that China is on track to meet its growth target of 6.5% in 2018 and “maybe a little bit more”.

                  Yi also pledged in a statement that “China will continue to let the market play a decisive role in the formation of the RMB exchange rate”. And, we will not engage in competitive devaluation, and will not use the exchange rate as a tool to deal with trade frictions.”

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                  Sterling gapped lower as Brexit talks stalled at Irish border backstop again

                    Sterling gapped lower as the week started with negative Brexit news again. The backstop on Irish border remained an unresolved issue despite efforts from both sides. And furthermore, as the negotiations stalled, there will be no more scheduled talks before the EU summit on later this week.

                    EU chief Brexit negotiator Michel Barnier tweeted after meeting UK Brexit secretary Dominic Raab in Brussels that “Despite intense efforts, some key issues are still open, including the backstop for IE/NI (Ireland/Northern Ireland) to avoid a hard border.”

                    Brexit Ministry said that there was progress “in a number of key areas”. “However there remain a number of unresolved issues relating to the backstop. The UK is still committed to making progress at the October European Council.”

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                    Fed Evans: With procyclical fiscal policy and a very strong economy, interest rates might have to go above neutral

                      Chicago Fed President Charles Evans reiterated his stance that interest rate might have to go to a bit restrictive. He said in a CNBC interview that “after many, many years of accommodative policy, which I have supported strongly because inflation’s now up at 2 percent, it’s time to readjust the policy stance at least to neutral.” Then, “let’s see how the economy is performing at that point and then we might have to do a little more after that.”

                      He further explained that “I would say that with the unemployment rate headed to three and a half percent, we’re in a more normal environment where an accommodative stance of policy, when we’ve got procyclical fiscal policy and a very strong economy, we probably need to be a little bit on the above-neutral side, but I don’t know that we need to be a lot.”

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                      Into US session: Dollar pare losses and global stocks rebound

                        Entering into US session, Dollar regains a lot of ground as global stock markets rebound today. Also, other than Trump, members of his administration tried to tone down the attack on Fed’s rate hikes. Nonetheless, Canadian Dollar and Australian Dollar are the strongest ones, not the greenback. Sterling is trading as the weakest, followed by New Zealand Dollar and then Euro. Overall, the forex markets have turned mixed.

                        At the time of writing:

                        • DAX is trading up 0.86%
                        • CAC up 0.90%,
                        • FTSE up 0.72%
                        • German 10 year yield down -0.0024 at 0.518.
                        • Italian 10 year yield is down -0.016 at 3.555.
                        • US futures point to high open, with triple digit gains for DOW. But it’s still more than an hour to go.

                        Earlier in Asia:

                        • Nikkei closed up 0.46%,
                        • Singapore Strait Times rose 0.71%,
                        • Hong Kong HSI rose 2.21%
                        • China Shanghai SSE is gained 0.91% to 2606.91, still below prior key support at 2638.
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                        US Mnuchin on Chinese Yuan, trade and Fed

                          US Treasury Secretary Steve Mnuchin met with China PBoC Governor Yi Gang on the sidelines of the IMF summit in Indonesia. Mnuchin said after the meeting that “I expressed my concern about the weakness in the (yuan) currency and that as part of any trade discussions, currency has to be part of the discussion. And he added that “we had a productive explanation from his standpoint on those issues” regarding Yuan’s depreciation against Dollar. It’s reported that Yi told people in a closed-door session that China’s monetary policy was on an opposite cycle to that of the US.

                          Mnuchin declined to comment on whether China would be named a currency manipulator in the upcoming Treasury report. But he emphasized that “The currency report is something we report to Congress. It is done pursuant to two separate pieces of legislation. This is not a political document.”

                          But on trade, Mnuchin insisted that”It has to be that we can reach an agreement on action items that can rebalance the relationship. We’ve made it clear that if they have real action items that they want to discuss that we will listen.”

                          On Fed, Mnuchin said “The president likes low interest rates. The president is concerned about the Fed raising interest rates too much and slowing down the economy and those are obviously natural concerns.” Meanwhile he called this week’s stock market rout as a ” natural correction after the markets were up a lot”. And according to Mnuchin, it’s not related to high interest rates and Fed policy and “there’s really no new information in the market on the Fed or on trade for that matter.”

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                          ECB Draghi: Cliff-edge Brexit a significant downside risk to financial stability

                            ECB President Mario Draghi reiterated in an IMF conference that “broad-based growth in the euro area will continue.” He added the central bank’s policy measures “continue to underpin domestic demand, which remains the mainstay of the ongoing expansion.” Global expansion will also continue to benefit Eurozone exports.

                            On inflation, higher headline inflation reflected rise in energy prices. “While measures of underlying inflation remain generally muted, they have been increasing from earlier lows.” And he echoed the monetary policy account that “uncertainty around the inflation outlook is receding.” While ECB is on course to stop asset purchases, he emphasized that “significant monetary policy stimulus is still needed to support the further build-up of domestic price pressures and headline inflation developments over the medium term.”

                            On financial stability, he said “recent episodes of heightened financial market volatility have led to only limited contagion across countries and markets.” However, “the uncertainty triggered by a cliff-edge Brexit could have the potential to pose a more significant downside risk to financial stability.”

                            His full speech here.

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                            UK Hammond on Brexit negotiation: Positive process, challenging substance

                              Chancellor of the Exchequer Philip Hammond said that there are still big issues to resolve in Brexit negotiation. He said “what has happened over the last week, ten days, is that there has been a measurable change in pace.” However, “that shouldn’t conceal the fact that we still have some big differences left to resolve. So process is a lot more positive this week – substance still very challenging.”

                              Separately, it’s reported that Prime Minister Theresa May is going to make a public statement saying UK “will not agree to be trapped permanently in a customs union in any circumstances”.

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                              Argentine Dujovne: Trade tensions faced among G20 members

                                Argentine Treasury Minister Nicolas Dujovne, chairm of this year’s G20 finance leaders’ meeting, said in urged the countries involved to solve trade tensions, in a the summit in Indonesia. He said, “we recognize we are now facing trade tensions among members of the G20”, without directly naming the US or China.

                                And he added that “the G20 can play a role in providing the platform for discussions. But the differences that still persist should be resolved by the members that are directly involved in the tensions.”

                                Dujovne also added “we agree that international trade is an important engine of growth, and that we need to resolve tensions which can negatively affect market sentiment and increase financial volatility”.

                                Separealy, US Treasury Secretary Steven Mnuchin said that “I expressed my concern about the weakness in the (yuan) currency and that as part of any trade discussions, currency has to be part of the discussion.”

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                                China exports to US grew despite trade war, imports shrank for another month

                                  China’s trade surplus surprisingly widened in September, as trade surplus with US jumped to record high at USD 34.1B. As trade war started and escalated to another phase, exports to US continued to grow while imports from the US contracted for another month. For the year as a whole, China continued to have faster import growth with EU, than exports.

                                  In USD terms, China’s trade surplus widened to USD 31.7B in September, well above expectation of USD 19.4B. Exports rose 14.5% yoy to USD 226.7B. Import rose 14.3% yoy to 195.0B.

                                  For the month of September

                                  • Exports to EU rose 1.2% mom, 11.4% yoy to USD 37.4B. Imports from EU dropped -0.6% mom, rose 9.1% yoy to USD 24.7B. Trade surplus rose 9.9%, 37.7% yoy to USD 12.7B.
                                  • Exports to US rose 5.2% mom, 14.0% yoy to USD 46.7B. Imports from US dropped -5.8% mom, -2.3% yoy to USD 12.6B. Trade surplus rose 9.9% mom, 21.5% yoy to USD 34.1B.

                                  From January to September

                                  • Exports to EU rose 11.4% yoy to USD 301.5B. Imports from EU rose 14.1% to USD 205.2B. Trade surplus rose 6.1% yoy to USD 96.3B.
                                  • Exports to US rose 12.9% yoy to 348.8B. Imports from US rose 8.3% to USD 123.0B. Trade surplus rose 15.5% to USD 225.8B.

                                  Sep 2018 figures, Aug 2018 figures, Sep 2018 figures

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                                  IMF downgrades 2019 Asia growth forecasts, including Australia, Hong Kong, Korea, Singapore, China, India

                                    In the regional outlook report released today, IMF downgraded Asia growth forecasts in 2019 due to financial market stress and trade tensions. But it maintained that “near-term outlook for Asia remains positive, supported by steady global momentum and broadly accommodative policies”. Also, “Asia continues to be the main growth engine of the world”.

                                    Overall Asian growth is projected to be at 5.6% in 2018 and 5.4% (downgraded by -0.2%) in 2019. For 2019, four of the seven advanced economies got growth projections downgraded, including Australia at 2.8% (-0.3%), Hong Kong 2.9% (-0.3%), Korea 2.6% (-0.3%), Singapore 2.5% (-0.2%). Taiwan got an upgrade to 2.4% (+0.4%), so did New Zealand at 3.0% (+0.1%). Japan’s forecast was unchanged at 0.9%. Overall emerging Asian economies was downgraded to 6.3% (-0.3%) in 2019. China’s growth was downgraded to 6.2% (-0.2%), India to 7.4% (-0.4%).

                                    Additionally, IMF cited the following near-term downside risks to the forecasts:

                                    • Escalating trade tensions
                                    • Tighter global financial conditions
                                    • Homegrown risks

                                    And it urged the following policy actions:

                                    • strengthen macro building blocks
                                    • liberalize trade and investment
                                    • strengthen productivity prospects
                                    • seize the opportunities of, while addressing the spillovers from, the digital economy

                                    IMF’s release and full report.

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                                    US Treasury not to name China a currency manipulator, just keep it in monitoring list

                                      There are media reports came out yesterday saying that US Treasury is not going to name China a currency manipulator in the upcoming report to be released later in the month. Though China will remain on a monitoring list due to the huge trade surplus with the US.

                                      That could put Treasury Secretary Steven Mnuchin under even bigger pressure from Trump and the trade hawks in his administration. Mnuchin is clearly the one who preferred to and tried to line up restart of negotiation with China. But he has been receiving cold shoulders from his colleagues.

                                      And Trump seemed to have gotten impatient with Mnuchin. If should be reminded that Trump didn’t just complained Fed for rate hikes. In his words, he said earlier “The problem [causing the market drop] in my opinion is Treasury and the Fed. The Fed is going loco and there’s no reason for them to do it. I’m not happy about it.”

                                      In a Bloomberg interview yesterday, Mnuchin declined to comment and only said “We are concerned about the depreciation” of the yuan, he said, “and want to make sure that it’s not being used as a competitive devaluation.”

                                      USD/CNH (offshore Yuan) was rejected from 6.9586 high yesterday, mainly thanks to Dollar’s broad based selloff. It’s technically still bounded inside a near term rising channel. Thus, more upside (that is more downside in Yuan) could be seen. But the corrective structure of the choppy rise from 6.7776 warrants that 6.9586 won’t be broken even in case of another rise.

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                                      Time for a rebound? A look at DOW, S&P 500 and NASDAQ after another day of selloff

                                        The recovery attempt in the US stock markets failed overnight. DOW lost another -545.91 pts or -2.13% to close at 25052.83. S&P 500 dropped -57.31 pts or -2.06% to 2728.37. NASDAQ fell -92.99 pts or -1.25% to 7329.06.

                                        DOW move further away from 55 day EMA affirms the case that it’s in medium term correction. That is, fall from 26951.81 is corrective the up trend from 15450.56, in a less bearish case. Eventually, it might decline to 38.2% retracement of 15450.56 to 26951.81 at 22558.33 before forming a real bottoming. Nonetheless, the next line of defense come is between 23997.21 structural support and 55 week EMA (now at 24512.04). Some interim support could be seen there. But looks like there’s some more downside for the near term.

                                        However, S&P 500 is already in proximity to equivalent support zone. That is, 2691.99 structure support and 55 week EMA (now at 2713.94).

                                        NASDAQ is well above equivalent structure support at 6926.97. But it’s already pressing 55 week EMA (now at 7306.12).

                                        So, the conditions are starting to be in place for an interim rebound, before weekly close or next week. (Well admittedly, it actually sounds rather trivial after the steep losses this week, stocks are ready for short covering recovery.)

                                         

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                                        Mid-US update: Stocks stablized as treasury yields dive, EUR/CHF and Gold upside breakouts

                                          There is tentative sign of stabilization in US stock markets today. DOW initially extended the selloff to as low as 25226.16. The tamer than expected inflation reading just provided brief support to investor sentiments. However, as bond yields’ decline gathers momentum, stocks are back to life. At the time of writing, DOW is down just -0.01%, S&P 500 down 0.13% and NASDAQ is indeed up 0.56%. 10-year yield is down -0.060 at 3.165. 30 year yield is down -0.056 at 3.342. European markets didn’t enjoy the recovery, closing a little too early. FTSE closed down -1.94%, DAX down -1.48%, CAC down -1.92%.

                                          In the currency markets, Swiss Franc is undoubtedly the weakest one for now, followed by Yen and then Dollar. New Zealand, Australia and Canadian Dollar are the strongest ones.

                                          One development to note is that EUR/CHF has firmly taken out 1.1452 resistance decisively. The development should confirm bullish reversal after drawing support from 1.1154/98 key support zone. Further rise is now in favor back to 1.1713 resistance next.

                                          Another development is gold’s break of 1214 resistance Rebound from 1160.36 is extending. But we’d expect 1235.24/1236.99 cluster resistance zone (38.2% retracement of 1365.24 to 1160.36 at 1238.62, 100% projection of 1160.36 to 1214.30 from 1183.05 at 1236.99) to limit upside.

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