Thu, Feb 21, 2019 @ 13:48 GMT

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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    BoC Poloz: Interest rates are headed higher

      BoC Governor Stephen Poloz said in a speech overnight that seeing some good pickups in wages in the last 6-8 months, the Canadian economy is in a “phase we call the sweet spot”. And, the policymakers are becoming “more confident” that less monetary stimulus is needed. There is a concern that interest rates are “really low” comparing to anything that can be described as neutral. Interest rates are “headed” higher and the question is just when.

      Poloz cited some factors restraining growth, including uncertainty about US trade policies, renegotiation of NAFTA and new mortgage rules. But he noted that “those forces will not last forever”. And, “as they fade, the need for continued monetary stimulus will also diminish and interest rates will naturally move higher.”

      But for now, Poloz indicated that the timing of the move will be guided by incoming data. And, it’s too soon to judge the impact of the prior rate hikes on the economy yet.

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      Chinese stocks and AUD surge as MSCI mulls lifting index weighting 4 times

        Chinese stocks rise sharply higher today on news that MSCI is considering to increase its A shares in the MSCI indexes.

        MSCI noted that the 5% initial inclusion of China A implemented in May and August 2018 got “overwhelming positive feedback from market participants”. It’s has now launched a consultation on further weight increase. The investment community could provide MSCI with proposals till February 15, 2019 and the decision would be made on or before February 28, 2019.

        The current proposals including adding the weight of China A Large Cap securities from 5% to 7% in two phases, 7.5% each in May and August 2019. Also ChiNext could be added to the list of eligible stock exchange segments in May 2019. China A Mid-Cap securities with 20% included factor in one phase in May 2020.

        MSCI’s full document here.

        At the time of writing, China Shanghai SSE composite is trading up 1.37% at 2819, finally back above 2800 handle.

        The news has apparently lifted Australian Dollar too. With today’s rise and 0.7228 minor support defended, AUD/USD is possibly extending the corrective rebound from 0.7084 through 0.7303 before completing it.

        EUR/AUD’s rebound from 1.6051 could also be finished at 1.6252. And, the correction from 1.6353 would likely have another take on 1.6051 support before completion.

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        European Commission to discuss actions on Italy’s budget today

          European Commission is set to discuss the actions regarding Italy’s draft budget today. Italy sent a three-page letter to the Commission yesterday, explaining its position on the budget, but without directly addressing the questions as presented by the Commission’s letter to them. Instead, Economy Minister Giovanni Tria tried to pain the budget plan, raising deficit target to 2.4% of GDP, as a “hard but necessary” decision after considering “macroeconomic and social conditions”. Prime Minister Giuseppe  Conte, also expressed the willingness for a “constructive dialogue” but reject any prejudice.

          European Commissioner for Economic Affairs Pierre Moscovici emphasized the “the European commission does not want a crisis between Brussels and Rome.” But he added that “the maximum that we can do … is to ask Italy to resubmit another budget, which takes account of the observations, of the questions, and also of European rules.”

          While attentions are mainly on the top line 2.4% of GDP deficit target, there are other issues that are yet to be addressed by Italy. In particular, the Italian government forecasts the economy to growth 1.5% in 2019, based on the budget. However, as the Commission pointed out in its letter, the plan has not been endorsed by any “independent fiscal monitoring institution”, like the Parliamentary Budget Office. And that’s a breach of EU rules. The growth projection is the basis for deficit target calculation and Italy has to either ask the PBO to reveal and endorse it, or explain why they just come up with the numbers on their own.

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          Into US session: Yen and Dollar Weak, Euro strong as German-Italian spread narrows

            Entering into US session, Yen and Dollar remain the weakest ones in the currency markets. Selloff in the Dollar slows a little bit but there is no sign of bottoming yet. Swiss Franc is currently trading as the strongest one, followed by Euro. It seems Euro is rather troubled by Trump’s wide of the mark accusation that it’s manipulated. Though, it’s also helped by narrowing German-Italian yield spread. Chinese delegation will arrive in Washington today to resume trade talks with the US tomorrow. But expectation on that is rather low.

            Instead, Dollar could look into Jackson Hole symposium for some inspirations to regain strengthened We find two areas where “expansive money” Fed chair Jerome Powell’s comments might trigger volatility. That is, will there be early end of balance sheet reduction. And, will Fed return to pre-crisis channel system monetary policy? More in this report. Jackson Hole Symposium Preview: Two Questions on Fed’s Monetary Policy.

            In other markets, Gold rides on Dollar selloff to as high as 1196.37 so far today. But as selling slows, there is not enough momentum to put it through 1200 yet. European stocks are mixed today, with FTSE trading down -0.12% at the time of writing. But CAC is up 0.74% and DAX is up 0.63%. Italian 10 year yield drops -0.097 to 2.939. German 10 year bund yield rose 0.020 to 0.326. German-Italian yield spread is narrowing back, which is a positive sign. Asian markets were generally positive today. Nikkei ended up 0.09%, Hong Kong HSI rose 0.56%, China Shanghai SSE gained 1.31%, Singapore Strait Times dropped -0.15%.

            The economic calendar continues to be light today with Canada wholesale sales as the only feature in US session.

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            Sterling surges as EU Barnier said Brexit deal in 6-8 weeks realistic, GBP/CHF bottomed

              Sterling surges broadly in early US session and it’s now the strongest one for today. It’s EU chief negotiator Michel Barnier again. Bloomberg reports that Barnier said a Brexit deal with the UK is “realistic” within six to eight weeks.

              According to an excerpt by Sky News, Barnier said “I think that if we are realistic we are able to reach an agreement on the first stage of the negotiation, which is the Brexit treaty, within 6 or 8 weeks.” And, “taking into account the time necessary for the ratification process, the House of Commons on one side, the European Parliament and the Council on the other side … we must reach an agreement before the beginning of November. I think it is possible.”

              Separately, it’s reported that EU is preparing to give Barnier new instructions to help closing a deal with UK. And that’s seen as a act to support UK Prime Minister Theresa May as she’s suffering attacks from Brexiteers at home. The decision could be made at the September 20 summit, paving the way to be adopted in October. And the Brexit deal could then be concluded at a special summit in November.

              Riding on Swiss Franc’s weakness too, GBP/CHF has taken out 1.2665 near term support, confirming short term bottoming. It’s a bit early to tell if the whole down trend from 1.3854 has completed. But in short term, further rise should be see to 55 day EMA (now at 1.2827).

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              UK Lidington said Brexit deal possible in 24-48 hours, but Hunt doesn’t know when

                Comments from UK officials regarding Brexit negotiation are rather confusing today. Cabinet Office Minister David Lidington said that “we’re not quite there yet”. But he emphasized “we are almost within touching distance now. ” And, a deal in the next 24 or 48 hours is “possible but not at all definite”. He was “cautiously optimistic”.

                On the other hand, Foreign Minister Jeremy Hunt said “we don’t have a solution yet”. He added “both sides draw encouragement form the fact that so much has been agreed”. And the figure 95% used was “probably accurate”. The 5% is a “difficult 5 percent though”. Hence, “we don’t know when it’s going to be possible to conclude those negotiations.”

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                Fed Brainard: Mounting tailwinds tip the balance of considerations.

                  Fed Governor Lael Brainard:

                  • Economic headwinds are shifting to tailwinds
                  • There will be “substantial” boost from tax cuts and public spending
                  • “In the earlier period, strong headwinds sapped the momentum of the recovery and weighed down the path of policy.
                  • “Mounting tailwinds at a time of full employment and above-trend growth tip the balance of considerations.”
                  • “With greater confidence in achieving the inflation target, continued gradual increases in the federal funds rate are likely to be appropriate.”
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                  Into US session: Euro strong on ECB, stocks and yields

                    Entering into US session, Euro is trading as the strongest one for today. It’s partly lifted as delayed reaction to news that some ECB policy makers are unhappy with market pricing of too slow rate path. Euro could also be following stocks and yields higher on news that Trump is offering a zero auto tariffs solution for trade dispute. At the time of writing, DAX is up 1.5%, CAC is up 1.2%, FTSE is up 0.56%. 10 year German bund yield is up 0.0153 to 0.321.

                    Sterling follows as the second strongest as supported by comments from BoE Governor Mark Carney. He reiterated that recent data pointed to Q1’s slowdown as being temporary. And the economic developments are broadly in line with the May projections. That gives a little more support for the chance of an August rate hike. Meanwhile, Yen is trading broadly lower as risk aversion eased, followed by Dollar as the second weakest.

                    We’d like to point out that from Action Bias tables, there is no overwhelming momentum in the markets yet. Euro could be having a relatively strong near term corrective up move against Dollar and Yen only and it’s just neutral against Sterling, Swiss and Australian Dollar. Similar picture is seen in Yen crosses.

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                    ECB Coeure: Interest rates to say at “very low levels” far beyond end of QE

                      ECB Executive Board Member Benoit Coeure said that interest rates will stay at “very low levels”, “far beyond the end of QE.

                      He said in French radio BFM business:-

                      • “It is very clear to us that short term interest rates, the ones that are controlled by the central bank, will remain at very low levels, far beyond the horizon of our asset purchases,”
                      • “Inflation is not quite where we would like it to be,”
                      • There was no discussion on a first rate hike in mid-2019
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                      Low-level US-China trade talks ended with no result

                        The low-level trade talks between delegation led by US Treasury Under Secretary David Malpass and Chinese Commerce Vice Minister Wang Shouwen ended without any progress.

                        White House spokesperson Lindsay Walters said in an email statement that “we concluded two days of discussions with counterparts from China and exchanged views on how to achieve fairness, balance, and reciprocity in the economic relationship.”

                        The Chinese Ministry of Commerce said in a brief statement that both sides conducted “constructive and frank exchanges” and “will maintain contact for the next step.”

                        A fresh round of tariffs on USD 16B of goods of both sides kicked in yesterday and trade war between US and China continued.

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                        Today’s top mover: GBP surges on Brexit hope, CAD dives as WTI oil free fall extends

                          At the time of writing, GBP/CAD is the top mover for today. But it’s very tight. Sterling is strongest for sure as boosted by Brexit optimism. The headlines flying around suggest that both UK and EU are working intensely to complete the withdrawal agreement, including the stick Irish backstop, within a day or two. That would give a green-light to hold an unscheduled EU summit to approve the deal later in November.

                          While there is no confirmation of any sort for the moment, at least, traders are betting on a positive outcome.

                          On the other hand, Canadian Dollar suffers renewed selling as oil price decline accelerates. WTI crude oil has now breached 57. The news of Saudi Arabia’s export cut earlier this week just gave oil price a temporary lift.

                          Take a look at GBP/CAD, the cross had two attempt to break through 1.6594 support in October but failed. This week’s rebound off 55 day EMA is a bullish development. But for now, it’s still holding in range of 1.6594/7285. So, we’d treat the current rebound as part of the consolidation pattern from 1.6594. That is, upside attempt would be limited by 38.2% retracement of 1.8415 to 1.6594 at 1.7290. Fall from 1.8415 is still expected to resume through 1.6594 low at a later stage. However, firm break of 1.7290 will invalidate out view and would at least bring further rise rise back to 61.8% retracement at 1.7719.

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                          Into US session: Swiss Franc overwhelmingly strong, Euro follows

                            Entering into US session, Swiss Franc is overwhelmingly the strongest one for today. The reason is so far unknown as we won’t see notable weakness in emerging market currentices. Nor is European stock market in risk aversion mode. Euro is following as the second strongest indeed, and then Yen and Dollar. Commodity currencies are generally softer as last week’s rebound lost steam. Sterling is mixed as there is no more significant development in the UK regarding leadership challenge, nor Brexit agreement.

                            In other markets, European indices are trading in positive territory at the time of writing:

                            • FTSE is up 0.71%
                            • DAX reversed earlier gains and is now up only 0.01%
                            • CAC also reversed earlier gains and is now up 0.08%.
                            • German 10 year yield is up 0.0-149 at 0.385, still below 0.4%
                            • Italian 10 year yield is up 0.025 at 3.514. German-Italian spread is above 310.

                            Earlier in Asia, all major indices closed up, except Singapore:

                            • Nikkei rose 0.65% to 21821.16
                            • Hong Kong HSI rose 0.72% to 26372.00
                            • China Shanghai SSE rose 0.91% to 2703.51
                            • Singapore Strait Times dropped -0.60% to 3065.07
                            • Japan 10 year yield dropped -0.0112 to 0.095. Back below 0.1%, suggesting some safe-have demand in Japan.
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                            German Finance Ministry: Turkish crisis adds to risks of Brexit and trade war

                              In its monthly report, the German Finance Ministry the “economic developments in Turkey present a new, external economic risk” to the economy. Germany is the second largest foreign investor in Turkey.

                              That adds on trop of Brexit as “risks remain particularly with regards to uncertainty over how Brexit is going to pan out”.

                              US trade policy is another main risk as “the persistent debate about tariffs and the threat of a trade war are choking trade activity.”

                              Nonetheless, despite the risks, the Minstry said the economy remains supported by state spending, private consumption, low interest rates, a robust labor market and rising real wages.

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                              No breakthrough in Mexico-US bilateral NAFTA talks, but Canada optimistic

                                The bilateral NAFTA meeting between Mexico and the US ended without breakthrough yesterday. Jesus Seade, designated chief negotiator of Mexican President-elect Andres Manuel Lopez Obrador, told reporters told reports that “We are already looking at all the issues. We might close this, not in a matter of hours, but these days. We still have next week.” Mexican Economy Minister Ildefonso Guajardo said talks will resume on Thursday.

                                Canada has been rejected from the supposed trilateral negotiation. But its Foreign Minister Chrystia Freeland still expressed optimism. She was in “very close contact” with her counterparts. And, she added “we are encouraged by the optimism that both countries have, and we are optimistic as well.” There are some concerns that Canada will face strong-arm tactics once the other two sides reach an agreement. But Freeland said “Canada will very much have a voice in the finalization of all of this.”

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                                Swiss CPI rose 0.4% mom, 1.0% yoy. Import prices led

                                  Swiss CPI rose 0.4% mom, 1.0% yoy in May, above expectation of 0.0% mom, 0.8% yoy.

                                  Core CPI rose 0.1% mom, 0.4% yoy. Domestic products CPI rose 0.2% mom, 0.4% yoy. Imported products CPI rose 0.8% mom, 2.7% yoy.

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                                  EU companies in China releases report with 828 reform recommendations in 14 areas

                                    The European Union Chamber of Commerce in China released an annual position paper today, urging China to accelerate reforms. The paper described the widening gap of the maturing economy and the shortcomings of reforms and opening agenda as “reform deficit”. Such reform deficit is seen as the “root cause” of tensions in the global economic tensions which resulted in the US-China trade war. And, “the strong reaction from the United States with its escalation of tariffs is, albeit undesirable, a direct response to these deficiencies, many of them longstanding.”

                                    The paper examines 14 common concerns faced by European companies. These issues “continue to hold back China’s development and prevent businesses from serving their core function”. And the paper urged that “each of these issues should be viewed by Chinese officials as a challenge to overcome in the years ahead.”

                                    The areas of concerns include access to licenses, complex and lengthy administrative procedures, consultation and communication, cybersecurity, IPR and R&D, overlapping regulations and interdepartmental coordination, market access barriers, SOE-related issues, standards setting, transparency issues, unclear regulations and unpredictable enforcement, unequal and unfair treatment, unfair procurement systems and SMEs. The 33-page paper listed out a accumulative total of 828 recommendations.

                                    The press statement and full report can be found here.

                                    Well… isn’t it “lead by example” that the US administration has to learn from?

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                                    ECB de Guindos: Challenges remain in the form of low trend growth

                                      ECB Vice President Luis de Guindos said in a speech that Eurozone economy is “continuing to grow” and the growth is “broad-based across countries and sectors”. He added that “during this recovery, the countries that were most affected by the crisis have regained competitiveness thanks to a combination of accommodative monetary policy, fiscal consolidation and structural reforms.”

                                      However, de Guindos warned that “challenges remain in the form of low trend growth compared with other advanced economies, and persistently high public and private debt levels in a number of euro area countries.”. He urged further efforts to “strengthen productivity growth and boost productive investments to lift long-term potential growth.”

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                                      BoE Carney: Much of Q1’s lost output will not be made up

                                        BoE Governor Mark Carney speaks to the Treasury Committee in the parliament for inflation report hearing today.

                                        Regarding the dismal Q1 growth, Carney said ” it’s more likely to have been temporary and idiosyncratic factors that slowed the economy.” But the MP didn’t expect much of that “lost output” to be made up. Therefore, BoE forecast 0.4% growth in Q2 only.

                                        Carney noted that there were arguments for and against publishing a rate path. But he pointed out that “e risk of it being interpreted as a promise, as a commitment are real, there are risks of procrastination once you put a path out there… there’s risk of pre-commitment as well”. And thus, the majority of the committee were not in favor of it.

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                                        EU warns Trump: We will not negotiate under threat

                                          More on EU’s response to US steel tariffs exemption. European Commission criticized that  the US decision “prolongs market uncertainty, which is already affecting business decisions”. It reiterated that EU should be given full and permanent exemptions as the tariffs “cannot be justified on the grounds of national security”. Also, EU warned that “as a longstanding partner and friend of the US, we will not negotiate under threat.”

                                          Full statement below

                                          Commission statement following US announcement of an extension until 1 June of the EU’s exemption from US tariffs on steel and aluminium imports

                                          The European Commission takes note of the decision of the United States to prolong the European Union’s exemption from import tariffs on steel and aluminium for a short period of time, until 1st June 2018.

                                          The US decision prolongs market uncertainty, which is already affecting business decisions. The EU should be fully and permanently exempted from these measures, as they cannot be justified on the grounds of national security.

                                          Overcapacity in the steel and aluminium sectors does not originate in the EU. On the contrary, the EU has over the past months engaged at all possible levels with the US and other partners to find a solution to this issue.

                                          The EU has also consistently indicated its willingness to discuss current market access issues of interest to both sides, but has also made clear that, as a longstanding partner and friend of the US, we will not negotiate under threat. Any future transatlantic work programme has to be balanced and mutually beneficial.

                                          European Commissioner for Trade Cecilia Malmström has been in contact with US Commerce Secretary Wilbur Ross and US Trade Representative Robert Lighthizer over the past weeks, and these discussions will continue.

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