Thu, Oct 17, 2019 @ 01:04 GMT

European Update: Sterling recovers, bears refuses to commit

    Sterling rebounds broadly today, except versus Kiwi, as bears refuse to commit further selling. Stronger than expected UK wage growth in September does provide some support. But more importantly, there are rumors flying around about an imminent Brexit deal with the EU. It’s reported that the “texts” are ready and they’re just waiting for the nod from UK Prime Minister Theresa May. We’ll see if both sides can really agree on something that paves the way to a November EU summit.

    Australian and New Zealand Dollar are also strong on improved sentiment over optimism on US-China trade spat. China Vice Premier Liu He might travel to the US to meet with Treasury Secretary Steven Mnuchin shortly, to prepare for the meeting between Trump and Xi on November 30 at the G20 summit. Yen and Dollar are trading as the weakest ones, paring some of this week’s gain. Canadian Dollar is back under pressure as WTI crude oil resumes recent free fall and hit as low as 58.33.

    In other markets, major European indices are trading higher at the time of writing:

    • FTSE is up 0.23%
    • DAX is up 0.91%
    • CAC is up 0.54%
    • German 10 year yield is up 0.003 at 0.404
    • Italian 10 year yield is up 0.020 at 3.467. German-Italian spread is above 300

    Earlier in Asia

    • Nikkei closed down -2.06% at 21810.52
    • Hong Kong HSI rose 0.62% to 25792.87
    • China Shanghai SSE rose 0.93% to 2654.88
    • Singapore Strait Times dropped -0.47% to 3053.6
    • Japan 10 year yield dropped further by -0.0026 to 0.117
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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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      Trump backs down on tough Chinese investment curb, revert to CFIUS

        The markets are responding positive to news that Trump is backing away from the rumored harsh measure on curbing Chinese investments in US technology companies. Instead, his administration will revert to existing laws, with an upgrade. Trump himself told reports that “it’s not just Chinese”. Treasury Secretary Steven Mnuchin also said that “we are not singling out China, but we will protect technology transfer to China as we will to other important areas.” Mnuchin also pledged that “we will have the necessary tools to protect investments, whether it’s China or anybody else.”

        The administration will relay on the newly strengthened Committee on Foreign Investment in the United States (CFIUS) to deal with the issue. The legislation to be used is called the Foreign Investment Risk Review Modernization Act. Trump said the upgraded CFIUS”will enhance our ability to protect the United States from new and evolving threats posed by foreign investment while also sustaining the strong, open investment environment to which our country is committed and which benefits our economy and our people.” And, “I have concluded that such legislation will provide additional tools to combat the predatory investment practices that threaten our critical technology leadership, national security, and future economic prosperity.”

        Trump originally considered invoking executive authority to impose and much tougher crackdown on Chinese investments. And there have been conflicting messages from White House trade adviser Peter Navarro and Mnuchin. But such an idea appeared to have drawn severe complaints from US businesses and Republicans, on the potential economic fallout.

        US stocks futures reversed initial losses and now point to flat open. In particular, NASDAQ will be an index to watch today for its tech compositions. Dollar also jumps on the news, ignoring mixed economic data.

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        USDJPY rebound completed as US yield reverses

          US treasury yields had a wild session overnight. 10 year yield hit as high as 2.992 but closed sharply lower at 2.933, down -0.042.

          There was no apparent major reason for the ride. Reasons cited include slump in emerging market currencies, fat finger trade as well as technical resistance at 3% handle.

          Net effect in the forex market is also no too clear, except that USD/JPY is dragged down. Judging from 6H action bias chart, the rebound from 108.10 is likely over.

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          China Xi to strengthen global strategic partnership with Italy

            On the eve of his visit to Italy, Chinese President Xi Jinping wrote in Corriere della Sera newspaper saying that the country is ready to strengthen a “global strategic partnership”. Xi added that “with my visit I wish to set out together with Italian leaders the guidelines for bilateral relations and take them into a new era.” Additional, China like to coordinate more closely with Italy in multilateral organizations like UN, WTO and GD20. And both countries could develop joint projects in ports, shipping, telecoms and pharmaceuticals.

            Separately, Vice Foreign Minister Wang Yi said “it is hard to avoid misunderstandings occurring during the process of advancing the construction of the Belt and Road. But he emphasized that “facts are the best proof”. Italy is set to send a high-level delegation to the second Belt and Road summit in Beijing next month. And they would be the first G7 nation to join the initiative, which could upset the US and alert EU.

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            Chicago Fed Evans discussed overheating and monetary policy

              Chicago Fed President Charles Evans delivered a speech at the University of Wisconsin today. There he laid down “three possibilities concerning low inflation and low unemployment and their implications for monetary policy”.

              The first one being the “overheating story” and said that the “risks are not particularly high”. Evans pointed out that the so called “Phillips curve” is much “flatter” than it was. And, adding to that “inflation expectations low and well anchored, and a lack of fuel from strong wage growth”, there is no “outsized risk of a breakout in inflation”.

              The second scenario is that “inflation is low because the sustainable rate of unemployment is actually much lower than the FOMC’s 4-1/2 percent estimate”. Therefore, “unemployment rate really isn’t putting any pressure on labor markets.” In this case, “the risks of overheating would be lower, and perhaps interest rate adjustments could be smaller.”

              In the third scenario, “unemployment running below its natural rate, u*, without rising inflation is due to labor market inefficiencies that are outside the purview of monetary policy.” He added that
              “let’s consider the possibility that unemployment remains low and some structural problem keeps wages and prices from rising to attract workers. Is this really a problem that monetary policy is suited to address? I think the answer is no.”

              Finally, Evans also noted that Fed is facing “low inflation trends and low inflation expectations”. And, ” some cyclical upturn in inflation is actually welcome because it should help solidify expectations symmetrically around our 2 percent objective. This is necessary for achieving our inflation target on a sustainable basis.”

              His full speech Overheating and Monetary Policy: How Does Low Inflation Affect the Policy Narrative?

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              Italy Tria to keep the main pillars of budget, EU Dombrovskis said assumptions overly optimistic

                Italy Economy Minister Giovanni Tria said today that the coalition government is “busy drafting the answer to the European Commission with regards to the most contentious points of the budget.” Italy is requested to present a new or revised draft budget plan to the Commission by November 13. Despite the the requests, Tria told the parliament today that they will confirm the budget plan’s “Main pillar”. Tria reiterated the commitment to cap 2019 budget deficit at 2.4% of GDP. But based on the Commission’s projection released yesterday, Italy’s budget deficit would hit 2.9%.

                European Commission Vice President Valdis Dombrovskis blasted Italy’s projections were based on “overly optimistic assumptions.” He added, “Basically the assumption is that if they … increase public spending, it will stimulate the economy and thus will help to reduce budget deficit. We see that this is actually not materializing.”

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                Canada GDP rose 0.3% in April, above expectation of 0.2%

                  Canada GDP rose 0.3% mom in April, above expectation of 0.2% mom. Goods-producing industries rose 0.4%, while services producing industries increased 0.2%. The 20 industrial sectors were nearly evenly split between gains and losses. On three-month rolling basis, GDP grew 0.3%, up from 0.1% in the three months to March.

                  Also from Canada, IPPI rose 0.1% mom in May versus expectation of 0.0% mom. RMPI dropped -2.3% mom, versus expectation of -3.0% mom.

                  USD/CAD dips mildly after the releases. Focus remains on 1.3068 cluster support (38.2% retracement of 1.2061 to 1.3664 at 1.3052). Decisive break should confirm medium term bearish trend reversal.

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                  German Merkel to stop leading CDU, markets shrug

                    It’s reported that German Chancellor Angela Merkel will not run for Christian Democratic Union leadership again in the December convention. Though, she intends to serve out her term as Chancellor through 2021. Merkel is expected to hold a media conference at 1pm Berlin time.

                    Right now, there are a few possible candidates for the party leadership. Jens Spahn, Ralph Brinkhaus, and Annegret Kramp-Karrenbauer are among the possible ones.

                    Market reaction is rather muted to the news though. It’s believed that even if Merkel would be replaced as Chancellor, there won’t be much change to the coalition’s policies, which will still be dominated by CDU/CSU and the SPD.

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                    Yen and Dollar strong on treasury yields, shrug off risk appetite

                      Yen and Dollar are trading as the two strongest ones today, and for the week, as supported by strength in treasure yields. 10 year JGB yield opened higher at 0.088 today and stays firm at 0.085 at the time of writing. It was bounded between 0.023 and 0.049 in July up until this Monday. Judging from the current momentum, 10 year JGB yield is having 1% in sight. Note that Yen is having little reaction to the China led Asian markets rally. It will continue to “listen” more to JGB yield than stocks/risk sentiments.

                      Meanwhile, US 10 year yield gained 0.70 overnight to close at 2.965. The strong rise, as led by 30 year yield’s jump since last Friday, should set the stage for 3.000 handle and above. For now, we’d not seeing any decisiveness for a break of 3.115 high yet. But it’s something that’s worth monitoring. While Dollar seemed to be talked down by Trump’s comment last week, surging yield would bring it back to life.

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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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                        Gemeinschaftsdiagnose slashes 2019 Germany growth forecasts to 0.8%, long-term upswing has come to an end

                          Germany’s leading economic institutes lowered economic growth forecasts for the country in 2019 sharply. GDP is projected to rise just 0.8%, down from Autumn 2018 forecasts of 1.9%. Nevertheless, for 2020, GDP is projected to grow 1.8%, unrevised.

                          In the press release, Oliver Holtemöller, head of the Department of Macroeconomics and Vice President of the Halle Institute for Economic Research (IWH) said that “the long-term upswing of the German economy has come to an end.” Though, he noted that “we still consider the chance of a pronounced recession to be slight.”

                          The statement also noted that “political risks have further clouded the global economic environment.” Also, “if a no-deal Brexit occurs, economic growth this year and the next is likely to be significantly lower than indicated in this forecast.”

                          The state was released by joint project group “Gemeinschaftsdiagnose”: German Institute for Economic Research (DIW Berlin), Halle Institute for Economic Research (IWH) – Member of the Leibniz Association, ifo Institute – Leibniz Institute for Economic Research at the University of Munich in cooperation with the KOF Swiss Economic Institute at ETH Zurich, Kiel Institute for the World Economy (IfW), RWI – Leibniz Institute for Economic Research in cooperation with the Institute for Advanced Studies Vienna.

                          Full release here.

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                          Trump said May’s Brexit plan would probably end a major trade relationship with US

                            Trump blasted UK Prime Minister Theresa May’s “business-friendly” Brexit plan, which was formally published yesterday, in The Sun newspaper interview. That came just hours ahead of their dinner at the Blenheim Palace. He criticized that “if they do a deal like that, we would be dealing with the European Union instead of dealing with the UK, so it will probably kill the deal.”

                            And he warned that the “soft” approach of May would “definitely affect trade with the United States, unfortunately in a negative way”. And, “if they do that I would say that that would probably end a major trade relationship with the United States.”

                            Trump also disclosed that he tried to interfere with the relationship between UK and EU. “I would have done it much differently,” Trump told The Sun. “I actually told Theresa May how to do it but she didn’t agree, she didn’t listen to me. . . . I think what is going on is very unfortunate.”

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                            Mid-US update: Dow rises 360 pts, EUR/USD back in range after brief spike

                              Yen and Swiss Franc are trading as the weakest ones as risk appetite return to the markets today. Dollar gets no support from the strong rebound in US equities, as treasury yields are essentially flat.

                              Meanwhile, New Zealand Dollar, Canadian Dollar and Sterling are the strongest ones.

                              Dollar was sold off in early US session as EUR/USD broke 1.1610 minor resistance. But the pair quickly lost steam and is now back in familiar range.

                              At the time of writing, DOW is trading up 1.38%, S&P 500 up 1.43% and NASDAQ up 1.84%. Five-year yield is up 0.004, 10-year yield down -0.002, 30-year yield down -0.003. While DOW’s rebound is strong, it should be reminded that it’s more likely a corrective move than not. And, it’s already close to first hurdle of 38.2% retracement of 26951 to 24845.10 at 25649.86, which is close to 55 H EMA at 25706. We’ll see whether DOW could extend the rebound through this hurdle, or get an instant rejection from it before today’s close.

                              In Europe, stock closed broadly higher on late buying.

                              • FTSE rose 0.43% to 7059.40
                              • DAX rose 1.40% to 11776.55
                              • CAC rose 1.53% to 5173.05
                              • German 10 year yield dropped -0.0102 to 0.495
                              • Italian 10 year yield also dropped -0.0928 to 3.462
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                              Fed Daly: Premature to say Dec hike a definite, Fed not on autopilot

                                San Francisco Fed president Mary Daly said yesterday that her modal forecasts was for two to three more rate hikes over the next period. However, she also noted that “the exact timing not being certain”. She went further saying that it’s “premature” to say that a December rate hike is a “definite”. And, “we have a lot of time between now and December to see how the economy unfolds.”

                                Nevertheless, Daly still believed that Fed should gradually raise interest rates towards neutral. Her estimate of neutral rate is between 2.5 and 2.8%. For now, she’d “probably” pick the middle of the rate at around 2.7% as the neutral rate. She added that “gradual is helpful because it allows us to raise the rate, look around, evaluate, interpret the data and then, and only then, make another increase”. And, “the frequency and size of any increase I think is something that we want to continue to have open and not be on autopilot.” Also, she thought it’s premature to discuss whether interest rate need to go into restrictive region.

                                Her comments came after giving a speech titled “A Strong Economy—But We Can Aim Higher“. There she said that the current state of economy is “very good”. But “some people are getting left behind”. She said essentially all labor market indicates are “flashing bright green” and signaled the US labor market is “indeed at full employment”. The “key exception is continued low rates of labor force participation”. While monetary policy can’t directly cure the participation problem, Fed can help by “keeping the expansion going”. She also noted that there are “upside potential for US workforce participation”.

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                                Fed George: Let’s step back and see what happens

                                  Kansas City Fed President Esther George expressed her support for pausing rate hikes yesterday. She said inflation pressures did not appear very strong. At the same time, there were concerns on global slowdown. Thus, “let’s step back and see what happens.”

                                  Cleveland Fed President Loretta Mester said at the coming meetings, Fed “will be finalizing our plans for ending the balance-sheet runoff and completing balance-sheet normalization.” And, Fed will “make these plans and the rationale for them known to the public in a timely way because transparency and accountability are basic tenets of appropriate monetary policymaking.”

                                  Fed Chair Jerome Powell delivered a speech on bank consolidations and rural communities. But he didn’t talk about monetary policy. On the economy, he just said “We don’t feel that the probability of recession is at all elevated.”

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                                  Canada Freeland won’t meet USTR Lighthizer until more technical discussions are done

                                    Canadian Foreign Minister Chrystia Freeland said that she won’t hold NAFTA talks with USTR Robert Lighthizer until some more work is completed. She told reporters that “we decided that in order to have another productive conversation, it would be best to give our officials some time to hold technical discussions.”

                                    It’s believed that dairy, cultural protection and dispute resolution mechanism remained the deadlocks. But Freeland said the talks have “absolutely not” hit a stalemate. And even though she won’t be present, Canada’s chief NAFTA negotiator, as well as the country’s ambassador to the United States, will fly back to Washington on Wednesday night.

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                                    US consumer confidence rose to 128.0 in May

                                      US Conference Board consumer confidence rose to 128.0 in May, up from revised 125.6 in April, met expectations.

                                      Conference Board noted in the release that:

                                      • Consumer confidence increased in May after a modest decline in April,
                                      • Consumers’ assessment of current conditions increased to a 17-year high (March 2001, 167.5), suggesting that the level of economic growth in Q2 is likely to have improved from Q1.
                                      • Consumers’ short-term expectations improved modestly, suggesting that the pace of growth over the coming months is not likely to gain any significant momentum.
                                      • Overall, confidence levels remain at historically strong levels and should continue to support solid consumer spending in the near-term.

                                      Full release here.

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                                      Japan PM Abe: Trade restrictions will not benefit anyone

                                        Japan Prime Minister Shinzo Abe said today that “imports of our nation’s automobiles and auto parts have never damaged U.S. national security and will not do so in the future.”

                                        And, he added “trade restrictions will not benefit anyone, and we will keep explaining that to the U.S. and work closely with them to ensure those tariffs are not imposed.”

                                        It seems like Abe only refer to the threat of auto tariffs. The already-in-effect steel and aluminum tariffs are forgotten? Or, are Japanese steel products security threat to the US?

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                                        US Empire State manfacturing rose to 10.1, but future conditions dropped to 3-year low

                                          US Empire State manufacturing general business conditions index rose 10.1 in April, up from 3.7 and beat expectation of 8. 33% of respondents reported improved conditions, 23% said worsened. New orders index rose 5pts to 7.5. Shipments rose 1pts to 8.6. However, index for future business conditions dropped a massive -17 pts to 12.4, lowest in more than three years.

                                          New York Fed noted in the release that growth picked up somewhat but remained fairly subdued. New orders rose slightly, and shipments continued to grow modestly. Delivery times and inventories both increased. Labor market indicators pointed to ongoing employment gains and a small increase in hours worked. The prices paid and prices received indexes moved lower, pointing to a slowing in both input price increases and selling price increases. Indexes assessing the six month outlook suggested that firms were much less optimistic about future business conditions than last month.

                                          Full release here.

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