Sun, Nov 27, 2022 @ 16:37 GMT

Italy worries temporarily eased. DOW, S&P 500, NASDAQ gained but show mixed picture

    US stocks rebounded broadly overnight as Italy worries eased temporarily. The turning point was anti-establishment Five Star Movement leader Luigi Di Maio’s willingness to find someone other than eurosceptic Paolo Savona as economy minister. Savona was vetoed by President Sergio Mattarella who emphasized that “the adhesion to the euro is a choice of fundamental importance”. For now, Savona is seen as a sticky point. Senior Five Star lawmaker Laura Castelli was quoted saying “it’s astounding that Paolo Savona, a person of great culture and political awareness, has not yet decided to take a step back.”

    The political turmoil is far from being resolved yet. But at lease for now, the risk of another election, which could be framed by the far-right League as referendum on Euro, appears to be lower. German 10 year bund yield closed at 0.376 yesterday. Italian 10 year bond year closed at 2.903. That is, the spread was still wider than 250.

    DOW closed up 306.33pts or 1.26% at 24667.78. The structure of of the rebound from 23344.52 still look like a corrective three wave move that’s completed at 25086.49.

    S&P 500 closed up 34.15pts or 1.27% at 2724.01. The chart looks better as the dip from 2742.24 was relatively shallower.

    NASDAQ closed up 65.86, or 0.89% at 7462.45. The chart is best looking among the three as it didn’t bother with Italy much. Rise from 6805.96 has resumed too.

    So overall, the picture in US stocks were mixed. But that is expected as the markets are generally in consolidation phase. It’s natural for the major indices to be out-of-sync sometimes during a consolidation.

     

    5 Star to find someone other than Savona as economy minister

      The anti-establishment 5-Star Movement in Italy in is working hard on forming a government to solve the current political turmoil. It’s leader Luigi Di Maio met with President Sergio Mattarella today. After that, Di Maio said “let’s find someone of the same caliber as Savona, who would still remain in the government in another ministry.” And “If the League agrees … we can still form a government.”

      Di Maio is now trying to find that “point of compromise” between Mattaralla and eurosceptic League. No name is thrown out yet and it could take some time to negotiate with League. Note that League leade rMatteo Salvini is pushing for another election as the effort to form a coalition government collapsed.

      But after all, the development s calmed the markets mildly as Euro also recovered.

      Canadian Dollar surges as hawkish BoC shows much confidence in statement

        BoC stands pat and maintains interest rate unchanged at 1.25% as widely expected. The most important part of the statement is that “developments since April further reinforce Governing Council’s view that higher interest rates will be warranted to keep inflation near target.” This is more hawkish than generally expected and shows that BoC is rather confident to continue with tightening, even though the timing of the next hike is still uncertain.

        USD/CAD dives sharply after the release and should be heading back to 1.2728 support.

        Here is the full statement:

        Bank of Canada maintains overnight rate target at 1¼ per cent

        The Bank of Canada today maintained its target for the overnight rate at 1¼ per cent. The Bank Rate is correspondingly 1½ per cent and the deposit rate is 1 per cent.

        Global economic activity remains broadly on track with the Bank’s April Monetary Policy Report (MPR) forecast. Recent data point to some upside to the outlook for the US economy. At the same time, ongoing uncertainty about trade policies is dampening global business investment and stresses are developing in some emerging market economies. Global oil prices have been higher than assumed in April, in part reflecting geopolitical developments.

        Inflation in Canada has been close to the 2 per cent target and will likely be a bit higher in the near term than forecast in April, largely because of recent increases in gasoline prices. Core measures of inflation remain near 2 per cent, consistent with an economy operating close to potential. As usual, the Bank will look through the transitory impact of fluctuations in gasoline prices.

        In Canada, economic data since the April MPR have, on balance, supported the Bank’s outlook for growth around 2 per cent in the first half of 2018. Activity in the first quarter appears to have been a little stronger than projected. Exports of goods were more robust than forecast, and data on imports of machinery and equipment suggest continued recovery in investment. Housing resale activity has remained soft into the second quarter, as the housing market continues to adjust to new mortgage guidelines and higher borrowing rates. Going forward, solid labour income growth supports the expectation that housing activity will pick up and consumption will continue to contribute importantly to growth in 2018.

        Overall, developments since April further reinforce Governing Council’s view that higher interest rates will be warranted to keep inflation near target. Governing Council will take a gradual approach to policy adjustments, guided by incoming data. In particular, the Bank will continue to assess the economy’s sensitivity to interest rate movements and the evolution of economic capacity.

        Information note

        The next scheduled date for announcing the overnight rate target is July 11, 2018. The next full update of the Bank’s outlook for the economy and inflation, including risks to the projection, will be published in the MPR at the same time.

        Dollar gets no support as ADP employment missed expectation

          Dollar remains generally weak in early US session and receives no special support from a batch of mixed data.

          ADP report showed private sector jobs grew 178k in May, below expectation of 190k. Prior month’s figure was also revised down from 204k to 163k. Q1 GDP growth was revised down from 2.3% to 2.2% qoq. GDP price index was revised down from 2.0% to 1.9%. Wholesale inventories rose 0.0% versus expectation of 0.5% in April. Trade deficit narrowed slightly to USD -68.2B, from USD -68.3B.

          From Canada, IPPI rose 0.5% mom in April while RMPI rose 0.7% mom. Current account deficit widened to CAD -19.5B in Q1. Focus will turn to BoC rate decision.

          German CPI accelerated to 2.2%, unemployment rate hit record low

            Data from Eurozone are generally positive today. German CPI accelerated to 0.5% mom, 2.2% yoy in May, up from 0.0% mom, 1.6% yoy, and beat expectation of 0.3% mom, 1.9% yoy. Retail sales rose much more than expected by 2.3% mom in April versus consensus of 0.5% mom. Import price index rose 0.6%, below expectation of 0.7% mom.

            German unemployment dropped -11k in May. Unemployment rate dropped to 5.2%, hitting the lowest level on record since reunification in 1990. Labour Office head Detlef Scheele said in a statement that “unemployment and underemployment have decreased again, employment within the scope of the social security system keeps rising and labour demand is still high.” And, “the upward trend on the labour market is continuing, albeit at a slower pace than in the winter months.”

            Eurozone business climate rose to 1.45 in May, up from 1.39 and beat expectation of 1.30. Economic confidence dropped to 112.5, down from 112.7 but beat expectation of 112.0. Industrial confidence dropped to 16.8, down from 7.3 but met expectation. Services confidence dropped to 14.3, down from 14.7 but met expectation. Consumer confidence was finalized at 0.2.

            French GDP was the main disappointment as it’s revised down to 0.2% qoq in Q1, down from 0.3% qoq. But that’s considered the “past” already.

            For Q2, the set German data are rather robust and should ease much concerns of ECB policy makers, in particular the CPI figure.

            Into US session: Oversold Euro recovers broadly, markets won’t forget there are US trade tensions

              Euro is making a strong come back today as market digest recent sharp losses. EUR/USD breached 1.1639 minor resistance while EUR/JPY break 126.43. Both developments suggest temporary bottoming. Though, they’re far from reversing recent down trend. And, at the time of writing, German (0.369) and Italy (2.864) yield spread are still close to 250, which suggests much nervousness in the markets.

              Though, the news that 5-Star Movement is trying to find a point of compromise for economy minister is supporting sentiments. At least, they’re working on forming a government again. And while being highly critical, 5-Star has never committed themselves to leaving Euro. The news that anti-euro League is not interested, but is pushing for election again is also sentiment supportive. Additionally, Eurozone data released today are not bad.

              Yen and Dollar, on the other hand, are trading broadly lower. Yen weaken on rebound in German, UK and US yields. Meanwhile, Dollar is weak as markets won’t forget that the US is in trade tension with many other countries/regions, even its own allies. NAFTA talk is going nowhere and there is no positive news regarding trade talk with EU. The steel tariff temporary exemption is going to expire on Friday and retaliations from Canada, Mexico and the EU are waiting on the line. Trump also made an about turn and issued a strong statement regarding China yesterday, indicating very little intention to carry on with negotiation.

              For the week, Euro remains the weakest one, followed by Sterling. New Zealand Dollar and Japanese Yen are the strongest ones.

              5-Star is finding a point of compromise for economy minister

                Reuters reported that a source close to the anti-establishment 5-Star Movement that it’s trying to find “a point of compromise on another name” as economy minister. The rejection by President Sergio Mattarella on anti-euro Paolo Savona as economy minister triggered this week’s political turmoil. If 5-Star can find someone acceptable by pro-Euro Mattarella, with far-right League or not, there is a possibly of finally forming a government. And it should be recalled that Five Star leader Luigi Di Maio said they never sought to leave the Euro via facebook comments.

                Prime Minister-designate Carlo Cottarelli is currently the technocrat that’s supposed to lead the government until a new election. He also said that “new possibilities have emerged for the birth of a political government.” And, “these circumstances, also considering the market tensions, have caused me to wait for further developments.”

                On the other hand, League leader Matteo Salvini poured cold water on the notion and urged another election. He said, “the earlier we vote the better because it’s the best way to get out of this quagmire and confusion.”

                The development is another factor that’s calming the Euro today.

                Euro recovers on oversold condition, German-Italian spread narrows

                  Euro is attempting a recovery today but that’s mainly technical on oversold condition.

                  Italian 10 year yield dips to 2.946 earlier today but is back above 3.000 handle. It’s possibly trying to settle at around 3% before another move.

                  German 10 year bund yields hit as high as 0.338 and is now back at 0.322. It breached 0.2 handle earlier this week during bund buying climax.

                  Technically, 1.1639 in EUR/USD and 126.43 in EUR/JPY should be watched. Temporary bottoms are considered to be formed in both pairs until these minor resistance levels are breached. Otherwise, further decline is more likely than not.

                   

                  China warns to take resolute and forceful measures if Trump insists on being arbitrary and reckless

                    Chinese Foreign Ministry spokeswoman Hua Chunying responded to he strong US statement released yesterday. She said “We urge the United States to keep its promise, and meet China halfway in the spirit of the joint statement.”

                    In addition, Hua warned to take “resolute and forceful” measures to protect its interests if Trump insists on being “arbitrary and reckless” She added that “when it comes to international relations, every time a country does an about face and contradicts itself, it’s another blow to, and a squandering of, its reputation,”

                    OECD projects G20 2018 growth to be 4.0%

                      In the latest economic outlook report released today, OECD projects 2018-19 global growth to be at around 3.8% while G20 growth would be 4.0%. It noted in the release that “the global economy is experiencing stronger growth, driven by a rebound in trade, higher investment and buoyant job creation, and supported by very accommodative monetary policy and fiscal easing.”

                      However, OECD also warned of “significant risks posed by trade tensions, financial market vulnerabilities and rising oil prices loom large”. And it urged that “more needs to be done to secure a strong and resilient medium-term improvement in living standards.”

                      OECD Secretary-General Angel Gurria said that “the economic expansion is set to continue for the coming two years, and the short-term growth outlook is more favourable than it has been for many years.” However, “the current recovery is still being supported by very accommodative monetary policy, and increasingly by fiscal easing”. Hence, “strong, self-sustaining growth has not yet been attained.”

                      Below is a summary of OECD projections.

                      Full release here and OECD presentation here.

                      DIHK slashed 2018 German growth forecast to 2.2%

                        The Germany’s Chambers of Industry and Commerce (DIHK) lowered 2018 growth forecast for the country to 2.2%, sharply down from prior estimate of 2.7%.

                        It noted in a report that “companies are looking to their future business with a little less optimism than before… scepticism is growing with regard to international business.”

                        Swiss KOF dropped to 100, back at long term average

                          Swiss KOF economic barometer dropped to 100 in May, down from 103.3 and missed expectation of 104.7.

                          KOF noted that the Barometer is back at its “long-term average after over two years of above average values”. And that “indicates a normalization of economic development”.

                          The decline was “mainly driven by the negative development of the indicators for manufacturing and the construction sector.”

                          Full release here.

                          IMF welcome China’s decisive policy shift to high quality growth

                            IMF released a statement on the preliminary findings after Article IV mission to China. There IMF noted that China’s growth is expected to weaken only slightly to 6.6% in 2018. Growth would moderate gradually to around 5.5% by 2023.

                            IMF staff welcome the government’s strategy to “more decisively shift the policy focus from high-speed to high-quality growth”.

                            The goal would be “greatly helped by accelerating reforms in many areas, including de-emphasizing growth target, further reining in credit growth, boosting consumption, allowing market forces a more decisive role, deepening opening up and modernizing policy frameworks.”

                            Full release here.

                            Fed fund futures now pricing in only 40% chance of two hikes by September

                              With the global financial market rout continuing, the markets are fast to pare back pricing of Fed hikes. We’ve pointed that out in out latest weekly report already. And the situation worsen quickly this week.

                              Fed fund futures are now pricing in less than 80% chance of a June hike to 1.75-2.00%. And it was 100% just a week ago.

                              For another hike to 2.00-2.25% in September, fed fund futures are pricing in only 40% chance. And it was over 80% a week ago.

                              Now, it seems a total of four hikes this year is out of the question. And even a total of three is in doubt.

                              SNB Jordan: Situation in the currency markets remains fragile

                                SNB chairman Thomas Jordan said yesterday that “the development in recent days shows the situation in the currency markets remains fragile.”

                                And, “our monetary policy, with negative interest rates and the readiness to intervene in currency markets when necessary, takes this fragility into account.”

                                Canada PM Trudeau: No Nafta is better than a bad deal

                                  Canadian Prime Minister Justin Trudeau dismissed the threat of auto tariffs of the US as “negotiating tactic” for NAFTA. And emphasized that won’t push Canada to accept a bad deal. He added that “quite frankly that’s simply not something we’re going to do.” Trudeau also reiterated that “no Nafta is better than a bad deal” and “we are not going to move ahead just for the sake of moving ahead.”

                                  He also talked down the collapse of NAFTA negotiation and said “the interconnectedness between the Canadian and U.S. economies is not going to change any time soon” and “you can’t get around geography”. And, “we are their (the Americans’) number one customer and there is no question that any disruption of that flow of goods, yes, would be terrible for the Canadian economy but would also be pretty terrible for a lot of U.S. jobs.”

                                  Canadian Foreign Minister Chrystia Freeland is in Washington meeting with US Trade Representative Robert Lighthizer. She said there were “very productive discussions” but declined to give any details. Asked about the temporary exemption on steel tariffs that’s going to expire this week, Freeland said “our government always is very ready and very prepared to respond appropriately to every action. We are always prepared and ready to defend our workers and our industries.”

                                  Trump brought up the issue of border wall again yesterday and said Mexico “do absolutely nothing to stop people from going through Mexico, from Honduras and all these other countries … They do nothing to help us.” And he said “in the end, Mexico is going to pay for the wall.” Mexican President Enrique Pena Nieto responded in his tweet saying that “President @realDonaldTrump: NO. Mexico will NEVER pay for a wall. Not now, not ever. Sincerely, Mexico.”

                                  To recap, there are a few deadlines for NAFTA negotiations to complete. Firstly, the temporary exemption on US steel and aluminum tariffs will expire on June 1 and it’s uncertain what will happen. Mexico Presidential election is upcoming on July 1. Timing is running out, or has already run out, for the current Congress to approve the new NAFTA deal within this year. And less pressing, the US has started national security investigation on automobile imports that could lead to new tariffs.

                                  Trump’s White House issued strong statement on China, unexpected yet expected

                                    The White House issued strong worded statement regarding trade relationship with China today.

                                    From a fact sheet titled “President Donald J. Trump is Confronting China’s Unfair Trade Policies”, it’s said that “China has consistently taken advantage of the American economy with practices that undermine fair and reciprocal trade.”

                                    And it accused that “China has aggressively sought to obtain technology from American companies and undermine American innovation and creativity.”

                                    The statement noted that “President Trump has taken long overdue action to finally address the source of the problem, China’s unfair trade practices that hurt America’s workers and our innovative industries.” And, “President Trump has worked to defend America’s intellectual property and proprietary technology from theft and other threats.”

                                    Full statement here.

                                    Simultaneously, there’s another statement outlining the Steps to Protect Domestic Technology and Intellectual Property from China’s Discriminatory and Burdensome Trade Practices.

                                    The Chinese Ministry of Commerce responded in a statement that the US statements were unexpected yet expected. It said the today’s statement contradict the consensus reached in Washington not long ago. And the MOFCOM pledged that “China has confidence, ability, and experience to safeguard the interests of the Chinese people and the country’s core interests. China urges the United States to act in accordance with the spirit of the joint statement.”

                                    To us, yes, it’s unexpected yet expected.

                                    Recalling what European Council President Donald Tusk said, he accused the US of “capricious assertiveness”. And in his own words again:

                                    ECB Lautenschlaeger: First hike around mid 2019 not entirely out of ballpark

                                      ECB hawk Sabine Lautenschlaeger said that “June might be the month to decide once and for all to gradually end net asset purchases by the end of this year.” And, “a first hike around the middle of 2019 is not entirely out of the ballpark.”

                                      Despite recent soft batch of data, she emphasized that “we are seeing that the pace of growth has become more moderate, but we are not seeing a turning point”. And, “we remain confident in the strength of the economy.”

                                      Cottarelli didn’t present cabinet to president Mattarella, possibly going to straight to snap election

                                        To the market’s surprise (and actually that make sense), Italian Prime Minister designate Carlo Cottarelli didn’t present his cabinet to President Sergio Mattarella at the meeting today. The president’s spokesman Giovanni Grasso said that “the prime minister-designate met with the president and told him about the current situation. The two will meet again tomorrow morning.”

                                        It’s obvious that the caretaker government won’t have enough confidence vote. And in any case, an early election, possibly in August, is the likely outcome. So it actually makes sense for Cottarelli to go straight forward to snap election.

                                        Yen stays strong, DOW selloff instensifies

                                          Yen remains the strongest one today, followed by Swiss Franc as risk aversion dominate. Euro is suffering the worst selling as the eye of the storm lies in Italy. Australian and New Zealand Dollar follow as the weakest.

                                          DOW’s selloff accelerates notably today and it’s now down more than -1.6% at the time of writing. The development suggests that choppy recovery from 23344.52 could have completed at 25086.49. That’s somehow a disappointment as it cannot even tough 25800.35 resistance. But after all, our view is unchanged. That is price actions fro 26616.71 is a corrective pattern that’s still unfolding. It should at least have a take on 38.2% retracement of 15450.56 to 26616.71 at 22341.24 before completion. Now, 23344.52 support is the target for near term.