European Parliament Trade Committee approved EU-Japan trade deal, timely signal in support of open, fair, values-based and rules-based trade

    The European Parliament’s international trade committee voted 25-10 today to approve the EU-Japan trade deal signed back in July 17, 2018. The deal could now be sent to the full chamber for a vote in December plenary session. And, if it’s approved, the deal could enter into force as soon as the Japanese Diet ratifies it.

    In short, the EU-Japan trade deal will create a trade zone of 600m people, covering a third of of global GDP and around 40% of global trade. Eventually, the deal will remove almost all customs duties, worth roughly EUR 1B annually on European products and services exported to Japan.

    The European Parliament’s Trade Committee MEPs emphasized that the agreement “represents a timely signal in support of open, fair, values-based and rules-based trade, while promoting high standards, at a time of serious protectionist challenges to the international order”.

    Full European Parliament release here.

    Today’s top mover: GBP/CHF ready to resume rise from 1.2457

      GBP/CHF is so far the biggest mover for today. The race is actually quite tight with GBP/USD, GBP/JPY and NZD/CHF.

      Anyways, GBP/CHF’s rebound from 1.2755 accelerates further higher today and focus is now on 1.3115 resistance. Decisive break there will confirm resumption of whole rise from 1.2457. This will remain the favored case as long as 1.2964 minor support holds. Though, break of 1.2964 could prompt near term reversal.

      Prior break of 1.3049 support turned resistance suggests that whole decline from 1.3854 has completed at 1.2457. Such decline displayed a three wave corrective structure. The reversal also came after drawing support from 61.8% retracement of 1.1701 (2016 low) to 1.3854 (2018 high) at 1.2523. So overall, the fall from 1.3854 to 1.2457 should be a counter trend move. And, the current rise from 1.2457 is likely along the larger main trend. Hence, on decisive break of 1.3115, GBP/CHF should target 100% projection of 1.2457 to 1.3115 from 1.2755 at 1.3413 in near term.

      ISM non-manufacturing dropped to 60.3, strong growth despite a slight cooling off

        US ISM non-manufacturing dropped to 60.3 in October, down from 61.6 but beat expectation of 59.5. Employment index dropped -2.7 to 59.7. ISM noted the reading respresnets “continued growth in the non-manufacturing sector at a slower rate.”And, the sector “again reflected strong growth despite a slight cooling off after a record month in September”. However, there are “continued concerns about capacity, logistics and tariffs. ”

        Some quotes from the respondents:

        • “Tariffs are beginning to impact business. We ask our suppliers to hold pricing for six months, but we are experiencing difficulties.” (Construction)
        • “Wrapping up fiscal year budgets [and] seeing modest increases in volume and spend. Some price increases due to tariffs on computers/peripherals.” (Finance & Insurance)
        • “It has been very difficult to make decisions due to instability brought by the latest trading dispute. In this environment, clients tend to postpone capital-expenditure decisions.” (Mining)
        • “The promotional-products trade continues to stay strong going into the end of the year. This reflects the overall macroeconomics of how the economy is doing thus far. We have not yet begun to see the impacts on prices due to the additional tariffs against China. We anticipate that price increases may start to work into the supply chain early in the first quarter.” (Management of Companies & Support Services)

        Full release here.

        BoC Poloz: Normalization produced welcome recalibration in equity markets

          BoC Governor Stephen Poloz said today in speech that “after a decade of extraordinary effort by central banks to flood markets with liquidity, the global economy has reached the stage where stimulus can be steadily withdrawn.” And, investors are now “confronting two sided risks to inflation”, as central banks are “shifting” the risks back to the market, the ” long-standing trend toward lower bond yields seems to be over”. As a result, the turn produced a “recalibration in equity markets” which is “creating a more normal level of market volatility”. But he emphasized such developments “do not point to a gloomy economy outlook by any means”. And they are merely “welcome symptoms of normalization”.

          Poloz also emphasized that BoC must “attempt to weigh both the upside and downside risks and take a middle, risk-balanced path.” And he reiterated the bank’s stance on monetary policy. That is, given the growth and inflation outlook. BoC’s
          “policy rate will need to rise to a neutral stance to achieve our inflation target.” And BoC will continue to monitor the economy’s adjustments to higher interest rates to determine the pace of rate hikes.

          Poloz’s full speech, and video webcast.

          European update: Sterling strongest, shrugs off Brexit noises

            Sterling is so far the strongest today despite all the Brexit negative noises. It’s reported that EU is insisting on having an Irish backstop without time limit. On the other hand, UK Brexit Minister Dominic Raab pushing for a three-months expiry on the backstop. There are even reports saying that a no-deal Brexit would be most probable if no agreement would be made within a week. But the pound just shrugs them off and stays firm. New Zealand Dollar is following as the second strongest. Dollar and Canadian follow. Meanwhile, fresh selling is seen Swiss Franc just now, and it’s the weakest for today, followed by Euro. Yen follows together with Australian Dollar.

            Reactions to European data are rather muted. Eurozone Sentix Investor Confidence dropped to 8.8 in November, down from 11.4 and missed expectation of 9.9. Sentix noted that the zenith is clearly passed in Eurozone back in January. UK PMI services dropped to 52.2 in October. Markit said that brought “mounting evidence” of Brexit impact on the economy.

            Technically, whether Dollar could take extend late Friday’s rebound is a development to watch. For now, USD/JPY is staying below 113.38 temporary top. USD/CHF, in spite of today’s rebound, is staying well below 1.0094 (last week’s high). USD/CAD, is at middle of tight range of 1.3048/3170. EUR/GBP will also be a pair to watch as it’s heading back to 0.8722 near term support.

            In other markets, major European indices are slightly firmer:

            • FTSE is up 0.25%
            • DAX is up 0.16%
            • CAC is up 0.14%
            • German 10 year yield is up 0.0028 at 0.435
            • Italian 10 year yield is up 0.451 at 3.351. Spread stays below 300

            In Asia:

            • Nikkei closed down -1.55% at 21898.99
            • Hong Kong HSI closed down -2.08% at 25934.49
            • China Shanghai SSE closed down -0.41 at 2665.43
            • Singapore Strait Times closed down -1.790% at 3060.62
            • 10 year JGB yield rose 0.0015 to 0.131.

            Eurozone Sentix investor confidence dropped to 8.8, the zenith is clearly passed

              Eurozone Sentix Investor Confidence dropped to 8.8 in November, down from 11.4 and missed expectation of 9.9. Sentix noted “The problem areas in Europe and the global economy remain largely the same, which does not make it any better. Germany’s weakness is also weighing on the Euroland economy.” Also, “the Eurozone economy passed its zenith in January. Since then, economic expectations have reversed and since April they have been negative.”

              Sentix noted factors such as “US President’s trade policy”, “discussion about the future of the car industry in Germany”, the “weakness of the banking sector” and the “budget question in Italy” are contributing to the development. Additionally, there is an “increasing perception of inflation” as “investors expect inflation to continue to rise. Thus, “central banks can hardly deviate from their current course towards a more restrictive monetary policy, at least not only because of an economic slowdown.”

              Full release here.

              UK PMI services dropped to 52.2: Mounting evidence that Brexit worries weigh

                UK PMI services dropped to 52.2 in October, down from 53.9 and missed expectation of 53.4.

                Chris Williamson, Chief Business Economist at IHS Markit, which compiles the survey:

                “The disappointing service sector numbers bring mounting evidence that Brexit worries are taking an increasing toll on the economy. Combined with the manufacturing and construction surveys, the October services PMI points to the economy growing at a quarterly rate of just 0.2%, setting the scene for GDP growth to weaken sharply in the fourth quarter.

                “However, while it is not surprising to see that Brexit uncertainties are increasingly undermining business activity at this stage of the negotiations, the survey responses also suggest that the economy is facing other headwinds, including a broader global slowdown, trade wars, heightened geopolitical uncertainty and tightening financial market conditions.

                “It therefore remains unclear as to the extent to which Brexit worries are exacerbating or obfuscating a more broad-based slowing of the economy, which would have important implications for policymaking.”

                Full release here.

                Eurozone FMs to discuss Italy’s recipe for reviving growth

                  Italy’s budget will certainly be a hot topic in the summit of Eurozone finance minister meeting in Brussels today. It comes at time time after European Commission rejected the country’s 2019 budget, with deficit target at 2.4% of GDP. The Commission demand Italy to revise the plan by November 13, But Prime Minister Giuseppe Conte insisted there is no “Plan B” for the program and indicated no intention to comply with EU’s demand.

                  Italian Deputy Prime Minister Luigi Di Maio, leader of the 5 Star Movement, said over the weekend that the coalition government “will not cede an inch” on the budget. He also hailed that their own plan will become a “recipe” for reviving European growth.

                  China Caixin PMI composite dropped to 28-month low, mounting downward pressure on the economy

                    China Caixin PMI services dropped to 50.8 in October, down from 53.1 and missed expectation of 52.9. That’s the lowest level in 13 months.

                    PMI composite output index dropped from 51.2 to 50.5, hitting a 28-month low, lowest since June 2016.

                    Commenting on the China General Services PMI™ data, Dr. Zhengsheng Zhong, Director of Macroeconomic Analysis at CEBM Group said:

                    “The Caixin China General Services Business Activity Index slipped significantly to 50.8 in October from the previous month, marking its lowest level since September 2017. The subindex for new business dropped to its lowest point since November 2008, despite staying in expansionary territory, indicating an obviously weakening demand for services. The employment subindex returned to positive territory following a drop in the previous month. The subindex for prices charged by service providers also returned to positive territory, while the one for input costs dropped despite staying in positive territory, suggesting easing pressure on company profit margins. The subindex for business expectations, which gauges services providers’ confidence toward operation prospects over the next 12 months, edged down mildly.

                    “The Caixin China Composite Output Index dipped to 50.5 in October from the previous month, reaching its lowest level since June 2016, indicating mounting downward pressure on China’s economy. The subindex for new orders fell, pointing to softening overall demand conditions. The employment subindex edged up despite staying in negative territory, which could possibly be due to government efforts to stabilize the labor market. The subindex for input costs remained unchanged from the month before, while the one for output charges inched up, indicating easing pressure on company profit margins — though upward price pressure remained. The subindex for future output edged down, reflecting weakening confidence among companies.”

                    Full release here.

                    China Xi pledged unambitious USD 30T imports at CIIE

                      China is holding a week-long China International Import Expo, or CIIE, in Shanghai, starting today. President Xi Jinping said “CIIE is a major initiative by China to pro-actively open up its market to the world.” And, he noted “economic globalization is facing setbacks, multilateralism and the free trade system is under attack, factors of instability and uncertainty are numerous, and risks and obstacles are increasing.” That’s the usual rhetorics that China has been using to position itself as defender of free trade.

                      Nevertheless, Xi also pledged to cut import taxes further and spend more on foreign goods and services. He said China’s goods import will exceed USD 30T over the next 15 years. Meanwhile, Services import will exceed USD 10T. The figure on goods was somewhat raised from Xi’s prior promise of USD 24T. But the fact is, USD 30T over 15 years means only USD 2T per annum, which Chin has already nearly met back in 2013 and 2014. After a dip to USD 1.6T in 2016, import has already bounced back to USD 1.8T in 2017. So, Xi’s target is not that ambitious.

                      BoJ minutes: Need to explain thoroughly the intention to continue with powerful easing

                        BoJ released minutes of September 18-19 monetary policy meeting. The minutes reiterated that the measures taken back in July, including introduction of forward guidance, were for strengthening the framework for “continuous” powerful monetary easing. However, A few members noted some market participants still viewed BoJ’s intention as “unclear”. Thus, “it was important to continue to thoroughly explain that the measure was intended to make clearer the Bank’s policy stance that it would persistently continue with powerful monetary easing while taking into account its side effects.

                        One member also pointed out that allowing long term yields to move in a “more flexible manner” prompted “heightened” volatility in JGB market. And, since it’s only two months past that meeting, with small transactions volume of JGB in summer, “it was necessary to continue to carefully examine the effects on financial markets”.

                        BoJ Kuroda: It’s necessary to persistently continue with powerful monetary easing

                          BoJ Governor Haruhiko Kuroda delivered a speech to business leaders in Nagoya today. There he acknowledged that “the BOJ fully recognizes that, by continuing monetary easing, financial institutions’ strength will be cumulatively affected.” And, even though, “these risks are judged as not significant at this point”, he pledged to “scrutinize developments and encourage financial institutions to take action as necessary.”

                          US-China trade war is one of the risks surrounding Japan’s outlook. Kuroda said “the impact of such problems on Japan’s economy is limited for now … ut if the problems persist, the effect on Japan’s economy could become bigger”.

                          Overall, Kuroda reiterated that “it’s necessary to persistently continue with powerful monetary easing, while considering both the positive effects and side effects in a balanced manner.” But BoJ will “of course” exit ultra-easy monetary policy when the 2% price target is reached.

                          US NFP rose 250k, unemployment at 3.7%, average hourly earnings rose 0.2%, Dollar trying to recover

                            US non-farm payrolls rose 250k in October, above expectation of 200k. Prior month’s figure was revised down from 134k to 118k. Unemployment rate was unchanged at 3.7%, matched expectations. Average hourly earnings rose 0.2% mom in October, matched expectations. Also from US, trade deficit widened to USD -54.0B in September. Dollar is trying to recover after the release

                            From Canada, employment market grew 11.2k in October, below expectation of 25.0k. Unemployment rate dropped to 5.8%, below expectation of 5.9%. Trade deficit narrowed to CAD -0.4B but missed expectation of CAD 0.2B surplus.

                            Into US session: AUD strongest, USD and JPY weakest ahead of NFP

                              Entering into US session, Australian Dollar remains the strongest one for today on optimism that there would be break through in US-China relationship that would avert full-blown trade war. Swiss franc, though, overtook New Zealand’s position as the second strongest. As the financial markets are enjoying strong risk appetite, in particular in Asia, Yen is naturally the weakest one. Without support of trade war, Dollar’s selloff intensifies today. Focus will turn to non-farm payroll to be release within less than an hour.

                              The “positive” telephone call between Trump and Xi was the turning point this week. And both sides appear to sound positive and “nice” after that. US and China are now preparing the meeting of the two presidents as sideline of G20 summit in Argentina on Nov 30 – Dec 1. Ahead of that, it’s also reported that Trump asked his key cabinet secretaries to draw up a potential agreement to sign during the meeting, as cease-fire in escalating trade war. Multiple agencies are believed to be involved in drafting the plan.

                              In European markets, at the time of writing:

                              • FTSE is up 0.82%
                              • DAX is up 1.60%
                              • CAC is up 1.41%
                              • German 10 year yield is up 0.032 at 0.433.
                              • Italian 10 year yield is down -0.076 at 3.304. Spread continued to narrow.

                              Earlier in Asia:

                              • Nikkei rose 2.56% to 22423.66
                              • Hong Kong HSI rose 4.21% to 26486.35
                              • China Shanghai SSE rose 2.70% to 2676.48
                              • Singapore Strait Times rose 1.81% to 3116.39.
                              • USD/CNH is now at 6.8635, comparing to the near term top made yesterday at 6.9871

                              UK construction PMI rose to 53.2, but underlying data paints less rosy picture

                                UK PMI construction rose to 53.2 in October, up from 52.1 and beat expectation of 52.1. Markit noted “fastest growth in civil engineering since July 2017”. However, there was “slower rise in new projects at construction companies:” and “business optimism weakest in nearly six years”.

                                Trevor Balchin, Economics Director at IHS Markit, which compiles the survey:

                                “Although total UK construction activity rose at a stronger pace in October, the underlying survey data paint a less rosy picture for the sector towards the end of the year.

                                “New contracts increased at only a modest pace, and firms were the least optimistic regarding the 12-month outlook for nearly six years. Construction companies again linked uncertainty to Brexit negotiations, which influenced delays to final decisions at clients.

                                “Moreover, the higher total activity figure reflected the civil engineering sector, which saw a rebound following declines in August and September. Housing and commercial construction activity both rose more slowly in October, and at rates that remained below long-run survey averages.

                                “More positively, construction firms continued to raise headcounts at a strong pace, suggesting they are not expecting an imminent contraction in demand. That said, if the new orders and expectations indices remain at current levels or fall further, the employment index could also drift back towards the 50.0 no-change mark.”

                                Full release here.

                                Eurozone PMI manufacturing finalized at 52.0, risks shifting to the downside

                                  Eurozone PMI manufacturing was finalized at 52.0 in October, down from prior month’s 53.2. Markit noted “fall in order books as exports decline for the first time in nearly five-and-a-half years”. Also, “trade concerns push confidence down to lowest level since December 2012”.

                                  Among the countries, Italy PMI manufacturing dropped to contraction at 49.2, hit a 46-month low. France reading dropped to 51.2, a 25-month low. German reading dropped to 52.2, a 29-month low.

                                  Commenting on the final Manufacturing PMI data, Chris Williamson, Chief Business Economist at IHS Markit said:

                                  “Concerns about the Eurozone manufacturing sector intensified at the start of the fourth quarter. The headline PMI fell to its lowest since August 2016, signalling a further slowing in the rate of expansion. New orders fell into decline for the first time in almost four years as trade woes escalated. Export sales fell for the first time in over five years.

                                  “Moreover, the survey suggests that the manufacturing sector could contract in the fourth quarter unless the data revive in coming months. However, with backlogs of work falling for a second successive month, and business expectations sliding to the lowest for nearly six years, risks seem firmly tilted towards the downside heading towards the end of the year.

                                  “While there was some evidence that the autos sector acted as a drag again in October, with car makers struggling with new emission regulations, the manufacturing sector’s problems look broadbased. Growing risk aversion, linked in turn to worries about the global economic environment, trade war worries, political uncertainty and rising prices, appears to be hitting demand for a wide variety of goods. The steepest drop in output and orders was seen in the intermediate goods sector, which comprises suppliers of inputs to other manufacturers.

                                  “The combination of destocking, deteriorating order books and drop in business optimism will add to concerns that growth risks are shifting to the downside rather than being “broadly balanced”, as indicated by the ECB.”

                                  Full release here.

                                  Trump preparing draft ceasefire trade deal with China, HSI gained 4.21%, USD/CNH breaks 6.9

                                    Chinese and Hong Kong stocks soar to a strong close, while Chinese Yuan’s rebound also accelerates on more positive news on US-China trade war. The Chinese foreign ministry said today that the telephone conversation between Chinese President Xi Jinping and Trump was quite positive. And the ministry added two presidents believe they should enhance trade relations. Chinese media also said Trump supported “frequent, direct communications between the two presidents. And there will be joint effort to prepare for the Xi-Trump summit as sideline of G20 in Argentina on Nov 30 to Dec 1. On the other hand, it’s reported that Trump has asked key cabinet secretaries to draw up a potential agreement to sign during the meeting, as ceasfire in escalating trade war. Multiple agencies are believed to be involved in drafting the plan.

                                    Hong Kong HSI closed up 1070.35 pts, or 4.21% at 26486.35. It now looks like this week’s low at 24540.63 is a medium term bottom. And, there should be more upside in near term, at least to correct the medium term down trend from 33484.07.

                                    USD/CNH (off shore Yuan)’s fall also extends through 6.8 handle today. It’s also likely that 6.9804 is a medium term top. And break of 55 day EMA should at least send USD/CNH to test 6.7817 support.

                                    Chinese Yuan rebounds strongly on US-China trade talk progress

                                      US and Asian stocks are boosted up on hope of resolution in US-China trade tensions. Trump tweeted yesterday that the had “long and very good” conversation with Chinese President Xi Jinping, with “heavy emphasis on trade”. He added the “discussions are moving along nicely” and meeting is being scheduled at the G20 summit in Argentina.

                                      Separately, Xi said on CCTW state television that “the two countries’ trade teams should strengthen contact and conduct consultations on issues of concern to both sides, and promote a plan that both can accept to reach a consensus on the China-U.S. trade issue.”

                                      Chinese Premier Li Keqiang also said yesterday that “we do hope that China and the United States will meet each other halfway and work together in the spirit of mutual respect and equality.”

                                      The response in Chinese Yuan was overwhelming. USD/CNH (offshore Yuan), hit as high as 6.9804 this week but it’s now back at 6.9269. And for now, hope is raised for China to defend 7.000 handle for the Yuan.

                                      EU floats compromised Irish backstop solution for Brexit

                                        The Financial Times reported that EU is floating around a compromised Irish border backstop proposal to solve the ongoing Brexit negotiation impasse. The proposal was briefed to EU ambassadors earlier on Wednesday.

                                        Under the proposal, EU would lay out the full terms of a “bare-bones” whole-UK customs union in the withdrawal agreement. It would apply a common external tariff on imports from outside the EU and rules of original. Meanwhile, under the backstop, Northern Ireland would remain in a deep customs union with the EU, applying all “customs code” and following EU’s regulations for goods and agri-food products. The stop-gap measures would remain in place until concluding the permanent UK-EU trade deal.

                                        UK Prime Minister Theresa May is expected to tell the EU whether UK is open to the compromise next week. And that would be a key factor to determine if a November Brexit summit is to be held.

                                        Japan PM Abe: Won’t proceed with sales tax hike if there’s global crisis

                                          Japanese Prime Minister Shinzo Abe appeared to be backing down on his stance regarding the planned sales tax hike next year. For now, he’s still on track to raise sales tax from 8% to 10% in October 2019. He also pledged to mitigate any impact on the economy by providing counter measures.

                                          However, he told parliament that “Our basic stance is that we will proceed with the sales tax hike. But it’s wrong to be too rigid about this and raise the tax rate no matter what.” And, “we will proceed with the tax hike unless the economy is hit by a shock of the scale of the collapse of Lehman Brothers”, which “would be something like a global economic crisis or a huge earthquake.”