Canada: Wholesale trade, May 2018

Wholesale sales rose 1.2% to a record $63.7 billion in May. Sales were up in four of seven subsectors, representing approximately 50% of total wholesale sales.

The miscellaneous, building material and supplies, and farm product subsectors contributed the most to the gains in May, while the motor vehicle and parts subsector posted the largest decline.

In volume terms, wholesale sales increased 1.3%.

Sales increase in four of seven subsectors, led by the miscellaneous and the building material and supplies subsectors

In dollar terms, the miscellaneous subsector reported the largest increase in May, as sales rose 7.8% to $8.3 billion. Sales were up in four of five industries, led by the agricultural supplies industry (+25.6%) following a 5.4% decline in April. In volume terms, the agricultural supplies industry increased 27.4%.

Sales in the building material and supplies subsector rose 5.0% to $9.7 billion as all industries posted gains in May. Much of May’s increase was attributable to higher sales in the lumber, millwork, hardware and other building supplies industry, up 7.3% to $4.9 billion. This was the third consecutive increase for the industry and the highest sales level since July 2017. In volume terms, the industry increased 6.8%, indicating that the gain in the current dollar series was partly price driven. In May, international merchandise trade reported gains in both imports and exports of building and packaging materials.

Following a 17.5% decline in April, the farm product subsector rebounded in May, up 25.5% to $859 million. This was the third increase in four months and the highest level since November 2017. A 28.5% increase in volume terms signifies that price changes had no impact on the growth seen in the current dollar series. Exports of farm and fishing products increased in May.

The motor vehicle and supplies subsector recorded the largest decline in dollar terms in May, down 2.5% to $11.1 billion. This was the second consecutive monthly decline and the fifth drop in six months, bringing the subsector to its lowest level since December 2016. The sole contributor to the decrease was the motor vehicle industry, down 3.7% to $8.9 billion. Imports and exports of passenger cars and light trucks as well as manufacturing sales of motor vehicles declined in May.

Sales increase in eight provinces

Sales were up in eight provinces in May, accounting for 49% of total wholesale sales in Canada. Higher sales in the western provinces led the gains. In dollar terms, Alberta contributed the most to the increase, more than offsetting the decline reported in Ontario.

Alberta reported its fifth increase in six months, with sales rising 6.7% to $7.3 billion, their highest level on record. Sales were up in six subsectors, led by the miscellaneous subsector (+26.7%). The agricultural supplies industry within the miscellaneous subsector contributed the most to the gains.

Sales in Saskatchewan increased for the third consecutive month, up 9.8% to $2.3 billion—the highest level since December 2016. The miscellaneous subsector (+17.2%) led the gains, with the agricultural supplies industry contributing the most to the increase.

In British Columbia, sales grew 1.9% to $6.7 billion, its third consecutive gain. The gains were led by the machinery, equipment and supplies subsector (+11.4%), more than offsetting the 10.2% decline in April.

Sales in Nova Scotia rose 9.0% to $962.3 million, driven by gains in the food, beverage and tobacco subsector (+38.8%).

Ontario posted its second consecutive monthly decline in May, down 0.9% to $32.1 billion. The motor vehicle and parts (-4.6%) and the food, beverage and tobacco (-6.5%) subsectors led the decrease. The motor vehicle and parts subsector was down for the second consecutive month, while the food, beverage and tobacco subsector declined for the second time in four months.

Wholesale inventories increase for the second consecutive month

Wholesale inventories rose for the second consecutive month, up 1.4% to a record $84.0 billion in May. Five of seven subsectors posted increases, representing 90% of total wholesale inventories.

In dollar terms, the machinery, equipment and supplies subsector (+1.6%) posted the largest gain, following a 0.3% decline in April. Three of four industries increased, with the other machinery, equipment and supplies industry contributing the most to the upturn.

Inventories grew 2.7% in the miscellaneous subsector, a third consecutive monthly gain. Increases were reported by all five industries and were led by increased stock in the other miscellaneous industry (+4.0%).

The building material and supplies subsector (+2.0%) rose for the third consecutive month, on the strength of higher inventories in the metal service centres (+3.8%) and the lumber, millwork, hardware and other building supplies (+1.6%) industries.

Higher inventories in the motor vehicle and parts subsector (+2.0%) were led by increased stock in the motor vehicle industry (+2.9%).

The inventory-to-sales ratio increased from 1.31 in April to 1.32 in May. This ratio is a measure of the time in months required to exhaust inventories if sales were to remain at their current level.

StatsCanada

Trade and currency wars a market threat

Monday July 23: Five things the markets are talking about

A new week starts with equities under pressure as capital markets digest warnings from G20 finance ministers about the impact of protectionism on growth – “risks to the world economy have increased.”

Also raising concerns is the Sino-U.S trade war is now spilling over into currency markets with President Trump rhetoric supporting the U.S administration preference for lower U.S dollar interest rates and a weaker currency.

Elsewhere, the yen (¥111.00) has found support while JGB’s slid on speculation about Bank of Japan’s (BoJ) stimulus. Crude prices trade a tad softer amid concern the escalating trade rows will destabilize energy demand.

On tap: an E.U Trade Commission is due to arrive stateside this week for trade talks. Expect some tough questions, demands and their own list of retaliatory measures in response to proposed U.S tariffs. The highlight of the week should be Thursday’s European Central Bank (ECB) monetary policy meeting.

1. Stocks start the week under pressure

Japan’s Nikkei fell to a ten-day low overnight, with exporters under pressure by the yen’s (¥111.00) rally and by market speculation that the Bank of Japan (BoJ) could wind back its exchange-traded fund purchases. The Nikkei ended the day down -1.33%.

Note: The market is speculating that the BoJ could debate changes in its monetary policy at its upcoming meeting, with potential tweaks to its interest rate targets and stock-buying techniques on the table.

Down-under, Aussie shares fell on President Trump’s threat to impose tariffs on all Chinese imports. The S&P/ASX 200 index declined -0.9% at the close of trade. The benchmark gained +0.4% on Friday. In S. Korea, it was a similar story. The Kospi fell about -1% overnight following Trump’s comments about tariff’s and the currency last week.

In China, stocks rallied on Monday, aided by strength in financials and industrial stocks, but a slump in healthcare shares capped the broader gains. The blue-chip CSI300 index rose +0.9% while the Shanghai Composite Index ended up +1.1%.

In Hong Kong, it was a similar story. Stocks rose slightly overnight, as declines in tech and consumer shares were offset by strength in financials. The Hang Seng index rose +0.1%, while the China Enterprises Index gained +0.5%.

In Europe, regional bourses are trading mostly lower across the board, following a mixed session in Asia. The Italian FTSE MIB is in focus following weakness in shares of Fiat and Ferrari after the stepping down of its CEO Sergio Marchionne due to health.

U.S stocks are set to open in the ‘red’ (-0.1%).

Indices: Stoxx600 -0.1% at 385.1, FTSE -0.4% at 7651, DAX -0.1% at 12549, CAC-40 -0.3% at 5382, IBEX-35 +0.2% at 9743, FTSE MIB -0.1% at 21,775, SMI -0.5% at 8947, S&P 500 Futures -0.1%

2. Oil steady after G20 warns of risks to growth, gold higher

Oil prices have stabilized as worries over production losses were outweighed by concerns that trade disputes would reduce economic growth and hit global energy demand.

Benchmark Brent crude oil is up +15c at +$73.22 a barrel, while U.S light crude is unchanged at +$68.26.

G20 Finance ministers over the weekend called for more dialogue to prevent trade and geopolitical tensions from hurting growth as “downside risks over the short and medium term have increased.”

Note: Baker Hughes data on Friday showed that U.S energy companies last week cut the number of oil rigs by the most since March following recent declines in oil prices. Drillers cut five oilrigs in the week to July 20, bringing the count down to 858.

Ahead of the U.S open, gold prices are steady atop of a one-week high as the dollar eased to a two week low after President Trump criticised the Fed’s interest rate tightening policy. Spot gold holds steady at +$1,231 an ounce. U.S gold futures for August delivery are nearly unchanged at +$1,231 an ounce.

3. Japan yields in focus

JGB’s have sold-off along the curve on reports late Friday that the BoJ might consider changes to interest rate targets. The market is speculating that the BoJ might be willing to let 10-year JGB yields (+0%) rise to some degree including a possible hike of the target level. Overnight, JGB 2-, 10- and 30-year yields were higher (+1.8, +4.5, and +8.0 bps respectively).

BoJ officials said to be looking for ways to keep stimulus program sustainable while reducing the harm it causes to markets and bank profits.

Note: The BoJ stepped in to buy unlimited bonds at a fixed rate of +0.11%, to cap the move.

On tap for this week: The ECB monetary policy meeting is on Thursday, no policy stance expected, but the market is looking for clarification on their first potential rate hike.

Elsewhere, the yield on 10-year Treasuries gained less +1 bps to +2.90%, the highest in more than a month, while in the U.K; the 10-year Gilt yield advanced +1 bps to +1.232%.

4. Dollar under pressure from Trump rhetoric

The ‘mighty’ USD maintains its softer tone after President Trump criticized the Fed for raising interest rates and suggested the USD was too strong.

Aside from currency Twitter rants, the markets focus this week will be on the ECB rate decision and press conference on Thursday. Consensus is ‘not’ anticipating any policy change in the short to medium term, however, the markets will be on the lookout for any clarification on the first potential rate hike. The EUR/USD is still flipping alternately between moves towards €1.16 and over €1.17 in response to news on the trade row, given the lack of clear direction.

GBP (£1.3124) continues to remain vulnerable to “headline risk,” but consensus believes a lot of negativity seems to be already priced. With parliament in recess, sterling has the potential to stage a modest retracement from its current area.

5. G20 communiqué

In their final communiqué yesterday from their meeting in Argentina, finance ministers and central bankers from the G20 economies said, “Heightened trade and geopolitical tensions pose an increased risk to global growth” and called for greater dialogue.

“Global growth remains robust and unemployment is at a decade low. However, growth has become less synchronised recently, and downside risks over the sort and medium term have increased,” said the communiqué.

Forex heatmap

Canada: Retail trade, May 2018

Retail sales increased 2.0% in May to $50.8 billion, following a 0.9% decline in April. Sales rose in 8 of 11 subsectors, representing 70% of retail trade.

Higher sales at motor vehicle and parts dealers and at gasoline stations were the main contributors to the gain in May. Excluding these two subsectors, retail sales were up 0.9%.

After removing the effects of price changes, retail sales in volume terms increased 2.0%.

Sales rebound in several subsectors

Sales at motor vehicle and parts dealers (+3.7%) made almost a full rebound following a 3.8% decline in April, which had unseasonably cool temperatures and inclement weather in many parts of the country.

Receipts at gasoline stations (+4.3%) were up for the second month in a row, partially reflecting higher prices at the pump. Sales in volume terms at gasoline stations rose 2.7%.

General merchandise stores (+3.2%), building material and garden equipment and supplies dealers (+5.4%) and clothing and clothing accessories stores (+2.8%) also contributed to the gain. Increases in each of these subsectors more than offset the declines that had been reported in April.

Food and beverage stores (-2.1%) posted a sales decline for the fourth time in five months. The decrease in May was primarily due to lower sales at supermarkets and other grocery stores (-3.1%).

According to the Retail Commodity Survey, 20.6% of food sales took place at general merchandise stores in the first quarter of 2018 compared with 19.1% in 2017. During the same period, 75.1% of food sales came from the food and beverage stores subsector, down from 76.5% in 2017.

Higher sales in seven provinces, led by Ontario and Quebec

Seven provinces reported higher sales in May, with Ontario and Quebec more than offsetting their declines from April.

Sales in Ontario (+2.6%) increased for the fourth time in five months. Higher sales at motor vehicle and parts dealers accounted for the majority of the increase in May. Sales in the Toronto census metropolitan area (CMA) were up 1.4%.

In Quebec, sales increased 3.0%, following a 2.6% decline in April. Sales were up 1.4% in the Montréal CMA.

E-commerce sales by Canadian retailers

The figures in this section are based on unadjusted (that is, not seasonally adjusted) estimates.

On an unadjusted basis, retail e-commerce sales totalled $1.4 billion, representing 2.5% of total retail trade. On a year-over-year basis, retail e-commerce rose 16.9%, while total unadjusted sales increased 5.5%.

StatsCanada

Canada: ADP National Employment Falls

Employment in Canada decreased by 10,500 jobs from May to June according to the June ADP® Canada National Employment Report. Broadly distributed to the public each month, free of charge, the ADP Canada National Employment Report is produced by the ADP Research Institute®. The report, which is derived from actual ADP payroll data, measures the change in total nonfarm payroll employment each month on a seasonally-adjusted basis.

Industry Snapshot:

– Goods Producing:

Manufacturing 1,800
Construction -5,600
Natural Resources and Mining 1,300

– Service Providing:

Trade/Transportation and Utilities -7,900
Information -2,400
Finance/Real Estate -4,300
Professional/Business Services 3,200
– Professional/Technical 2,400
– Management of Companies -800
– Administrative and Support 1,600
Education & Health Care 1,600
– Educational Services 3,900
– Health Care -2,300
Leisure and Hospitality 2,300
Other Services2 -500

“We saw a significant dip in job growth in Canada for the month of June,” said Ahu Yildirmaz, vice president and co-head of the ADP Research Institute. “This decline likely reflects the impact of regulations on mortgage financing and a slowdown in consumer spending.”

The May total of jobs added was revised up from 2,900 to 27,800.

The July 2018 ADP Canada National Employment Report will be released at 8:30a.m.ET on August 16, 2018.

Newswire

Fed Powell advances the dollar

Wednesday July 18: Five things the markets are talking about

U.S assets get another leg up from rookie Fed Chair Jerome Powell who again expressed optimism over the U.S’s economic growth and stable inflation, telling Congress yesterday that domestic data should keep the central bank on track to raise “gradually” short-term interest rates. However, as per usual, there was a disclaimer – it was too soon to say if trade disputes might interfere with his plans.

To date, the Fed has refrained from commenting on trade policy, saying it is outside of their remit, yet Powell did caution that “open economies have fared better than closed ones.”

Elsewhere, commodity prices continue their decent, dragged down mostly by crude prices, which are off another -1% on a surprise U.S. crude stockpile report, while the ‘big’ dollar is outperforming its G10 currency pairs, with many EM currency pairs trading atop their multi-year lows outright.

In fixed income, Treasury yields have backed up along with most European bonds. Global equities have had a mixed overnight session.

On tap: Fed Chair Powell will testify for a second day on the hill today (10:00 am EDT).

1. Stocks mixed results

In Japan, the Nikkei share average advanced to a one-month high overnight as exporters – in particular, the auto sector – found support after the dollar hit a six-month high against the yen (¥113.04). The Nikkei gained +0.4%, as too did the broader Topix.

Down-under, Aussie stocks rallied after four consecutive session losses in the past six sessions, supported by one of the country’s biggest companies by market cap. The S&P/ASX 200 rallied +0.7% as BHP Billiton jumped +3.3% following an upbeat production update. In S. Korea, stocks slid to session lows in some heavy trading. After jumping as much as +0.9% on the open, the Kospi finished down -0.3%, recording its third-straight drop.

In Hong Kong and China, stocks came under renewed pressure from a weaker yuan, which has reduced appetite. In Hong Kong, the Hang Seng index fell -0.2%, while the China Enterprises Index lost -0.1%, while in China, the blue-chip CSI300 index fell -0.5%, while the Shanghai Composite Index lost -0.4%.

Note: Overnight, China’s yuan hit a two-week low outright, breaching the key ¥6.700 level – a rising dollar raises concerns of further capital outflows.

In Europe, regional bourses have opened slightly lower and are trading sideways. The financial sector remains the best performer in muted volatility, while tech stocks are underperforming.

U.S stocks are set to open ‘flat.’

Indices: Stoxx50 -0.2% at 3,446, FTSE +0.1% at 7,608, DAX flat at 12,562, CAC-40 flat at 5,412; IBEX-35 flat at 9,714, FTSE MIB +0.4% at 21,906, SMI -0.4% at 8,812, S&P 500 Futures flat.

2. Oil prices fall on rise in U.S stocks, gold lower

Oil prices again have come under renewed pressure after yesterday’s data reveal a rise in U.S crude inventories last week, defying markets expectations for a “big drop,” while concerns about weak demand again have resurfaced.

Brent crude oil is down -60c at +$71.56 a barrel – the benchmark hit a three-month low yesterday – while U.S light crude is down -50c at +$67.58, not far off Tuesday’s one-month low of $+67.03 per barrel.

Expect today’s price action to largely depend on what the EIA release comes in at. Yesterday’s API data showed an unexpected rise of more than +600K barrels in national crude inventories. For today, the market is forecasting a decline of -3.6M barrels in U.S crude stocks for the week through July 13 (10:30 am EDT).

Also putting pressure on energy prices for the past month is Saudi Arabia and other OPEC members agreeing to increased production, while investors have also begun to worry about the impact on global economic growth and energy demand of the escalating Sino-US trade dispute.

Ahead of the U.S open, gold prices have slipped to a new 12-month low as the ‘big’ dollar firms after Fed Chairman Powell’s U.S economic outlook reinforced the markets views that the central bank is on track to “steadily” hike interest rates. Spot gold is down -0.2% at +$1,224.16 an ounce. U.S gold futures for August delivery are -0.2% lower at +$1,224.30 an ounce.

3. Sovereign yields on the move

In Europe, investor uncertainty over global growth is compressing German 10-year yields, and the hunt for yield then sees demand spill over to other debt further out the curve. The gap between German 10- and 30-year Bund yields are at its narrowest in over five-weeks at +67 bps.

In the U.S, the Fed Chair Powell indicating an “unsurprising” preference for a continued steady rise in interest rates is inevitably flattening the U.S government yield curve. The spread between the two-year and 10-year Treasury bonds is narrowing and is last at +24.7 bps.

The yield on 10-year Treasuries has climbed +1 bps to +2.87%, the highest in more than two weeks. In Germany, the 10-year Bund yield has gained less than +1 bps to +0.35%, while in the U.K; the 10-year Gilt yield has rallied less than +1 bps to +1.258%.

4. Dollar goes from strength to strength

The mighty U.S dollar is holding onto its recent gains in the aftermath of Fed chair Powell’s testimony yesterday. With the Fed chair reiterating that interest rates would continue to increase gradually again supports interest rate differentials trading strategies.

Note: Euro and U.K inflation data this morning remained underwhelming (see below).

EUR/USD is a tad softer by approx. -0.3% at €1.1622, while weaker-than-expected U.K inflation data for June sent sterling to multi-month lows against the dollar and the euro.

GBP/USD has fallen to a 10-month low of £1.3010 and EUR/GBP has rallied to a four-month high of €0.8923. Also, Brexit concerns continued to weigh upon the pound as PM May’s government again survived a recent Brexit amendment vote by a “slim” margin.

Note: U.K’s June CPI was the key focus with prospects of an August rate hike in the balance. Odds for a hike have diminished a tad, now down to +72%.

5. U.K inflation steady in June

Data this morning showed that annual inflation in the U.K. held steady last month, as summer-clothing sales offset a rise in petrol prices.

As reported from the ONS, consumer prices rose +2.4% on the year and keeps annual price-growth in excess of the Bank of England’s (BoE) +2% target.

Today’s data should keep the BoE in line to hike again next month – only politics and trade disputes could derail Governor Carney’s agenda.

Digging deeper, the data shows that prices charged by companies at the factory gate accelerated in June, gaining +3.1% on year compared with an annual rise of +3% a month earlier, in a sign that inflationary pressures are building. Raw material costs jumped +10.2% on year according to the ONS.

Note: U.K policy makers have said they expect to raise borrowing costs three or more times during the next few years to bring inflation back to their goal.

Forex heatmap

Dog Days of Summer ? (OANDA Trading Podcast Money FM 89.3)

Stephen Innes Head of Trading at OANDA APAC tells Michael Switow what oil, the RMB, gold and Netflix have in common. And the rest of the market movers

 

Money FM 89.3

 

 

Monday blues or Dog days of summer

Monday blues or Dog days of summer

Whether a case of the Monday blues, the Dog Days of summer setting in or a combination of both, markets struggled for direction despite upbeat US economic data while quarterly earnings have failed to inspire investors. And we might chalk it up to a typical summer afternoon NY trading session.

Event-wise, apart from the Tump/Putin headline which managed to supplant China-US trade headlines, there has been very little news worth to report as the markets hardly budged on the positive US retail sales print and remained in stasis during the Empire survey. And  Sterling barely blinked after UK PM May scraped through a Customs Union amendment by 305 votes to 302. However, with May yet again snatching victory from the jaws of defeat, it should provide a reasonable underpin for the Pound over the near term although this morning activity has been remarkably muted

US markets
Wall Street opened with a misfire. Investor expectations were running at peak optimism, and while banks stocks looked favourable, sentiment turned sour, as oil price worries intensified.

Then the thud that was heard up and down wall street as Netflix fell off a cliff in late trading after posting dispiriting subscriber growth last quarter. Indeed, with one of the markets key highfliers going into the tank, it could be a tough 24 hours for FANG stocks. FANGS ‘s have been the undisputed heavyweight champions of the equity world, and pretty much impervious to risk off and trade wars. But when you start looking under the hood and strip away a couple of FANG outperformers, US equity markets aren’t all that cheery. This negative Netflix result could spur more moves into to cash as investors may finally adopt a delayed sell in May and go away strategy.

Oil markets

Oil markets

Oil markets are slip sliding away under renewed selling pressure from long liquidation as bearish sentiment grows thick k with the US  actively considering tapping the Strategic Petroleum Reserve, the chatter of increased Russian oil production after Putin extends the US an olive branch to add more barrels, while the US considers waivers on Iranian sanctions. The sweeping slew of bearish signals has wholly eroded market sentiment with Brent Crude breaking bad now trading below May 2018  lows.

Also, with the market ignoring bullish indicators, specifically the latest production outage in Libya, where the 290,000 bpd Sharara oil field is reducing output due to an act of terrorism.  It calls attention to just how big of a shift market sentiment has undergone since last Wednesday’s high-volume meltdown.

Gold markets

Bearish sentiment continues to engulf the precious metal space after a break of the fundamental $ 1,240 support level overnight while breaching multi-year trendlines. Markets are becoming more e convinced about a strengthening dollar, which will unquestionably act as a most significant headwind and could continue to pressure gold lower as safe-haven demand remains muted.

In fact, the dollar slipped lower in modest price action, yet gold still fell below critical support. Ignoring even the slightest bullish indicator is an unfortunate sign and suggests we could push significantly lower when the USD moves out of its current melancholic state and starts to reassert its presence.

Currency Markets

The USD eased lower for the third consecutive day as trade war headline decreased and some of last week’s froth give way to position neutrality. But we’ve been in this back and forth momentum on the USD since the beginning of June. Whenever the USD picks up steam, everyone boards the rally bus only to get whipped sawed by a brutal correction. But as we move into the dog days of summer, expect volumes to taper but volatility to remain elevated given considerable headline risk. But overall. caution prevails

When markets turn directionless, it’s time to revert into the interest rate matrix for clarity which suggests the USD has more gas in the tank than say the EUR, JPY or the AUD.

GBP: In general, I think everyone likes GBP higher. Therefore, the crowded trade phenomena make correction even more brutal. Again, back to basics. Assuming Brexit risk remains contained (big headline risk assumption) and with the surprisingly hawkish shift from Cunliffe, the BOE’s standing dove, a rate hike in August is all but inevitable GBP should remain in favour.

JPY: Equity momentum has waned this week but increasing JPY outflows to suggest we may only be in the early stages of this move higher in USDJPY. With US yields ticking higher, the fundamental differential argument remains intact.

AUD: Shorts should continue to lead the way, China remains a significant risk despite some favourable commodity forecast based on positive what if scenarios. i.e. what if Trade war abates

MYR: There was a regional sigh of relief after China GDP matched market expectations. While of course taking the data print at face value, the markets are reading this as more or fewer things are not as bad as they could have been. But there is little to get excited about a slowing economy in my views.

With no  “risk on catalysts”, the MYR will take cues from the RMB complex as the local markets will wait for Wednesday  Malaysia CPI data. The data will be of interest given the BNM neutral stance from last week. But the market does think the zero GST effects will likely see inflation drop to the 1.7 %level which will not change markets view that BNM stays on hold for some time. Suggesting the MYR will get little support from interest rate differentials for the foreseeable future.

Also, the bearish sentiment in the oil markets continues to permeate every nook and cranny which should skew negative for MYR sentiment today.

Trade ,earnings ,teapots and the US dollar

Trade, earnings, teapots and the US dollar

Strong domestic growth and on-target core inflation continue to suggest the US economy is in that happy place,  but this week’s US economic data will begin to shape market expectations for Q2.

And equally significant will be Fed Chair Powell’s semi-annual monetary policy testimony before the Senate Banking (Tuesday) and House Financial Services (Wednesday) Committees. We should expect Powell testimony to reflect the minutes of the June 13 meeting broadly. But members did note the increased risk to their base economic outlook from trade wars, but since then, President Trump has tabled a review of tariffs on $200billion of additional goods from China. But of course, this escalation was widely telegraphed by the Trump administration, which suggests the FOMC trade concerns were based on the 200 billion in trade war escalation anyway.

However, the new tariffs would not be put in place before the end of August and could be even further kicked down the road as the US and China seek to a secure a lasting bilateral trade based on freer and fairer policy.

But, should the US eventually move ahead with these tariffs, China could not escalate on an even basis given China only imports roughly 130 billion annually from the US suggesting they would either need to levy higher trade tariffs on a small number of selected products or take the least attractive measure of tactically weakening the Yuan. Hence the lack of immediate response from China, as administrators will be ultra-careful not to send the wrong signal triggering another market melt in China.

One does get the sense that investors believe this latest threat from Trump will bring back both parties to the negotiating table and yield some form of compromise.

Economic Union ( EU) chiefs Jean-Claude Juncker and Donald Tusk will take their anti-Trump trade roadshow to China and Japan hoping to preserve some semblance of free trade world order. And as opposed to Trumps fire and fury style of negotiation, there’s excepted to be fewer fireworks although the EU leader will press China for free access to China markets while discussing Chinas propensity to dump cheap steel on EU markets.

But absent continued headline risk from trade war this week, desk noise should be a few decibels lower, but it will be far from a walk in the park, with the Trump-Putin still tentatively set for Monday despite Friday “coincidental” set of indictments of 12 Russian military intelligence in Mueller gate. While this isn’t great news for the US-Russian relations unless the citations reveal an actual smoking gun,  don’t expect too much to be focused on this despite the abundance of partisan political posturing.

US markets

What trade war? It is clear as a bell the US economy is on fire. Soaring business confidence and corporate tax cuts are fuelling surging company profits, but more significantly for the prolonged effect, Americans are returning to the works force end masse.

So, despite all the trade war bluster, US markets continue to grind higher, even with numerous trade headwinds. Indeed, the only thing unlucky about Friday the 13th was for equity market bears.

But earnings season is always a bit of a wildcard, and with investors hoping for a  contiued buying binges. They could be a bit disappointed given that sentiment continues to run at peak optimism, even more so, if markets start dialling in more trade war pessimism to the calculus.

Indeed, this week’s key US economic data will be so crucial in shaping investor expectations for Q2, especially around the retail sales data.

Among the companies due to report are Bank of America, Goldman Sachs, Johnson & Johnson, Morgan Stanley and Microsoft.

Oil markets

The oil market consolidated into the weekend as traders were still rehashing the myriad of developments which saw prices head sharply lower last week. The reported increase in Libyan crude oil production was perhaps the most significant fundamental eye-opener of the week, but then Russian Energy Minister Alexander Novak chimed in about a possible supply increase and then stated Russia might swap goods for Iranian oil, a move that would severely dent the impact of US sanctions.

Also, the decline in China’s crude oil imports for June raised a few eyebrows on Friday and did weigh negatively on the demand side of the equation. But given that  China crude import numbers are highly volatile, the markets tend to sidestep a one-off print. But looking under the hood, Chinas crude imports fell -12.04% month on month to 34.35 m tons last month, its lowest level since December. Reduced imports were likely due to China ordering at least five independent refineries (teapots) in Shandong to cut run rates ahead of the Shanghai Cooperation Organization (SCO) summit to be held the port city of Qingdao on June 9-10. So, it possible the teapots will gear up again on additional quotas.

Despite last week’s plethora of bearish signals Oil prices rallied towards $71.50 during Friday’s  New York session, but the rally was cut short by media headlines suggesting ” “The Trump administration is actively considering tapping into the nation’s emergency supply of crude oil as political pressure grows to rein in rising gasoline prices before the mid-term congressional elections”

While trade war rhetoric should subside this week and could be a possible plus for oil prices, with the Trump administration actively considering tapping into the nation’s Strategic Petroleum Reserve, it could weight negatively on trader’s cerebral side of the oil price equation.

Gold Markets

The precious space continues to hold critical support at $1,240, but the gold complex remains under pressure. US equity markets continue to trade well triggering few if any defensive allocations into Gold as ETF flows have remained muted lately. With sluggish demand for precious metals and the USD on solid footing, gold prices will stay pressured lower for the foreseeable future as gold has wholly lost its glittering appeal in this enduringly bullish equity and USD environment.

Currency Markets

JPY
Massive move in USDJPY last week which caught everyone flat-footed given the volumes turned and the breadth of the movement. The break above the yearly highs does suggest this move has more ways to run although during Friday trade flows were much more balanced perhaps reflecting the softer Michigan Sentiment index and the negative US political fallout for Mueller gate escalations. USDJPY is signalling the most significant break out in years, and the long USDJPY is a position severely under-owned which suggests the pair will explode higher on any positive news. One can only imagine spot will trade if an intense wave of risk on kicks in or trade war fizzles out.
Only a week ago we were lamenting on how UDJPY was the low beta range trade so what the heck changed. For one, equity markets are surging, 2 year US yields are moving higher, but that only paints a corner of the picture.

1) There is the fair value argument that USDJPY is undervalued supported by interest rate differentials

2) Trade war fears are good for the US dollar because it could shrink the trade deficit when they become competitive enough. Primarily, if the Trump administration puts the automobile tariff in practice, it will exert a fatal blow to Japan’s economy and an already weakening trade balance, which will act as a JPY negative eventually.

3) Japanese institutional investors are increasingly looking outward for investment particularly in the US. And as well are not hedging full returns. The how the notion of Japanese investors repatriating when global risk rises are diminishing.

4) The old FOMO as traders move from what’s not to what’s hot. But arguably this position is under-owned with many structural risks off long JPY still in play, so a push into the 113 could trigger a significant extension of the current rally as more risk off hedged unwind, and more traders become believers.

MYR and the knock-on effects of the Yuan

The perfect storm of negatives saw the USDMYR predictably take out the 4.05 level on Friday trade. Despite the KLCI trading in the green while tracking local burses higher as risk sentiment recovered on Friday, the local currency unit didn’t fare so well. Despite the obvious political overhang from IMDB investigations and political and fiscal uncertainty weighing negatively for the Ringgit. The USD started to reassert itself, and when coupled with increasingly bearish signals from the oil patch, the market was prone to a selloff. But even worse when the $Asia shows sings of recovering, the Ringgit continues to lag the moves.

In addition, the RMB complex continues to set the pace of play in regional currency markets and besides the daily risk YO-YO on equity markets taking its toll on regional sentiment, with the Pboc weighing possible policy options around mainlands economic slowdown, this uncertainty is having a negative knock-on effect in local currency markets.  Uncertainty around policy, trade and retaliation will keep the riks reward needle skewed negatively for the Yuan near-term.

What sparked the dollar rally ? ( OANDA Trading Podcast on Money FM 89.3)

Stephen Innes Head of Trading Asia tells Michael Switow why the yen is weak, and stocks are rallying.

Money FM Singapore 89.3

 

 

The sky hasn’t fallen just yet

Trade War Escalates, but the sky hasn’t fallen just yet as optimism crept back into the market on reports of fresh bilateral trade negotiations between China and the US coupled with a slightly firmer RMB scrim. “Where there is a will, there is a way”. But when it comes to backroom negotiations, one can only imagine that talk is not going to come cheap.

The broader market continues to remain in wait and see mode for further details on how China might retaliate on trade, while equity markets continue to press higher under the guise that “no escalating news is good news”. Indeed equity markets continued to retrace the sharp mid-week sell-off. But again, the US technology sector comes shining through as US internet and technology stalwarts are leading markets to a solid finish in Thursday’s New York session.

While investors could be breathing a sigh of relief, they’re probably just happy their investment portfolios are breathing and alive and kicking after the latest trade war episode. But even the most pessimistic investors must take note of just how enduringly bullish these markets are, after having everything thrown at them including the kitchen sink (Trade, Italy Germany, Long Bond Rates). It’s incredible what global bourses have withstood all this harmful noise and continue to march higher. But indeed, the solid foundation of a bull market is that it ignores the bad news and keep on grinding higher. And one can only imagine what levels the S&P would be trading if trade war fizzled out.

Equities shrug off trade tariff tensions

Speaking of bull markets, USDJPY continues to grind higher and perhaps a bit of the above is starting to factor in (i.e. ignore the bad news and keeps moving higher). The break above 111.75 was one of the most unambiguous signals in some time, and a move into the 113’s could trigger an unwind in longer-term structural risk-off (long JPY) positions which could see this current rally extend much higher.

There was little movement on Powell interview on Marketplace but here are the full transcripts.

Chairperson Powell’s Marketplace interview

And the NATO summit ended on a more cheerful note, with President Trump reaffirming his commitment to the alliance while focusing more closely on the financial obligations of the other countries. So, the market is happy to hear the NATO band marching on.

Oil market

The oil markets are trying to make some inroads after Wednesday’s spill, but are having trouble holding both tops and momentum. I think this is a one-part trade war and one-part supply coming back online. But Wednesday was one of those steep selloffs on record volumes that will give even the bravest of bull’s cause /pause for thought about holding long positions, especially into the weekend. On the supply front, the latest news from Libya is short-term bearish with the El Feel or Elephant field restarting for the first time since February, and there is some discussion suggesting the supply rebound could increase and more than offset the impacts from the Eastern port closures.

Gold market

The precious space continues to hold critical support at $1,240, but the Gold complex is still hovering in the mixed territory zone. The global equity market is bouncing higher overnight, and there are very few defensive allocations into Gold. However, with Fed Chair Powell not ringing any alarm bells for more aggressive fed tightening, gold picked up a bit of goodwill. But ultimately, the USD looks to be on solid footing while preparing to take the driver seat once again, especially on USDJPY, which should hold the gold bulls at bay.

Currency Markets

The USD is looking to get back in in the driving seat once again.

JPY: USDJPY is signalling the most significant break out in years, and the long USDJPY is a position severely under-owned which suggests the pair will explode higher on any positive news. One can only imagine where spot will trade if an intense wave of risk on kicks in or trade war fizzles out.

CNH: The Yuan remains at the centre of all the action, but with further signs of policy easing on the cards given the economic slowdown has been much deeper rooted than feared, markets will continue to buy dips until a definitively positive shift in trade war sentiment.

USDAsia
Strong demand on the platform for long USDAsia is consistent with the general market views.

Trade war escalation is a definite plus for the dollar and coupled with robust US economic data; it does support this view.

MYR: Despite some optimism creeping back in on reports of bilateral trade negotiations between China and the US, while most of $Asia pulled back from yesterday morning highs, the Ringgit continued to lag the moves.

The Ringgit continues to suffer from political risk and fiscal uncertainty. If the USD does start to reassert itself and coupled with short-term bearish signals on oil prices,  the USDMYR will likely slice through the 4.05 level like a hot knife through butter in this environment.

INR The Ruppe hit and all-time interday  low and has now plummeted over 7.6 % versus the USD will wiping out a significant portion of carry-trades in its wake. But the Rupee will continue to trade at the mercy of oil prices

KRW.After testing 1130.00, the dissenting policy vote injected some life into the Won and coupled with the firmer RMB backdrop saw the USDKRW fall below the 1124 level. The won will be the go-to trade on the escalation of trade war tensions, but in the meantime, the RMB complex will continue to dictate the pace of play