Bring on the FOMC !

FOMC 

The FOMC meeting next week has a hike fully priced in so the focus will be on the dot plots and the follow-up presser which has dollar bulls questioning their near-term positions.

The meeting will be overly scrutinised to see if there are any changes in the projections, with new Vice-chair Clarida voting for the first time. Also, Chair Powell will likely be quizzed on Fed Governor Lael Brainard view that US interest will probably need to be made more restrictive in the sense that at some point in the future if the unemployment rate remains low, policy rates should move above neutral and into the restrictive territory.

Dovish tail risk

And herein lies the dovish tail risk which has  USD Bulls erring on the side of caution. With 2 US rates hikes priced into  the rest of 2018 and in the absence of inflation, it’s almost impossible for the  Feds to bump up the 2019 curve. So, the markets will end up focusing on shifts in the longball forecast into 2020 which is not the best or brightest of signals for currency traders who tend to view markets in much nearer time horizons. Even if the Feds prod 2020 curve higher, its unclear how much of a USD fillip that shift could deliver given that Chair Jay Powell has contiued to de-emphasise 2020 dots. Unless we get an unexpected shift in the Feds terminal policy range of 2.75-3.00%, not sure the dollar ( X -JPY) goes anywhere but trades within well-worn ranges.

What else in G-10?

AS for the rest of G10, there will be no shift from RBNZ, but in the wake of the surprisingly strong data of late especially the monster GDP beat, we could see a subtle less dovish change in guidance.

It’s not a busy calendar next week per say but dotted by US PCE and EUR sentiment surveys. Canada delivers a GDP report, but NAFTA talks will continue to overshadow data as yet another NAFTA month-end deadline looms.

Brexit Blues 

It’s back to the Brexit drawing board after EU leaders “Chequers mated “and utterly humiliated May at the Salzburg meeting which sent the Pound tumbling below the 1.3100 before finding some composure. Of course, most believe a deal in some form or another will eventually happen. But in the nub of all this Brexit bluster, UK data has been surging with both CPI and Retail Sales beating expectations, but indeed  Brexit uncertainty has overshadowed.  Next week’s UK GDP data could be another strong point, however, with little to no breakthrough on Brexit likely to happen any time soon, The Bank of England will remain unwavering until clarity on Brexit it offered up so the market will likely look past next weeks UK data.

Great insights from our Senior Markets Analyst in London, Craig Erlam  

Sterling Down on May Brexit Warnings

OANDA Market Insights podcast (episode 32)

Craig reviews the week’s business and market news with Jazz FM Business Breakfast presenter Jonny Hart.

This week’s big stories: Sterling wobbles on Brexit fears, US/China tariffs tit for tat, Inflation hike against expectations.

China 

China PMI which will be closely monitored. Also, we should expect more trade headlines to come into play as both US and China tease with the idea of resurrecting trade talks.

USD Price Action 

Gauging this weeks price action in the wake of Trump tariff announcement, the markets overwhelming viewed the 10 % on 200 billion tariff levy and the measured responses from China as a smoke signal for further negotiation shortly. So the unwind of global USD hedges ensued as the market just found themselves far too long USD at not such grand levels. But the robust fundamental storyline in the US economy coupled with weak PMI data in Eurozone this week, I don’t think we’ve heard the last from the dollar bulls just yet.

Currencies in focus next week

EUR: a huge disappointment to the bulls with a close below 1.1750. While Fed forward guidance will drive the bus next week, the negative  EU PMI lean could hang like an anvil around the EURO neck.

CNH: It has to be on everyone’s radar especially after this weeks exodus of long USD hedge position on a combination of Trade war de-escalation, comments that mainland will not weaponise the Yuan as a tool in the trade war and offshore funding squeeze on the back Pboc to sell bills in Hong Kong. Despite the correction lower in USDCNH, given that China’s current account surplus is expected to shrink as a result of US tariffs and if the Feds signal clear dot plot sailing or even shift slight higher, CNH could sell off again.

Oil markets

Traders will pay close attention to Sunday headlines from Algiers as OPEC, and cooperating non-OPEC producers will meet on Sunday in Algeria

Likely seeking to appease President Trump, unnamed members of OPEC suggested they would discuss adding 500 K barrels per day, and while it gave cause to book some profit and reduce risk, its highly unlikely anything dealing with supplies will happen before the December 3 OPEC summit.

Despite wire reports suggestions otherwise, most of the oil traders in my circle, and despite the usual OPEC headline noise, think the meeting will be little more than the steering committee review of production and market data.

Please join me on Live on Monday discussing cross-asset markets 

BFM Radio Kuala Lumpur  7:35 AM SGT  on the Market Watch

938Now 9:00 AM SGT for an extended view  on global markets

France 24 TV at 12:15 SGT for the European Open coverage

Jazz FM London 1:00 PM SGT discussing the Asia markets today

 

 

 

 

Canada retail sales climb, inflation falls, CAD rallies

Canadian retail sales climbed in July following a decline in June, led by demand for food and higher gas prices.

Stats Canada said retail sales rose +0.3% in July to a seasonally adjusted C$50.9B.

Note: In June, retail sales fell by a revised -0.1%.

Ex-autos, July sales rose by a robust +0.9%, despite a decline of -2.2% at new car dealerships weighing on the overall results. However, on a price-adjusted basis, sales fell -0.1%. On a year-over-year basis, retail sales in July rose +3.7%.

Canada inflation slows in August

On the inflation front, it decelerated in Canada last month, but remained close to its seven-year high print from July. This headline print very much keeps the Bank of Canada (BoC) in play for another +25 bps hike in October.

Stats Canada said that CPI rose +2.8% y/y in August, following a +3.0% increase in July.

Digging deeper, core-inflation prices rose in a range from +2.0% to +2.2%, based on the three preferred gauges used by the BoC.

CAD initial reaction saw the loonie catch a bid, to deal at C$1.28864 a new weekly high.

Central Banks up the ante to normalize interest rates

Friday September 21: Five things the markets are talking about

Aside from trade, tariff and retaliation, central banks are upping the ante to “normalize” interest rates.

This week, Norway’s Norges Bank has joined the BoE, and the central banks of the Czech Republic and Romania in withdrawing some of its stimulus, while Sweden’s Riksbank has indicated that it may raise its key rate before the end of the year. The ECB plans to end QE this December, while next week the Fed is expected to hike +25 bps (Sep 26) – the market will be looking for any comments on the impact of escalating trade tensions.

Earlier this week the BoJ kept its stimulus policy unchanged, however, the move overnight to cut the purchases of super long-bonds would suggest that the period of easy-money era is ending. In Hong Kong, the HKD has surged the most in 15-years in part due to the prospect for higher interest rates there.

There are a number of EM hotspots that the market is also focusing on, in particular – Turkey & South Africa. The lack of details on how Turkey can achieve a soft landing for an economy that topped the G20 growth charts in 2017/18 continues to contribute to a volatile TRY, but a plan is forthcoming.

While in South Africa this morning, President Ramaphosa announced details of a stimulus package to take immediate effect to battle the country’s technical recession.

With trade war concerns receding in the background, the U.S dollar is on track to close out the week trading atop of its seven-month lows against G10 currency pairs as stronger equity markets and rising bond yields encourage investors to purchase riskier assets.

Note: Expect today’s session to be volatile as its quadruple witching – futures and options on indexes and individual stocks expire.

On tap: Canadian CPI and retail sales at 08:30 am EDT

1. Stocks rally to records

With Wall Street indexes hitting a record high again yesterday has encouraged Asian and Euro bourses to take flight.

In Japan, equities rallied to an eight-month high, with noted gains in insurance, energy, and shipping stocks. The Nikkei did fade late, but still gained +0.8%. Financials were helped by the BoJ’s offer to buy less super-long bonds. The broader Topix gained +0.9% to hit a four-month high.

Down-under, the Aussie stock market again underperformed in the region overnight. The S&P/ASX 200 finished up +0.4%. The index ticked up +0.5% for the week, a second consecutive modest gain. Providing intraday pressure were utilities, which lost -0.5% last night, but consumer staples rallied that much while materials jumped a further +1.5% and IT climbed +2.2%. In S. Korea, the Kospi closed +0.68% higher on Friday as investors risk appetite recovered. For the week, the benchmark index climbed +0.9%.

In China, stocks surged overnight before a long holiday weekend, with investor sentiment boosted by hopes that a government effort to boost domestic demand could help offset effects of an escalating trade war. At the close, the blue-chip CSI300 index rallied +3.0%, its biggest one-day gain in four-months. The Shanghai Composite Index gained +2.5%, closing out its best week in six months.

In Hong Kong, stocks ended higher for a fourth consecutive session overnight, helped by consumer and technology shares, as sentiment improved after the Sino-U.S trade war unfolded in ways less damaging than feared. The Hang Seng index ended +1.73% higher, while the China Enterprises Index closed +2.17% firmer.

In Europe, regional bourses continue to rise despite sluggish PMI results. In the U.K, the FTSE is supported by positive Brexit comments, while in Italy; bourses are supported by budget talks.

Note: Expect stock markets to be influenced by today’s quadruple witching hour.

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

Indices: Stoxx50 +0.7% at 3,428, FTSE +0.8% at 7,429, DAX +0.7% at 12,418, CAC-40 +0.8% at 5,494, IBEX-35 +0.6% at 9,639, FTSE MIB +0.9% at 21,588, SMI

2. Oil higher on supply worries, but Trump’s call for lower prices drags

Oil prices are a tad higher this morning after falling in yesterday’s session as U.S President Donald Trump urged OPEC to lower crude prices at its meeting in Algeria this weekend (Sep 23).

Note: OPEC and its allies are scheduled to meet on Sunday to discuss how to allocate supply increases to offset a shortage of Iran supplies due to U.S sanctions.

Brent crude for November delivery is up +26c, or +0.33%, at +$78.96 a barrel, while
U.S West Texas Intermediate crude for October delivery is up +7c, or +0.10% at +$70.39 a barrel.

Trump took to twitter and called on OPEC to lower prices, saying, “they would not be safe for very long without us, and yet they continue to push for higher and higher oil prices”.

Trump’s veiled threats are unlikely to force OPEC and its allies to agree to an official increase in crude output on Sunday.

The fact that Sino-U.S trade tensions have somewhat dissipated is helping precious metal prices. Ahead of the U.S open, gold prices remain better bid on the back of a weaker U.S dollar and are heading for its first weekly gain in a month. Spot gold is up +0.3% at +$1,210.68, after touching its highest since Sept. 13 at +$1,211.02. It has rallied +1.3% so far this week. U.S gold futures are up +0.3% at +$1,215 per ounce.

3. Italian bond yields fall as investors await budget clarity

Italian bond yields are under some pressure this morning as the market awaits clarity on the 2019 budget and after the 5-Star Movement denied a report that Deputy PM Di Maio had threatened to pull his party out of the government.

An ISTAT report shows that the budget deficit as a proportion of national output was slightly higher last year than previously estimated, but that debt was lower also helped to push down yields.

Italian BTP yields are down -5 bps along the curve, having jumped by up to +12 bps yesterday. Elsewhere, Germany’s 10-year Bund yield has eased to +0.47% as some Euro investors returned to safe-haven assets.

Note: Bunds backed up to a four-month high of +0.506% Wednesday, but have struggled to maintain this level, rallying back down after renewed Brexit concerns and the infighting in the Italian government.

In Japan, the Bank of Japan (BoJ) has cut its purchase of super long JGB’s. This has send Japanese yields to 2018 highs. The 40-year yield has jumped +5 bps to +1.04% while 10’s gained +1.5 bp to +0.13%.

Stateside, the yield on 10-year Treasuries has jumped + 2 bps to +3.08%, the highest in more than four-months.

4. Hong Kong dollar spikes

Expectations of a rise in bank lending rates and tightness in cash supplies caused a sharp spike in HKD overnight, pulling it off the weak end of its narrow trading band it had been stuck in for the six-months.

The HKD rallied to $7.8244, hitting its highest levels since late February. Since March, it had stayed near $7.85, the lower end of the Hong Kong Monetary Authority’s (HKMA) managed trading band.

USD/INR rose to an intraday high of $72.47 before fading after a sharp spike lower in Indian Indices on liquidity concerns of Indian Housing name Dewan Housing.

ZAR (+0.46% to $14.2629) found support after S. African President Ramaphosa announced a number of policy reform plans this morning, including re-prioritising +$3.5B of public spending to boost economic growth and create jobs.

GBP/USD (£1.3185) falls from yesterday’s highs as the E.U warns the U.K of a possible “no-deal” Brexit. Initial support is around £1.3171.

5. Euro zone business growth eased

Data this morning showed that Euro zone business growth eased this month although optimism picked up a tad from last month’s two-year low.

Nevertheless, growth remained robust and firms were able to increase prices, which should keep the ECB happy.

Digging deeper, there remains a divergence between services and manufacturing – the dominant service industry beat forecasts for no change in the pace of growth from last month. IHS Markit’s Euro Zone Services Flash Purchasing Managers’ Index (PMI) rose to 54.7 from 54.4.

Manufacturers however failed to live up to expectations. The factory PMI slumped to a two-year low of 53.3 from 54.6 – the market was looking for 54.4.

Divergence raises the question, how long can you maintain a strong service sector growth without an upbeat manufacturing sector?

Forex heatmap

OANDA Trading Asia market closing note: HKMA in focus

EM sentiment continues to improve, and regional equities all in the green and USD broadly weaker. China complex in focus today following headlines that PBOC will issue bills via HKMA.

Hong Kong Dollar

The PBoC will via HKMA issue notes ( bills) Hong Kong. The market has interpreted this as one more tool to control liquidity in the offshore market, hence capping offshore spot upside.

Massive liquidation in long USDHKD positions sent liquidity tighter this morning as a pass-through from elevated funding rates following Pboc announcement to issue bills in Hong Kong, and the  CNH curve gapped much higher.

I guess are we going to see more Pboc presence in HK money markets after the memorandum of cooperation was signed between HKMA and the Pboc and will probably continue taping and draining the HK money markets and pushing rates?? Which is an ominous sign for property markets

While this takes a tremendous amount of pressure off the peg, but none the less a worrisome sign for property investors who given soaring real estate prices in Hong Kong are highly leveraged and remain at the mercy of floating HIBOR rates.

I suspect funding will remain tight for the foreseeable future until the Pboc intentions are fully vetted.

The other big discussion in Asia is  China reducing Import Tax

Reuters

Two significant takeaways, there could be a more bilateral trade with the rest of the world to compensate for increase tariff is one theory. However, if you look across Asia at the new iPhone release, I wonder just how much mainland consumer preference will change from what will amount to a 10 % increase on selected US products.

The other takeaway which is more significant in my view is that this tax break accelerates Mainland’s push to increase domestic demand and move off the reliance on traditional brick and mortars to stimulate the economy.

Finally, I think this a brilliant and measured response from Chinese authorities to not fight fire with more fire.

Abe re-election 

A good write up from our  local Singapore Senior Markets Analyst Andy Robinson

Yen at two-month low versus the dollar on Wall Street surge

OANDA Trading Podcast discussing Prime Minister Shinzo Abe’s third term win   on Singpore Money FM

U.S weekly jobless claims fall

The number of Americans filing for unemployment benefits unexpectedly fell last week, hitting near a 49-year low in a sign the job market remains strong.

Initial claims for state unemployment benefits fell by 3,000 to a seasonally adjusted level of 201,000 for the week ended Sept. 15, the Labor Department said on Thursday. That is the lowest level since November 1969. Data for the prior week’s claims was unrevised.

Economists polled by Reuters had forecast claims rising to 210,000 in the latest week.

The Labor Department said only claims for Hawaii were estimated last week. The four-week moving average of initial claims, considered a better measure of labor market trends as it irons out week-to-week volatility, declined by 2,250 to 205,750 last week, the lowest level since December 1969.

The labor market is viewed as being near or at full employment. It continues to strengthen, with nonfarm payrolls increasing by 201,000 jobs in August and annual wage growth notching its biggest gain in more than nine years. Job openings hit an all-time high of 6.9 million in July.

Though there have been reports of some companies either planning job cuts or laying off workers because of trade tensions between the United States and its major trade partners, they have been partially offset by increased hiring in the steel industry.

Economists, however, have warned of job losses if the trade tensions escalate.

Thursday’s claims report also showed the number of people receiving benefits after an initial week of aid fell 55,000 to 1.645 million for the week ended Sept. 8, the lowest level since August 1973. The four-week moving average of the so-called continuing claims fell 20,750 to 1.691 million, the lowest level since November 1973.

CNBC

U.S safe-haven appeal diminishes

Thursday September 20: Five things the markets are talking about

It’s not been easy, two and two do not add up when trading these Twitter directional asset classes. Fundamentals have been temporary ignored as the ‘lemming’ trades takes a grip.

Fading market fears over a Sino-U.S trade row has the U.S dollar trading within striking distance of its two-month lows. Even emerging-market currency pairs have found some traction after China said it would not retaliate with competitive currency devaluations.

Global equities are beginning to struggle as U.S yields approach their highest level this year.

In Europe, U.K Consumer spending remains buoyant despite Brexit uncertainties. Norway raises interest rates for the first time in seven-years and the Swiss kept rates on hold.

1. Stocks mixed results

In Japan, the Nikkei ended little changed overnight as an extended rally in financial sector was largely offset by profit taking after this weeks rally. The Nikkei inched up +0.01%, just about staying in positive territory for the fifth consecutive session. The broader Topix added +0.11%.

Down-under, Aussie shares slipped overnight, led lower by banks and consumer staples as investors shifted funds to emerging markets as they became less worried about a U.S-China trade war. The S&P/ASX 200 index fell -0.3% at the close of trade. The benchmark gained +0.5% yesterday. In S. Korea, the Kospi index rallied +0.65%, supported again mostly by Samsung.

Stocks in China fell overnight, as investor sentiment remained fragile following the latest hit of tariffs in the Sino-U.S. trade war. At the close, the Shanghai Composite index and the blue-chip CSI300 index were both down -0.1%.

In Hong Kong, there were mixed results as some investors held on to hopes that China and the U.S would eventually reach an agreement to avert an all-out trade war. The Hang Seng Index rose +0.26%, while the Shanghai Composite Index slipped -0.06%.

In Europe, regional bourses have opened broadly higher. Market will focus on the ‘informal’ E.U leaders summit comments.

U.S stocks are set to open little changed (+0.0%).

Indices: Stoxx50 +0.3% at 3,379, FTSE +0.1% at 7,334, DAX +0.2% at 12,248, CAC-40 +0.4% at 5,415, IBEX-35 +0.4% at 9,526, FTSE MIB +0.5% at 21,396, SMI +0.4% at 8,974, S&P 500 Futures flat

2. Oil steady, supported by U.S. stocks and supply concerns

Oil prices trade steady, nevertheless, the market remains a tad better ‘bullish’ after this week’s U.S crude inventory reports and on signs that OPEC may not raise production enough to compensate for the loss of Iranian exports hit by U.S. sanctions.

Brent crude oil is unchanged at +$79.40 a barrel, while U.S light crude oil is +40c higher at +$71.52 after rising nearly +2% in yesterday’s session.

Note: Brent has been trading below $80 for the past week after conflicting reports of the market views of Saudi Arabia, the biggest producer in OPEC. They wanted oil to stay between +$70 and +$80 a barrel for now, seeking a balance between maximizing revenue and keeping a lid on prices until U.S midterms. However, giving the market a bid undertone are reports yesterday indicating that the Saudi’s were happy with prices above +$80 a barrel.

EIA data Wednesday showed that U.S crude oil stockpiles fell for a fifth consecutive week to a three-year low in the week to Sept. 14, while gas stocks also showed a larger than expected draw on unseasonably strong demand. Crude inventories fell by -2.1m barrels, compared with expectations for a decrease of -2.7m.

Note: OPEC and other producers, including Russia, meet on Sunday in Algeria to discuss how to allocate supply increases to offset the loss of Iranian barrels.

Ahead of the U.S open, gold prices have inched higher as the ‘big’ dollar softened amid easing Sino-U.S trade tensions. Nevertheless, expect investors to remain cautious ahead of next week’s Fed meeting. Spot gold is up +0.1% at +$1,204.69, after rising +0.5%yesterday.

3. Norway hikes rates for the first time in seven years, SNB on hold

Earlier this morning, Norway’s central bank hiked its key interest rate for the first time in more than seven-years. Norges Bank increased the rate to +0.75% from +0.5%.

The central bank said another rate increase is likely in the first three months of next year, with a gradual series of moves taking it to +2% by the end of 2021.

“If the key policy rate is kept at the current level for too long, price and wage inflation may accelerate and financial imbalances build up further,” said Governor Olsen. “That would increase the risk of a sharp economic downturn further out.”

Note: Sweden has also indicated that it may raise its key rate before the end of the year, while the ECB plans to end QE in December.

Elsewhere, the Swiss National Bank (SNB) kept its deposit rate at -0.75%, as expected. The accompanying statement painted two different pictures – the negative rate and willingness to intervene in FX markets “remain essential in order to keep the attractiveness of CHF low and thus ease pressure on the currency.” That said, policy makers also painted a brighter economic future and raised its 2018 GDP forecast to between +2.5% and +3%.

4. Dollar downfall

The CHF ($0.9659) is a tad weaker after the Swiss National Bank (SNB) left rates on hold. The fact that the franc remains “highly valued and has appreciated noticeably” has investors wary of the bank’s next moves.

EUR/NOK (€9.6068) initially fell following the Norges rate hike, but has since reversed and is trading down -1% outright after the bank cut its policy rate forecasts.

GBP/USD (£1.3226) has rallied sharply, again testing yesterday’s intraday highs, on Brexit talk and on stronger than expected U.K retail sales (see below).

USD/ZAR is down by -1.5% at $14.4793 – some investors are anticipating a surprised rate hike this morning. Nevertheless, the consensus expects rates to remain unchanged, given that prices remain within the bank’s inflation target range and that the economy has slid into a recession.

5. U.K retail sales slowed in August

Data this morning showed that U.K. retail sales slowed in August but continued to point to buoyant consumer spending in Q3, which suggests that the economy has kept expanding despite uncertainty over Brexit.

According to the ONS, U.K retail sales rose +0.3% on month in August, after a revised +0.9% rise in July.

Digging deeper, consumer spending continues to power the U.K economy as sales increased across most store categories with the exception of food and clothing outlets.

But is it sustainable, given high inflation, low wage growth and rising interest rates? Uncertainty over the U.K’s future continues to deter investment.

Forex heatmap

OANDA Trading Asia market closing note : Irrational exuberance ? YUAN

Irrational exuberance? YUAN

EM Asia currencies

The Yuan

Could be little more than a case of irrational exuberance as the markets have completely latched on to Premier Li Keqiang comments which, at the World Economic Forum, said China would not devalue the currency to stimulate exports and as one would expect the Australian dollar is getting taken along for the ride

Traders are positioning long USDCNH based a weaker RMB currency profile that was thought would underpin domestic economic activity and possibly prop-up equity markets. So, if the US does ramp up tariffs, I’m not sure what possible counter-strategy mainland authorities would implement that would be as easy and as impactful as steering the Yuan weaker. None the less the USD has been trading broadly weaker on the news despite my overly pessimistic view of the current proceedings.

The Thai Baht

Despite the BoT leaving its policy rate unchanged at 1.50%, USDTHB is dipping lower to June levels. . The markets are viewing the two dissenting votes as hawkish. But the THB has been an excellent regional haven play as its been pretty insulated from the trade war fracas. A hefty current account surplus will do that for you in this environment, not to mention tourists aren’t about to skirt BKK anytime soon and that industry provided nearly 20 % of GDP.

G-10

The Euro 
Once again, the Euro has a spring in its step in early London trade. However, pushing through the August high of 1.1730 remains critical for a substantial extension. Frankly, the EURUSD is where the near-term US dollar (X JPY) battle lines are forming as the ECB has shifted less dovish and should continue to so with Italian risk falling. But Brainard has signalled the Fed intentions, so the battle lines are forming around 1.1730

 

US yields take a runner.

One could expect a bit of apprehension to enter the fray, and traders to tap the brakes not just from a relief rally hangover perspective, but local bond and currency traders could start looking over their shoulders at US 10y bond yields that have raced higher to 3.05 %.

While everyone thought US bond yields could begin to rise in September as the markets emerged from summer holiday, but few could have predicted returns to come on as strong as the did with US 10Y touching to 3.05 %
While last NFP data produced robust wage growth data, I think its as much a function of hawkish fed speak as anything else.

The most significant shift in my view comes from Fed Governor Lael Brainard, who I dare say it was starting to roost with the Hawk suggesting the sitting Federal Reserve Board is a tad more hawkish than markets have priced.

While last week lower than expected US CPI, print does suggest we are nowhere near a reprice higher of the Fed curve from an inflationary standpoint.

But with the market emerging from its summer slumber and the US economy rocking on overdrive, traders may soon realise that they are pricing 2019 rate hike risk far too pessimistically. If the strong run of US economic data continues and an even more so on the first glint of inflation.

The pragmatist in me says this is USD supportive and not an especially appealing prospect for local Asia markets, in my view.

China to penalize $60B of U.S. imports but reduce amount of tariffs it collects

China will levy tariffs on about $60 billion worth of U.S. goods in retaliation for the latest round of U.S. tariffs on Chinese products, as previously planned, but has reduced the level of tariffs that it will collect on the products.

The tit-for-tat measures are the latest escalation in an increasingly protracted trade dispute between the world’s two largest economies.

On Monday, the U.S. administration said it will begin to levy new tariffs of 10 percent on $200 billion of Chinese products on Sept. 24, with the tariffs to go up to 25 percent by the end of 2018.

Previously, U.S. President Donald Trump threatened to hit those goods with 25 percent tariffs immediately.

“China is forced to respond to U.S. unilateralism and trade protectionism, and has no choice but to respond with its own tariffs,” the Finance Ministry said in a statement on its website late on Tuesday.

China will levy tariffs on a total of 5,207 U.S. products, at 5 and 10 percent, instead of the previously proposed rates of 5, 10, 20 and 25 percent, even as the products remain unchanged from the previous plan, the finance ministry said.

China will impose a 10 percent tariff on U.S. products it previously designated for a rate of 20 and 25 percent, and 5 percent tariffs on goods previously under the 5 and 10 percent rates.

Items previously designated to be hit by 20 or 25 percent tariffs included products ranging from liquefied natural gas and mineral ores to coffee and various types of edible oil. Those goods will now be taxed 10 percent.

Goods previously marked under the 10 percent category included products such as frozen vegetables, cocoa powder and chemical products. Those products will now be taxed 5 percent.

The new tariff measures will take effect at 12:01 p.m. (0401 GMT) on Sept. 24.

China will further respond accordingly if the United States insists on increasing tariffs, according to the Finance Ministry.

Reuters

Where to hide? That’s the next million-dollar question

Tuesday September 18: Five things the markets are talking about

It was coming, the market new it was coming, just when, and how much, were the unknown variables.

President Trump has imposed an additional +10% tariffs on about +$200B worth of imports from China, rising to +25% by the turn of the New Year. Trump has threatened additional duties on about +$267B more if China contemplates hitting back on the latest U.S action, beginning next Monday.

Of course China is going to retaliate, but how, is part of the guessing game – “to protect its legitimate rights and interests and order in international free trade, China is left with no choice but to retaliate simultaneously.”

There are a few tech exceptions – which benefit Apple/Fitbit for now – and the tiered deployment is to help U.S companies find alternative supply chains. However, if the U.S needs to go to phase three, it would consume all remaining U.S imports from China and Apple products and its competitors would not be spared.

The problem for China is that they do not import enough U.S goods to go head-to-head with the U.S leverage strategy. They will want to cause U.S pain and will probably focus even more on the tech sector. Nevertheless, watch the Yuan’s value, it may be one of China’s strongest weapons. It has weakened by about -6.0% in the past three-months, offsetting any -10% tariff rate by a substantial margin.

From an asset price viewpoint, it’s been a rather ‘subdued’ reaction to Trump’s announcement. Buying U.S dollars in response to trade conflicts does not seem to be as appealing anymore. The delay in imposing +25% tariffs may explain the lack of movement, in addition to the fact that the tariffs have been widely anticipated.

1. Stocks mixed results

In Japan, the Nikkei rallied overnight to its highest close in seven-months, led by insurers thanks to rising U.S Treasury yields. However, no surprises, capping gains were electronic suppliers, which underperformed as the market weighs the new U.S China, tariff impact. The index closed out +1.4% higher, while the broader Topix rallied +1.8%.

Down-under, materials and energy stocks pushed Aussie equities lower as the escalating Sino-U.S trade war pressured commodity and oil prices. The S&P/ASX 200 index fell -0.4% at the close. The index rallied +0.3% yesterday. In S. Korea, the Kospi stock index closed +0.26% higher along with some of its regional bourses as Chinese markets largely shrugged off trade tariff threats.

In China, stocks staged a late rebound as the blue-chip index CSI300 rallied +1.9% as some investors bet that authorities will increase their investment in infrastructure to offset the impact of the latest tariff penalties from Trump. In Hong Kong, the Hang Seng index closed out +0.6% higher.

In Europe, regional bourses have shrugged off early weakness following the ‘telegraphed’ U.S tariff announcement after the yesterday’s U.S close. Autos lead the gains, while the materials sector and consumer discretionary are under early pressure.

U.S stocks are set to open in the ‘black’ (+0.2%).

Indices: Stoxx50 +0.5% at 3,363, FTSE +0.1% at 7,318, DAX +0.6% at 12,164, CAC-40 +0.6% at 5,383; IBEX-35 +0.4% at 9,446, FTSE MIB +0.2% at 21,148, SMI -0.3% at 8,908, S&P 500 Futures +0.2%

2. Oil prices fall as U.S-China trade war questions demand, gold lower

Oil markets have eased a tad as the Sino-U.S trade war questions the outlook for crude demand from the world’s two largest economies.

Brent crude futures have dropped -29c, or -0.37% to +$77.76 per barrel, while U.S West Texas Intermediate (WTI) crude is down -15c, or -0.22%, at +$68.76 per barrel.

U.S crude ‘bears’ believe that these tariffs are likely to limit economic activity in both China and the U.S – a hit to growth is a hit to consumption.

Note: Refineries stateside consumed about +17.7m bpd of crude oil last week, while China’s refiners used about +11.8m last month.

Crude ‘bulls’ are currently clinging to the potential supply cuts caused by U.S sanctions on Iran (third-largest producer in OPEC) as reason enough to support short-term oil prices.

Ahead of the U.S open, gold prices are under pressure as the ‘big’ dollar steadies amid concerns of an escalation in Sino-U.S trade tensions. Spot gold is -0.3% lower at +$1,197.51 an ounce, after rising +0.6% in Monday’s session. U.S gold futures are down -0.3% at +$1,202.20 an ounce.

However, if the ‘big’ dollar loses its ‘tariff haven’ appeal, expect the ‘yellow’ metal to find support on pullbacks.

3. Sovereign yields rally

U.S Treasury yields have backed up along the curve on growing expectations that the Fed could raise interest rates a few more times this year after recent data showed wages spiking last month, elevating concerns about inflation.

Note: U.S data last week showed that wages in August posted their largest annual increase in more than nine-years, rising +0.4% m/m and +2.9% y/y.

Yesterday, U.S 10’s touched +3.022%, the highest level in four-months, along with U.S 30-year yields at +3.159%. As to be expected, the short end rallied to a 10-year high, backing up to +2.799%.

Elsewhere, German Bund yields continue drifting upward to the +0.50% level amid better sentiment around Italy. The 10-year Bund yield is trading at +0.46%, up +0.05%. In the U.K, the 10-year Gilt yield has rallied +1 bps to +1.536%.

4. Dollar muted reaction

EUR/USD (€1.1680) shows a muted reaction to the U.S announcement that it will charge +10% on another +$200B of Chinese imports starting from next Monday. Typically trade tensions have been positive for the ‘big’ dollar; maybe attitudes will change once China shows its hand.

GBP/USD (£1.3126) pulls back from recent six-week highs as the market awaits Thursday’s E.U summit.

TRY ($6.3670) continues to weaken, down another -0.7% as investors remain confident in fading last weeks bigger than expected Central Bank of the Republic of Turkey (CBRT) rate hike.

An interest rate increase by the Norges Bank on Thursday is widely expected and already broadly priced into EUR/NOK (€9.5406). However, NOK bulls believe the central bank will likely signal more rate increases, which should provide further support for this commodity currency.

5. Reserve Bank of Australia (RBA) stays true to its ‘hawkish’ stance

In its minutes released overnight there were no surprises. The RBA maintained its interest-rate guidance in the minutes from its meeting a fortnight ago, reiterating that increases will eventually come amid anticipated economic strength.

RBA also noted that a number of G10 central banks, including the Fed, were expected to continuing rate hikes. This had been reflected in the markets, “most notably a broad-based appreciation of the US dollar” that “raised risks” for some, especially for “fragile emerging” markets. However, “the modest depreciation of the AUD was helpful for domestic economic growth.”

The copy and recent rhetoric suggests that Aussie policy makers remains highly confident its current stance – interest rates at record lows will ultimately bring lower unemployment, higher wage growth and an uptick in inflation over time.

Forex heatmap

Canada: International transactions in securities, July 2018

Foreign investment in Canadian securities reached $12.7 billion in July, mainly from acquisitions of federal government bonds. At the same time, Canadian investment in foreign securities totalled $13.1 billion, led by record purchases of foreign bonds.

Foreign investment in federal government bonds resumes

Foreign investment in Canadian securities reached $12.7 billion in July, up from $10.3 billion in June. Overall, foreign investors acquired Canadian bonds and, to a lesser extent, equities, but reduced their exposure to money market instruments.

Non-resident acquisitions of Canadian bonds totalled $11.1 billion in July. Foreign investors acquired $5.2 billion of federal government bonds. This was the first monthly investment this year. From January to June, foreign divestment in federal government bonds totalled $33.9 billion. Non-resident investors also added $3.8 billion of private corporate bonds to their holdings in July, the lowest level since January. Canadian long-term interest rates were up by 22 basis points in July. The Bank of Canada raised its benchmark overnight interest rate by 25 basis points to 1.5% in July, the second increase so far this year. In general, interest rates and bond prices move in opposite directions.

Foreign investors reduced their holdings of Canadian money market instruments by $379 million in July, the fourth consecutive month of divestment. Lower foreign holdings of federal government and federal government enterprise paper was moderated by investment in private corporate paper. Canadian short-term interest rates were up by 15 basis points and the Canadian dollar appreciated slightly against its US counterpart in the month.

Foreign investment in Canadian equities increased to $2.0 billion in July from $1.4 billion the previous month. The investment activity was concentrated in listed shares in the month. Canadian stock prices edged up in July.

Canadian investors acquire foreign bonds at a record pace

Canadian investment in foreign securities totalled $13.1 billion in July, following an $11.2 billion investment in June. Purchases of debt instruments were moderated by sales of equities in the month, an investment pattern generally observed since March.

Canadian investment in foreign debt securities reached a record $13.9 billion in July. Acquisitions of non-US foreign bonds and US Treasury bonds were the main contributors. Canadian investors acquired $44.9 billion of foreign bonds from January to July, with nearly 90% in instruments denominated in foreign currencies. These acquisitions mainly targeted bonds issued by foreign governments. The level of investment in 2018 has already surpassed the record investment for one year set in 2006 ($43.8 billion). In 2006, acquisitions were mainly in foreign bonds denominated in Canadian dollars, also referred to as maple bonds, as foreign corporations were active raising funds in the Canadian credit market prior to the global financial crisis. US short-term interest rates were up by five basis points, while US long-term rates declined slightly in July.

Canadian investors reduced their holdings of foreign shares by $796 million, the fourth divestment in five months. The reduction largely targeted non-US foreign shares in July.

StatsCanada