May 21, 2018
All it took was 8 simple words, with little factual backing and no way of enforcement, to send global markets and US equity futures soaring overnight: “We are putting the trade war on hold,” Treasury Secretary Steven Mnuchin said Sunday, refuting Trump’s prior skepticism, in which the president said the doubts China trade talks will be successful, and sending risk assets across the globe (even as most of Europe was closed due to Whit Monday) higher.
For those who missed it, on Sunday, US Treasury Secretary Mnuchin stated that US and China are putting the trade war on hold, while he added that previously announced tariffs on Chinese steel and aluminium, as well as USD 150bln of tariffs on other Chinese imports, would be placed on hold as discussions with China progress. US Treasury Secretary Mnuchin also stated that President Trump is more interested in obtaining a good deal with NAFTA partners rather than quickly concluding talks in time to be voted by Congress this year. US Trade Representative Lighthizer stated that US may still resort to tariffs and other measures such as restrictions on investment and export regulations unless China makes real structural adjustments to its economy.
At the same time, in a just as hollow vow, Beijing promised to “significantly” increase purchases of U.S. goods and services, without however mentioning a dollar figure, and focusing primarily on the energy sector, i.e., oil and refined products, something the world’s biggest oil importer would have done anyway.
These two hollow promises, which while representing a marked thaw in US-China trade relations, will do little if anything to change the complexion of bilateral trade between the two countries, and as Bloomberg writes this morning, “U.S.-China Trade Truce May Not Last With Differences Unresolved.” For now however, the world is delighted by this unexpected development, and as shown in the chart below, US equity futures spiked higher…
… and global markets are well in the green…
… although that may not even last the day, for one simple reason: recall that in recent months, the key “loophole” the Fed used as a hint it may halt the tightening cycle was fears about trade war. Well, now that “trade war is on hold”, the Fed no longer has an alibi to halt, or even slow the rate hikes, which means a strong dollar, which means higher short rates, which means a potentially catastrophic volatility eruption on the short end, as Deutsche Bank laid out over the weekend in the following flowchart.
And sure enough, while stocks are sharply higher, the FX dynamics continue to deteriorate for the emerging markets, with the Bloomberg Dollar Spot Index building on recent gains following the “trade truce”…
… which has also sent the yen to a four-month low, while lingering concerns over Italian politics push the euro below 1.1720 for the first time since December.
The ongoing dollar spike also pushed the pound to the lowest level since December 28 amid lingering U.K. political uncertainties. Higher U.S. yields also support the greenback during another session in the red for emerging-market currencies, where the relentless rout of the past month continues with another bloodbath in the EM FX screen, with Turkey once again hit the hardest as the Borsa Istanbul 100 Index drops 0.3% in early trading as the Turkish lira weakens to a record low and 10-year bond yields hit an all-time high.
Threatening to spoil today’s party, a somber analysis from Macquarie Bank notes that the greenback will nudge higher against emerging-market currencies from current levels as the U.S. trade policy remains a concern: “There will be some pressure” on EMs from a stronger dollar and rising USTs, although the market is still “quite far away” from calling the selloff a crisis, Nizam Idris, head of strategy for fixed income and currencies in Singapore, told Bloomberg TV. There’s a “significant sigh of relief” among investors in Asia following the trade truce, although “the relief today was very cautious” as it will be “near impossible” for China reduce U.S. trade deficit by $200BN by merely importing more American products.
Meanwhile, speaking of Italy, as we reported on Sunday, the country’s populist leaders are set to propose a cabinet as early as today, with Florence University law professor Giuseppe Conte the pick for Prime Minister. However what the market is more worried about is the risk of Italeave rising now that Rome may implement a parallel currency: indeed, Italian bonds slipped amid “mini-BOTs” speculation, with the 2Y yield soaring while a flight to core European safety meant German bunds were better bid. And while Italy’s FTSE MIB index did fall as much as 2.1%, most of this was the result of about half of the stocks on the 40-member benchmark trading ex-dividend, with an impact of -1.7% at the open.
Yet despite the growing risk of another Italian crisis, European markets are surging, facilitated by the slump in the Euro, which has buoyed exporters. In company-specific news, Ryanair said annual earnings are set to slump for the first time since 2014 after a pilot shortage compelled it to give in to demands for union recognition and sweetened contracts. Elsewhere the FTSE 100 hit record highs with some credit attributed to FX effects. Sectors are all in the green with outperformance in consumer discretionary and underperformance in financials. In stocks specifics, FTSE 100 heavyweight AstraZeneca (+2.3%) shares are higher amid the FDA approving a treatment. Note that European volumes are muted as many European markets including Germany, Switzerland, Denmark and Norway are closed today.
“The continued buoyancy in European markets is being helped in no small part by the weakness in both the euro and the pound against the U.S. dollar, while concerns about an escalation in tensions between China and the U.S. appear to have been deferred in the short term after progress in trade talks at the weekend. This deferral of tensions should see markets in Europe get off to a positive start this morning with the FTSE 100 on course to open at a record high,” wrote CMC Markets chief market analyst Michael Hewson.
Earlier in Asia, market traded mostly positive, with the Nikkei 225 (+0.3%) benefiting from a weaker yen, while the ASX 200 (-0.1%) lagged behind its regional peers with upside capped by weakness in its largest weighted financials sector as the Royal Banking Commission shifts its attention to Westpac’s business lending practices. Shanghai Comp. (+0.6%) and Hang Seng (+0.6%) outperformed with Chinese bourses the main benefactor of the reduced trade tensions following the postponement of US trade war.
In other overnight news, President Trump spoke with South Korean President Moon regarding North Korea in which they agreed to work together for a successful summit, while Moon will be visiting the White House on Tuesday to coordinate on the summit. Iran pledged to adhere to the nuclear agreement if EU helps it offset US sanctions.
Looking at commodities, oil is currently higher with both WTI and Brent +0.3% in-fitting with the broader risk-picture, albeit off best levels alongside fluctuations in the USD. Energy newsflow remains light with the only commentary of note being from IEA’s Birol who stated that he sees initial signs of a slowdown in oil demand and they are ready to act. Elsewhere, gold is at 5 month lows as the USD prints fresh YTD highs with demand for the safe-haven dampened by the risk tone which was also the key factor that propped up copper prices (+0.1%) overnight, especially considering the outperformance in its largest consumer China. Iron ore is currently down 3%, falling for the fourth straight session on restocking delays in steel mills which has also weighed on steel prices, currently down 1%
A handful of companies is set to report earnings, and data on the Chicago Fed national activity index is also expected. Three speakers form the US Federal Reserve crowd the agenda today, and the minutes of the last FOMC meeting will be released on Wednesday.
Bulletin Headline Summary from RanSquawk
Top Overnight News
Asian equity markets traded mostly positive with sentiment underpinned following the conclusion of the 2nd round of US-China trade talks in which China agreed to purchase more goods to avoid a trade war but stopped short of indicating an actual amount it plans to reduce the deficit by. More importantly, US Treasury Secretary Mnuchin announced that tariffs on China would be placed on hold as discussions progress, which eased trade concerns and saw the E-mini S&P gap higher by 0.6% while DJIA futures gained over 200 points. Nikkei 225 (+0.3%) benefitted from a weaker currency, while ASX 200 (-0.1%) lagged behind its regional peers with upside capped by weakness in its largest weighted financials sector as the Royal Banking Commission shifts its attention to Westpac’s business lending practices. Shanghai Comp. (+0.6%) and Hang Seng (+0.6%) outperformed with Chinese bourses the main benefactor of the reduced trade tensions following the postponement of US trade war. Finally, 10yr JGBs were subdued amid gains in stocks and early pressure in T-notes at the open as participants reacted to the trade-related developments, although the latter has since recovered amid reports of block buying from intraday lows.
Top Asian News
European equities trade higher (FTSE 100 +0.8%, CAC 40 +0.7% and IBEX +0.3%) with the absence of German and Swiss stocks in light of Whit Monday. Italy is in focus as the populist leaders agreed on a choice of Premier and cabinet for a coalition government. The party leaders are to meet with Italian President Mattarella this afternoon. Recent reports state that the President does no see any obstacles to a Giuseppe Conte Premiership. Elsewhere the FTSE 100 hit record highs with some credit attributed to FX effects. Sectors are all in the green with outperformance in consumer discretionary and underperformance in financials. In stocks specifics, FTSE 100 heavyweight AstraZeneca (+2.3%) shares are higher amid the FDA approving a treatment.
Top European News
In FX, the index has now crossed over 94.000 amidst broad Usd gains on the back of a semi-successful conclusion to the latest trade talks between the US and China. In short, concessions have been made on either side and a truce called on tariffs pending further discussions to reach a mutual agreement and ultimately rebalance the lop-sided trade accounts. For the record, 94.064 is the fresh multi-month DXY high and chart-wise 94.200-219 is the next upside target (Fib level), as latest CFTC data reveal a further reduction in short vs all counterparts aside from the Jpy and Cad. JPY Stops have finally been tripped at 111.20 vs the Dollar and the obvious nearest bullish objective is 111.50 vs a circa 111.39 peak so far where barrier option offers are reported. 111.00 now becomes support. JPY: Stops have finally been tripped at 111.20 vs the Dollar and the obvious nearest bullish objective is 111.50 vs a circa 111.39 peak so far where barrier option offers are reported. 111.00 now becomes support. EM: No respite for the likes of the Lira, as Usd/Try jumps to just shy of 4.5600 and the Turkish authorities only offer words to address the situation and little tangible to arrest the currency’s slide. Many market observers are now eyeing even more record lows for the Lira unless the CBRT takes decisive/dramatic policy action on June 7.
In commodities, oil is currently up with both WTI and Brent +0.3% in-fitting with the broader risk-picture, albeit off best levels alongside fluctuations in the USD. Energy newsflow remains light with the only commentary of note being from IEA’s Birol who stated that he sees initial signs of a slowdown in oil demand and they are ready to act. Elsewhere, gold is at 5 month lows as the USD prints fresh YTD highs with demand for the safe-haven dampened by the risk tone which was also the key factor that propped up copper prices (+0.1%) overnight, especially considering the outperformance in its largest consumer China. Iron ore is currently down 3%, falling for the fourth straight session on restocking delays in steel mills which has also weighed on steel prices, currently down 1%
Looking at today’s calendar, it is a fairly quiet start to the week with the main highlights being the afternoon and evening Fedspeak when Bostic, Harker and Kashkari all speak separately. Datawise, the April Chicago Fed national activity index in the US is due. Elsewhere, the ECB’s Nowotny and Riksbank’s Jansson are also due to speak.
US Event Calendar
DB’s Jim Reid concludes the overnight wrap
It looks like many of the tariffs agreed by the US and China could be ripped up too after this weekend’s positive joint announcement, although it seems that the US may be keeping some glue handy in case they decide that China is not meeting its obligations. The statement highlighted a consensus to “substantially reduce the US trade deficit in goods with China”. China promised to “significantly increase purchases of US goods and services”. There was no numerical target nor timeline though. One specific was that China promised to buy more agricultural and energy products. However as our Chinese economists pointed out, China’s imports of these products from the US were USD 26bn in 2017. The bilateral trade deficit was 375bn. The head of Chinese delegation, Mr Liu He, said in an interview that both sides agreed not to fight in a trade war, and stop imposing incremental tariffs on each other. The US response was a little more guarded with Trump’s advisor Kudlow not confirming that tariffs were on hold but Treasury Secretary Mnuchin later said that “We’ve decided to put the trade war on hold. So right now, we have agreed to put the tariffs on hold while we execute a framework”. He also added the US expects an increase of 35-40% in agricultural exports this year to China and a doubling of energy exports over the next 3-5 years.
Overall, our Chinese economists think that the trade war may be suspended for now, but doubt it has ended. Their future direction may depend on non-economic issues such as geopolitical risk in the Korean peninsula and the US midterm election. Overall while positive they think there remains a lot of unanswered questions. See the link for more.
This morning in Asia, markets are broadly higher with gains from the Hang Seng (+1.23%), Nikkei (+0.37%) and Kospi (+0.26%) while the ASX 200 is marginally lower. Elsewhere, futures on the S&P are also up c0.5% following the more reassuring comments from Secretary Mnuchin while UST 10y yields are up c1bp. Datawise, Japan’s April trade surplus was above expectations at JPY626bn (US $5.6bn vs. JPY440bn expected) as exports outpaced a weaker than expected growth in imports (5.9% yoy vs. 9.8% expected).
The other big weekend story was the latest developments in Italy. The head of League Party Mr Salvini said “we closed the deal (with 5SM) this morning on the candidate for Premier and Ministers, so we’re ready to get started”. He added the government will include “unexpected” external figures, to which Bloomberg reported that Florence University law professor Giuseppe Conte may emerge as the Premier and the cabinet make up to be revealed as early as today. Elsewhere, French Finance Minister Bruno Le Maire warned that “if the new (Italian) government took the risk of not respecting its commitments on debt, the deficit…the financial stability of the entire Euro zone will be threatened”. Subsequently, the League’s Salvini tweeted the warning from France was “unacceptable” interference and added “Italian first!” So still lots bubbling along. As a reminder the spread between 10y BTPs and Bunds is now at 165bp, the highest since mid-October.
The focal point data wise this week will likely be the latest global flash PMIs (Wednesday), especially those in Europe. In terms of expectations, the consensus for the Eurozone manufacturing reading is 56, which follows the 56.2 reading in April and a 60.6 high print back in December. The composite print for the Eurozone is expected to be flat mom at 55.1. The PMIs in the US are also expected to be broadly stable mom, with the consensus for the manufacturing print expected to be 56.5 for April. Elsewhere the FOMC minutes on Wednesday evening from the May 2nd meeting will be closely watched. The statement at the time arguably moved us incrementally in a more hawkish direction. It also included use of the word ‘symmetry’ in relation to the 2% inflation objective, so it’ll be interesting to see if this is fleshed out at all. Indeed, our US economists saw the meeting statement as a first step towards altering the balance of risks language and expect to learn more from the minutes. As we know, since the meeting we have had some disappointing inflation readings in the US (CPI and average hourly earnings), however, bond yields have continued to march higher. The rest of the global week ahead is included at the end.
Now recapping other markets performance from Friday. In equities, the Stoxx 600 dipped -0.28% on Friday, but was up for the 8th consecutive week (+0.58%), buoyed by energy stocks over this period. The S&P weakened -0.26% on Friday, weighed down by energy and financial stocks. In FX, the US dollar index firmed for the fifth day (+0.18%) while the Euro and Sterling weakened -0.19% and -0.35% respectively. Elsewhere, precious metals strengthened slightly (Gold +0.17%; Silver +0.06%) while other base metals were mixed but little changed.
Over in government bonds, the yields on UST 10y fell for the first time in six days (-5.5bp) to 3.057% while Bunds (-6.0bp) and Gilts (-6.3bps) also rallied. There wasn’t really an explanation for the sharp reversal after a bearish week for bonds.
Elsewhere, yields on 10y Italian BTPs jumped +11bp on Friday and c36bp for the week, so the flight to safety effect may have also played its part. Now moving onto Iran and the US sanctions. Reuters reported that Iran will join a meeting this Friday with diplomats from the UK, Germany, France, China and Russia to discuss next steps following the US withdrawal from the nuclear accord.
Ahead of this, the German newspaper Welt am Sonntag cited unnamed senior EU officials who noted that the possibility of “….adding a few additional elements (to the accord). Only that will convince President Trump to agree and lift sanctions again”.
Before we take a look at today’s calendar, we wrap up with other data releases from Friday. Germany’s April PPI was above market at 2.0% yoy (vs 1.8% expected), while the Euro area’s March trade surplus was marginally higher than expectations at €21.2bln (vs. €21.0bln). Over in Canada, both its core and weighted median April CPI were in line at 1.9% yoy and 2.1% yoy respectively. Overall, the average reading across the measures is now 2.0% – a pace last exceeded in February 2012.
Looking at Monday’s events, it is a fairly quiet start to the week with the main highlights being the afternoon and evening Fedspeak when Bostic, Harker and Kashkari all speak separately. Datawise, the April Chicago Fed national activity index in the US is due. Elsewhere, the ECB’s Nowotny and Riksbank’s Jansson are also due to speak.
This article was posted: Monday, May 21, 2018 at 7:50 am