As one deconstructs the moves in the market, it becomes clear that there was a much higher degree of prudence all around. At the epicenter driving today's market movements, we find the standstill by the US and China to make progress in trade ties...
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It was a hostile day to be a risk-seeker, even if one would need to check the screens twice judging by the impressive run in the New Zealand Dollar, recently supported by a higher dairy auction but paradoxically, with the RBNZ potentially readying a rate cut in August. But I digress, as one deconstructs the moves in the market, it becomes clear that there was a much higher degree of prudence all around as the S&P 500 lost nearly 0.8%, long-dated US-30 year bond yield open Asia on Thursday 0.61% lower, Gold printed a bullish engulfing bar on the daily and Oil continues to find sellers even if we are back to square one in the US-Iran hopes to bridge differences after remarks by Iran's Foreign Minister. At the epicenter driving today's market movements, we find the standstill by the US and China to make progress in trade ties. An article published by the WSJ highlighting the difficulties to move forward with Huawei led to the over-supply in risk to worsen. Shifting gears, when analyzing FX moves on a merit basis today, the EUR index keeps whispering that the market is in no mood to amass the currency, as expectations keep building up that the ECB may have found enough evidence to wait no longer before it introduces its new stimulus program as soon as next week. The USD, meanwhile, saw a moderate retreat, but nothing major, with today's Fed speakers and the Fed Beige Book, reinforcing the notion that one or two insurance rate cuts are coming on the basis of 3 shaky pillars (global growth slowdown, trade uncertainty, low inflation). The JPY, as one would expect, attracted solid bids amid the shift to risk-off dynamics. The Swissy trod water, failing to attract the buying interest the Yen did. The Sterling, while it managed to stop the bloodbath in the last 24h, is still a currency with the most fragile macros, with banks such as Morgan Stanley calling for a 1-1.10 range as 'fair valuation' if a hard-Brexit ensues by the end of October. The CAD, meanwhile, has been trading for more than a week without the 'punch' it had us accustomed as a macro resistance in the index has been reached. Besides, intermarket flows, are far from ideal to be overly optimistic on the CAD heading into Thursday. Lastly, the AUD succumbed to risk-off by adjusting its valuation a tad lower even if the structure of the index is still of the most positive out there as the RBA will most likely take a pause in easing till Q4 at the bare minimum. Overall, the movements in Forex are still lagging way behind compared to the amount of vol experienced in equities or commodities.
Narratives In Financial Markets
* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.
Risk of ECB’s Draghi overdelivering: ECB governing council member, Benoit Coeure, reiterated its dovish stance by saying that the Central Bank is determined to act in case of adverse contingencies by adjusting all of its instruments as appropriate. On the outlook moving forward, Couere warned that evidence through economic data and surveys points for weaker growth in Q2, Q3 with risks tilted to the downside. The Euro has been out of love since late June, in a move that appears to be predicated by the anticipation that ECB’s Draghi may overdeliver by introducing a new stimulus program next week rather than simply adjusting the forward guidance to cut in September. Yesterday’s ill-fated German Zew survey only fortifies the immediate dovish expectations.
No love for the Pound: UK Brexit secretary, Stephen Barclay, spoke about his recent private meeting with EU chief Brexit negotiator, Michel Barnier, telling the press that there is a strong desire to avoid a no-deal Brexit, while also forewarning that the Irish backstop option was non-negotiable in an attempt to shift the focus towards what other alternative arrangements may exist. The news signifies no change from known events hence it’s unlikely to alter the negative mood in the Pound with the market gradually coming to a rude awakening that this time might be it for the UK to be headed towards a harder Brexit as it runs out of options on the basis that the two Conservative Party leadership contenders, Jeremy Hunt, and Boris Johnson, see an Irish backstop as ‘dead’. What this scenario creates is a very troublesome situation as the EU is unwilling to offer concessions.
US-China in a cul-de-sac road: According to US States Secretary of Commerce, Wilbur Ross, the US and China are expected to hold another trade call this week, which will have a bearing on whether or not an in-person meeting takes place. The preponderance of evidence since both countries announced a trade truce at the G20 to buy some time has proved rather uneventful in terms of any progress. If anything, comments from both sides do imply that the long list of disagreements remain unresolved, with provoking and out of place comments by Trump threatening to impose more tariffs on China if he wanted yesterday, not helping the case to build any optimism.
As China sticks to its guns: Global Times editor Hu Xijin, who has become a widely followed voice for the Communist party, said China is insistent on the three principles if a trade deal is to occur. These include the removal of all tariffs, realistic targets for China to buy US products and more equality in any future drafted trade agreement, which at this point, is a long distant prospect. Besides, with the latest US and Chinese data improving and the US equity market at all-time highs, the incentives for both sides to rush into any hasty decision as part of the negotiations is far from ideal.
True risk-off day as a result: The appreciation in the JPY index today, gunning through its baseline, comes as the dynamics shift to a short-term risk-off profile as depicted by the lower levels recorded in both US stocks and yields. The mood towards risk deteriorated significantly towards the close as a report in the Wall Street Journal did the rounds, noting that "talks with China had stalled while the Trump administration determines how to address Beijing’s demands that it ease restrictions on Huawei Technologies Co., according to people familiar with the talks." Easing expectations by the Fed have underpinned stocks (music to buyers' ears) but in the background, the thorny issue of China and the lack of progress in negotiations, at a time when stocks have recorded new historical highs, warrants caution.
IMF reminds us Fed has a say to reflate the global economy: As part of its annual External Sector Report released today, the IMF estimates the US dollar is 6-12% overvalued relative to US fundamentals, while the Yuan is at levels warranted by economic fundamentals. The overvaluation of the USD has become a hot topic, especially after jawboning by President Trump that a future (mid-term) intervention could be on the cards. One of the heavy-weight reasons for global disinflationary pressures to have prevailed is predicated on the lofty levels of the USD, and its impact on commodity prices, credit in EMs and the ability of USD-funded corporations to keep up its profitability levels. Since the Fed’s rationale to cut rates has shifted towards suppressed inflation, trade uncertainty, and global growth, it suggests it is within the Fed’s reach to now influence the USD levels if it so desires to stimulate the follow-through selling of USDs and incentivize renewed reflationary pressures.
Fed members keep a consistent message: San Francisco Federal Reserve Bank President Mary Daly, gave an interview via Reuters, sounding non-committal by reserving her judgment on the next interest rate call. Daly said she is not leaning one way or the other on July interest rate decision, adding that is too early to tell if the economy needs additional stimulus to get to above-trend growth. Interestingly, while she sticks to the script of other Fed members by not observing weakness in consumer spending or jobs, Daly recognizes a mixture of headwinds, including trade, mood, uncertainty, global slowdown, which is precisely the logic behind Fed’s Chair Powell guidance to justify an insurance cut(s).
Even Fed hawks respect unity in rhetoric: Fed's Kansas City President George, who is characterized by her upbeat remarks on policy, made comments today consistent with the rhetoric that a lower adjustment in rates is a possibility by stating that “trade, tariffs and global growth are risks to the US outlook”, and adding that “she is prepared to adjust her view of appropriate monetary policy should downside risks materialize.” Since that’s the line of reasoning for Powell to slash rates in July, the comments, in my view, reinforce the idea that the Fed is talking with cohesion and unity to telegraph one or two rate cuts, with the debate of one/two-and-done or an easing cycle to be data-dependent.
As does the Fed’s Beige Book: Today’s primary messages by the Fed's Beige Book are also congruous with a context that could warrant one or two rate cuts. The Beige Book highlighted that economic activity expanded at 'modest pace overall', and while the outlook 'generally was positive', widespread concerns about possible negative impacts of trade-related uncertainty were noticeable. Even on inflation, the remarks were in accordance with a laxer Fed, noting that price inflation was 'stable to down slightly' from the prior period, and even if firms generally saw higher input costs on labor and tariffs, the ability to pass them on to the end user was limited. One more piece of evidence that the Fed is talking with one voice in a united front setting up the stage for lower rates.
BOC won’t budge after today’s Canadian CPI: Canada’s June CPI y/y, as was the case in New Zealand yesterday, came bang on expectations at +2.0%, while the month-over-month was marginally better-than-feared at -0.2% vs -0.3% exp. As per the core measures, the median CPI printed 2.2% vs 2.1% exp, and the trimmed saw a minor retreat to 2.1% vs 2.2% exp. I can’t envision how this data may alter the current BOC stance, which remains on neutral territory even if alerted to adapt to rising uncertainties. Overall, the CAD put on a very decent performance despite a slump in Oil prices. The news that Canada was affirmed at AAA by Fitch with a stable outlook was a factor that may have contributed to the firm demand as well. Fitch referred to Canada's macro performance 'robust'.
Back to square one with Iran: Iran's Foreign Minister Zarif, in his comments today, essentially canceled much of the optimism that was hovering around the trading floors yesterday that the US and Iran may have struck a compromise that would allow them to at least return to the negotiating table. The reports yesterday suggested that Iran could be willing to negotiate its missile program, which led to an instant aggressive low adjustment in the price of Oil. However, even if the Oil price remains under pressure, Zarif’s comments that the US 'shot itself in the foot' by quitting the nuclear deal, are far from striking much consistency in Iran’s intention to negotiate.
Recent Economic Indicators & Events Ahead
A Dive Into The Charts (Tech, Funda, Intermarket)
EUR/USD: Unfinished Business To The Downside
GBP/USD: Don't Fight The Trend
USD/JPY: Risk Builds For Lower Adjustments As Risk-Off Back
AUD/USD: No Clear Bias After Single Volume Profile Distribution
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