14 May 2019 Issue 808
Global Market Commentary
- US: The trade relationships between China and the US are tense. Following Trump’s order to impose tariffs on US$325 billion worth Chinese goods, the Customs Tariff Commission of the State Council of the People’s Republic of China decided to increase tariffs on certain imported goods produced in the United States since June 1. Over the week, the Dow fell by 2.12% to 25,942.37. The S&P 500 index fell by 2.18% to close at 2,881.40. The Nasdaq fell by 3.03% to 7,916.94.
- Europe: Affected by the growing trade tension between China and the United States, the European stock markets dropped. For the whole week, the UK’s FTSE 100 index fell by 2.40%, the German DAX index fell by 2.84%, and the French CAC40 index fell by 3.99%. The STOXX 600 index fell by 3.39% to 377.14 points.
- Asia: The trade relationships between China and the US are tense. Following Trump’s order to impose tariffs on US$325 billion worth Chinese goods, the Customs Tariff Commission of the State Council of the People’s Republic of China decided to increase tariffs on certain imported goods produced in the United States since June 1. For the whole week, the Nikkei 225 index fell 4.11% to 21,344.92 points. The MSCI Asia Pacific Index fell 3.61% to 157.05 points.
- US: Affected by the trade tension between China and the US, funds flows to the risk-averse US bond market. For the whole week, the US 10-year bond yield fell by 6 basis points to 2.414%.
- Europe: Affected by the trade tension between China and the US, funds flows to the bond market. Throughout the week, the German 10-year bond yield fell by 7 basis points to 0.045%.
- Oil: Two Saudi oil tankers were being attacked near the Persian Gulf on Sunday, stimulating oil prices. However, oil prices fell later following the stock markets. Over the week, New York oil futures fell by 0.45% to close at $61.66 a barrel.
- US dollar: After the United States imposed tariffs on China, the Dollar Index fell. For the entire week, the Dollar Index fell by 0.195% to 97.330.
- China: Affected by the trade tension between China and the US, renminbi fell. For the whole week, the yuan fell by 1.197% against the US dollar at 6.816.
- US: The US Trade Representative issued a detailed plan to impose a tariff of up to 25% on $300 billion worth Chinese goods, mentioning that a public hearing on these new tariffs will be held on June 17.
- U.S: As the trade relationships between China and the US are tense, Trump plans to meet with Chinese President Xi Jinping at the G-20 summit next month. Trump said that the United States expects China to retaliate against US tariffs, but he believes that Beijing still wants to reach an agreement with the US.
- U.S: Sino-US disputes affect the economic outlook. The market is expecting the Fed will cut the interest rate. The January Fed funds futures contract shows that the Fed’s benchmark interest rate will fall to 2.095% by the end of the year.
- Euro-zone: The European Union is finalizing a list of US goods, and once Trump decides to impose tariffs on cars imported from Europe, the EU may impose retaliatory tariffs on these US goods. Trump is expected to make a decision by May 18.
- Euro-zone: According to statistics from the British Bureau of Statistics, the UK’s first quarter Gross Domestic Product (GDP) growth rate accelerated to 0.5% in the first quarter of this year, in line with market expectations. The annual growth rate has accelerated to 1.8%, which is also in line with market expectations.
- Euro-zone: The survey of the Bank of France (BOF) showed that France’s manufacturing sentiment index unexpectedly fell to 99 in April, which is lower than the market expectations of 100. Besides, the sentiment index of service industry and the construction industry have also dropped from 101 and 106 to 100 and 105 respectively.
- Japan: Japanese Cabinet Office’s data showed that after the seasonal adjustment, the final value of Japan’s Leading Indicator decreased from 97.1 in February to 96.3 in March, a new low since June 2016, but it is still in line with market expectations.
- Japan: The Japanese Cabinet Office announced that after seasonal adjustment, Japan’s Household Consumer Confidence Index fell for seven consecutive months, from 40.5 in March to 40.4 in April, hitting a new low since February 2016, but still slightly higher than the market expectations of 40.3.
- Australia: The National Australia Bank (NAB) survey showed that Australia’s NAB Business Confidence Index ended its two consecutive months fall, increased form -1 to 0, but it is still lower than the market expectations of 1.
|China Market Commentary|
|• China announced that it will increase the tariff rate on $60 billion worth US goods on June 1. It will raise the tariff rate to 25% on 2,493 US goods, such as liquefied natural gas (LNG). And the additional tariff rate of the remaining goods is between 5% and 20%. It is noted that the crude oil, automobiles and some auto parts are still not subject to retaliatory tariffs.
• MSCI announced the results of the Semi-Annual Review of the stock market index. It is noted that there are 31 equities have been added into the MSCI China Index, and four equities have been removed.
The most daunting challenge for US-China relationship
An immediate US-China trade war escalation
Whether the “sell in May” is a coincident again for 2019 or not, the return of US-China trade tensions obviously resulted in Chinese assets leading the broader Emerging Market assets lower with equities experiencing the most pain last week. The US administration decided to raise additional tariffs on $200bn of Chinese exports from 10% to 25% on May 10. In return on 13 May, China retaliated by announcing plans to impose 20-25% tariff (from 5-10% previously) on $60bn of +5,000 American imports starting June 1. The latest breakdown shows that there are still large discrepancies between the two countries and they still haven’t found the right formula to negotiate effectively. With rising pessimism, the MSCI China, MSCI Asia and MSCI EM index has tumbled by 3.9%, 4.1% and 4.3% respectively last week.
Both sides have worked hard to calm down the market since the end of discussion on Friday and emphasizes that negotiations will go on, but people close to the talks say has been a bigger erosion of trust and there are widening fundamental differences between the two sides. One of the key arguments between the two countries has been US plans to keep some tariff in place after the deal, which is unacceptable in China’s point of view. Another major area of conflict has been the long arguing intellectual property right, which are unlikely to find a common ground sooner or later.
What’s next and the economic effects?
However, the worst has not yet to come as the U.S. may backfire again by putting another 25% tariffs on $325 billion in Chinese goods that remain untaxed. On the other hand, China’s retaliation could also go beyond the goods trade and target services, especially in the finance, tourism and cultural sectors. According to UBS, the current trade war of 25% tariff on $200bn Chinese goods is likely to lower China’s real GDP growth by 30-50bps in the next 12 months and the growth could slow further by 120-150bps if a full-blown trade war happens. On the other side, UBS estimates that the negative impacts to U.S. GDP growth is about 20-35bps ($45-65bn) in the next two quarter and the impacts can be worsen to 75-100bp ($150 to $225bn) of GDP growth over the next four quarters if situation get worse.
The market impacts…
As we mentioned in early May, the extremely low market volatility YTD is unlikely to sustain especially during the late economic cycle. The VIX spiked up to 20.6 on May 13 from only 12.9 in just only one week. Asian equities including HK/China before were pricing in limited risk of the US/China talks breaking up. Therefore, we saw a big correction for Asian equities over the last few trading days, and there could be another 10-15% downside risk in the full-blown trade scenario as market is still pricing in a low-single digit and double-digit earnings growth for Asia and China for 2019, respectively. On the currency side, CNY has been weakening again since the news flow last week and it could break above 7.0 in the worst-case scenario. However, we believe the Chinese government will continue to refrain from allowing for a large CNY depreciation, e.g. to above 7.3, as a sharp depreciation could destabilize confidence and lead to more capital outflows. Nevertheless, a slump in China’s currency would be a negative to Asian currencies, in particular KRW, THB, MYR and SGD historically have had the highest sensitivity to RMB weakness (of ~0.6). On the other hand, a depreciating CNY also tends to weigh on Hong Kong’s equities as Hang Seng Index’s companies generate about 60% of their earning in CNY.
The key watching date
According to U.S. officials, the potential 25% tariffs on $325 billion Chinese goods would not take effect until late June at the earliest. The two countries still have another month to reach a deal, while the G20-meeting on June 28-29 in Osaka, Japan plays an ever-more important role as Chinese President Xi and U.S. president Trump are likely to meet and have a discussion on trade there. We expect market volatility to remain high before the G20 summit and suggest investors not to be too speculative, while it may be a good to rebalance your portfolio and reduce the weight of risky assets.