20 May 2019 Issue 809
Global Market Commentary
- US: The S-US trade war has once again stalled, and there is still no date for the next round of negotiations between China and the United States, dragging down the stock market. Over the week, the Dow fell by 0.69% to 25,764.00. The S&P 500 index fell by 0.76% to 2,859.53. The Nasdaq fell by 1.27% to 7,816.29 points.
- Europe: European stock markets performed well at the beginning of last week, rising for three days, but the market worried about the Sino-US trade conflict and the prospects of the UK, the European stock market dropped at the end of last week. Over the week, the UK’s FTSE 100 index rose by 2.02%, the German DAX index rose by 1.49%, and the French CAC40 index rose by 2.08%. The STOXX 600 index rose by 1.16% for the week, at 381.71 points.
- Asia: The US-China trade war has once again stalled, and there is still no date for the next round of negotiations between China and the United States, dragging down the stock market. For the whole week, the Nikkei 225 index fell by 0.44% to 21,250.09 points. The MSCI Asia Pacific Index fell by 1.95 percent to 153.99.
- US: China and the United States will not restart trade negotiations in the short term, causing funds flow into the bond market. For the whole week, the US 10-year bond yield fell by 8 basis points to 2.405%.
- Europe: The market outlook is unclear. China and the US will not restart trade negotiations in the short term, making funds flow into the bond market. For the whole week, the German 10-year bond yield fell by 6 basis points to -0.155%.
- Oil: Since the tense relations between Iran and the United States and its allies, market is worried about global oil supplies. Over the week, New York oil futures rose by 1.78% to close at $62.76 a barrel.
- US dollar: The latest economic data released by the United States is ideal, which drive up the US dollar exchange rate. For the entire week, the Dollar Index rose by 0.683% to 97.995.
- China: The yuan fell due to the slowdown in the Chinese economy and the US tariff hike. For the whole week, the yuan fell by 1.423% against the US dollar at 6.915.
- US: US President Trump said that the United States will cancel tariffs on steel and aluminum imposed on Canada and Mexico to encourage members of Congress to approve the United States–Mexico–Canada Trade Agreement.
- U.S: Informed person said the White House is considering having US Deputy Secretary of Communications Derek Kan to fill one of the two vacant director positions in the Federal Reserve Board.
- U.S: The University of Michigan’s May consumer confidence index hit a 15-year high, as economic expectations rose.
- Euro-zone: British Prime Minister Theresa May said that the government is considering whether to have indicating vote or different Brexit options. Besides, the Brexit negotiations between Theresa May and the opposition party, Labor Party, have ended without results.
- Euro-zone: According to preliminary statistics from Eurostat, the euro zone’s total exports in the first quarter of this year rose by 3.9% year-on-year to 575.7 billion euros. Also, the total import volume rose by 4.8% year-on-year to 533.2 billion euros. During the period, the trade surplus narrowed by 6.5% year-on-year to 43.5 billion euros.
- Euro-zone: Eurostat announced that after seasonal adjustment, the euro zone’s first quarter Gross Domestic Product (GDP) increased from 0.2% to 0.4%, maintaining a year-on-year growth of 1.2%.
- Japan: The Cabinet Office of Japan announced that after the seasonal adjustment, Japan’s initial Gross Domestic Product (GDP) in the first quarter of 2019 unexpectedly increased by 0.5% from the previous month, much higher than the market expectation of a 0.1% decrease.
- Japan: The Ministry of Economy, Trade and Industry announced that after the seasonal adjustment, Japan’s third industry activity index unexpectedly fell for two months in March, but the monthly decline rate narrowed from 0.6% to 0.4%, to 106.2. The market originally expected it to rebound by 0.1%.
- Singapore: Singapore International Enterprise Development Agency (IE Singapore) announced that Singapore’s non-oil exports (NODX) fell for two consecutive months in April, down 10% year-on-year, far below market expectations of a 4.6% decline.
|China Market Commentary|
|• The China Central Bank’s first-quarter monetary policy implementation report stated that trade conflicts and policy uncertainties remain significant risks. Besides, it reaffirmed the flexibility of the RMB exchange rate.
• According to informed person’s claim, before Trump ordered the containment on Huawei, Huawei had already stocked enough chips and other important components to keep its business running for at least three months.
China Central Bank Want to Slow the Pace of Currency Depreciation
RMB fell to weakest level since December last week, and to within shrinking distance of the mark of 7 which was last seen during financial crisis in 2008. RMB depreciated 3% last month on fading hopes of a deal between US and China.
No sharp falls on RMB
According to Reuters report, China central bank will use foreign exchange intervention and monetary policy tools to stop the yuan weakening past the key level in the near term. A weaker yuan will support Chinese exporters, the decline need to be significant to offset the impact of new tariffs. However, any sharp fall of RMB will lead to a capital flight in China’s economic stability.
China central bank bills in Hong Kong this week, shrinking the supply of RMB. The market believes PBOC wanted to discourage investors to shoot sell it.
The balance between stability and competitiveness
Currency can not be weapon of trade war. A stable currency is required for China as it need to open the financial market by attracting more portfolio inflows and push for global equity/bond index inclusions. A rapid devaluation would shake confidence in the local market and among domestic investors.
China can re-introduce a counter-cyclical factor, in order to adjust the daily reference point for the yuan trading band. Market believe it has been using the factor last week for temper depreciation.
Currency volatility matters
RMB is a key indication of risk appetite. In the offshore markets, RMB one year forward had weakened to 6.977 per dollar, slipping from 6.8482 one week ago before Trump raised tariffs. A sharp change is also seen in option market, which signal the currency volatility increasing.
EM bond suffer a hard outflow last week. Some portfolio managers shrink the position more defensively by cutting EM bond. However, not many portfolio managers change their believes that China will not allow their currency materially depreciate.
For rest of the year, we still believe market will focus on the instruments generating high yield. Benefit from the faith above and dovish Fed, we still believe investors can buy the dip of EM bond in the near future.