10 June 2019 Issue 812
Global Market Commentary
- US: China and the United States have not made any real progress in trade disputes, but the market expects Federal Reserve will cut interest rates, which drive the stock market. For the entire week, the Dow rose 4.71% to 25,983.94. The S&P 500 index rose 4.41% to 2,873.34. The Nasdaq rose 3.88% to 7,742.10.
- Europe: The European Central Bank issued a statement after the monetary policy meeting, slightly raising the Eurozone’s Economic Growth Forecast by 0.1 percentage point this year to 1.2%. In addition, the European Central Bank promised to maintain low interest rates for a longer period of time, and it is expected that interest rates will remain unchanged or even lower until the first half of 2020. Over the week, the UK’s FTSE 100 index rose 2.38%, the German DAX index rose 2.72%, and the French CAC40 index rose 3.00%. The STOXX 600 index rose 2.28% to 377.48 points.
- Asia: The United States has indefinitely postponed plans to impose tariffs on Mexican imports, which drive the investment sentiment. Over the week, the Nikkei 225 index rose 1.38% to 20,884.71 points. The MSCI Asia Pacific Index rose 1.29% to 154.32 points.
- US: Due to weak US employment data, market expects the Fed will cut interest rates. For the whole week, the yield on the US 10-year government bond fell 4 basis points to 2.114%.
- Europe: The European Central Bank is committed to maintaining low interest rates for a longer period of time and it is expected to keep interest rates unchanged or even lower until the first half of 2020. For the whole week, the German 10-year bond yield fell by 5 basis points to -0.258%.
- Oil: The trade war between the US and Mexico is settled within a short period, and Trump said it would cancel the tariff plans indefinitely. In addition, the oil-producing country Saudi Arabia said that the oil group is close to reaching a consensus on extending the reduction agreement. Over the week, New York oil futures rose 0.92% to close at $53.99 a barrel.
- US dollar: Affected by the economic slowdown and the expectation of interest rate cuts, the US dollar index decreased. For the entire week, the Dollar Index fell 1.234% to 96.544.
- China: China’s foreign exchange reserves unexpectedly increased by 6.05 billion U.S. dollars in May, and the exchange rate of the RMB strengthened. For the whole week, the yuan rose by 0.039% against the US dollar to 6.910.
- US: US Treasury Secretary Mnuchin and Chinese Central Bank governor Yi Gang met during the weekend G20 meeting. Mnuchin claimed that they had a “candid” and “constructive” talk on trade issues. He expected that the “main progress” would occur at a meeting between presidents Donald Trump and Xi Jinping at the G-20 leaders’ summit in Osaka at the end of the month.
- US: Trump said he will decide whether to impose further tariffs on USD 325 billion worth Chinese goods after the G20 summit. It is expected to meet with Xi Jinping at the summit.
- U.S: Trump announced on Friday night that the United States and Mexico had reached an agreement on illegal immigration issues, and the proposed tariff that will impose on Mexico goods would be suspended indefinitely.
- Euro-zone: The European Central Bank is committed to maintaining low interest rates for a longer period of time and is expected to prevent interest rates hike until the end of the first half of 2020, which is six months longer than previously promised.
- Euro-zone: According to a Bloomberg survey of analysts, the pound may dropping by more than 2% to $1.24, a two-year low, if a hardline euroskeptic takes over as U.K. prime minister.
- Euro-zone: The ECB issued a statement after the monetary policy meeting, slightly raising the Eurozone’s Economic Growth Forecast by 0.1 percentage point to 1.2% this year, and next year’s Economic Growth Forecast is expected to drop by 0.2 percentage points to 1.4%.
- Japan: Japanese Cabinet Office data showed that after the seasonal adjustment, the initial value of Japan’s leading indicator in April unexpectedly fell for two months, from 95.7 in March to 95.5, the lowest since December 2012, lower than the market expectations of 95.8.
- Japan: Japan’s Ministry of Internal Affairs and Communications data showed that after intermittent price adjustments, Japan’s household spending rose for the fifth month consecutively in April, but the year-on-year increase was unexpectedly narrowed from 2.1% in the previous month to 1.3%, lower than the market expectations of 2.6%.
- Australia: The Australian Bureau of Statistics announced that after the seasonal adjustment, Australia’s trade surplus in goods and services in April unexpectedly narrowed to AUD 4.871 billion. The market originally expected the April’s surplus may expand to AUD 5.05 billion.
|China Market Commentary|
|• China will release trade data for May today, which is expected to show the pressure from the escalation of trade war. According to a Bloomberg survey, the year-on-year decline on exports in US dollar is expected to increase from 2.7% in April to 3.8%, and imports will lower from a 4% increase in April to a 3.3% decrease.
• The People’s Bank of China announced that it had USD 3.101 trillion foreign reserves at the end of May, increase by US$6.051 billion according to Bloomberg. The Foreign Exchange Bureau said that good economic fundamentals will provide a solid support for the overall stability of foreign reserves.
Is interest rate cut enough to save the market?
Is it about the time for US to lower the interest rate?
The recent stock market movements have again shown that equities prices are highly sensitive to the outlook of US rates as global economy continues to slow. The US Fed Chair Powell in the Fed’s policy review last week expressed a willingness to “act as appropriate to sustain the expansion” should further escalation of trade tensions weigh on growth. The comments were interpreted by the market as decidedly dovish, which leaves door open to a possible rate cut. As a result of the comments, the US stock markets rebounded strongly last Tuesday and recorded their best one-day percentage gains since January this year and the S&P 500 index surged by about 4.4% for the full week.
The probability of rate cuts in the remainder of 2019 has risen recently. Markets have sharply increased their expectation that the Fed will cut the rate as early as in July or September this year given the tightening in financial conditions and the deterioration in the growth outlook lately. The relevant short-term interest rate futures imply over 50-75bp of cuts in the remainder of 2019 and another 40bp in 2020, likely bringing back the Fed fund rate to below 1.5% next year. However, if a US recession or the next global crisis is really coming, we can expect there will be more rate cuts as the last two interest rate cycle suggests that a 5% rate cut is needed to stabilize and revamp the economy. At the end, the Fed may need to cut rates to zero again and resort to “unconventional” tools like bond buying to support the economy.
Financial War could be the most dangerous risk
Nervousness in markets has temporarily eased after Fed’s dovish comments, however, what makes us more worry is that trade is no longer the only battleground where the two superpowers compete for world dominance. Recent developments have suggested that the conflicts will eventually extends beyond trade and technology, and there could be various form of restrictions, investigations or even penalties to be initiated by both countries on potential areas such as tourism, education (e.g. students and academic visas), energy, auto as well as banking and financial industry. The scariest thing to the market is if the recent suggestion by the former White House adviser Steve Bannon really come true one day – to completely exclude Chinese companies from the US capital markets by cutting all the IPOs and to unwind all the investment positions of US pension funds and insurance companies on Chinese companies. Such action will have explosive impacts to both the stock and bond markets given that foreign investors hold more than $1.5 trillion of Chinese debt as of end-April 2019, while Chinese entities and government own more than $2,000 billion in Shares and $1.1 trillion in debts of the United States. All in all, we believe the probability of a full fledged financial war is still limited, wile market has yet to priced in this risk. Investors should remain cautious in 2H19 and have to maintain a more diversified portfolio.