12 August 2019 Issue 821
Global Market Commentary
- United States: The Sino-US trade war has escalated. US President Trump announced that it will impose a 10% tariff on 300 billion worth Chinese goods from September 1. Over the week, the Dow fell by 0.75 percent to 26,287.44. The S&P 500 index fell by 0.46 percent to 2,918.65. The Nasdaq fell by 0.56% to 7,959.14.
- Europe: The market worried about the global economic prospect as there are lots of uncertainties, including political uncertainty in Italy, the Sino-US trade war uncertainty, and the risk of the no-deal Brexit. For the whole week, the UK’s FTSE 100 index fell by 2.07%, the German DAX index fell by 1.50%, and the French CAC40 index fell by 0.58%. The STOXX 600 index fell by 1.74% for the week to 371.56 points.
- Asia: The Sino-US trade war has escalated. US President Trump announced that it will impose a 10% tariff on 300 billion Chinese goods from September 1. China has also announced that it will stop buying US agricultural products. Over the week, the Nikkei 225 index fell by 1.91% to 20,684.82 points. The MSCI Asia Pacific Index fell by 2.14% to 152.26 points.
- United States: The Sino-US trade war has escalated. The market is worried that the Sino-US trade war will affect the global economy, causing capital flows into the bond market. For the whole week, the yield on the US 10-year government bond fell by 10 basis points to 1.745%.
- Eurozone: The Sino-US trade war has escalated. The market is worried that the Sino-US trade war will hit the global economy, causing capital flows into the bond market. For the whole week, the German 10-year bond yield fell by 8 basis points to -0.578%.
- Oil Price: Investors are worried that the Sino-US trade war will affect the market demand for crude oil, and the US crude oil inventories increased by 2.4 million barrels, more than market expectations. Over the week, New York oil futures fell by 2.08%, to close at $54.50 a barrel.
- United States: China’s yuan fell below the politically sensitive level of seven to the U.S. dollar. Trump once again criticized the Fed’s decision to raise interest rates last year. For the whole week, the Dollar Index fell by 0.594% to 97.491.
- China: China’s yuan fell below the politically sensitive level of seven to the U.S. dollar. The United States subsequently announced that it officially listed China as a currency manipulator. For the whole week, the yuan fell by 1.702% against the US dollar at 7.058.
- United States: Trump said the US will not have business with Huawei. Later, Fox News reporters said in a tweet that Trump only prohibited federal agencies from purchasing Huawei products.
- United States: The White House economic adviser Kudlow said that the United States still expects Chinese negotiators will travel to the United States for economic and trade consultations in September. He also claimed that the US will “carefully observe” whether China has taken action to stop the depreciation of the renminbi.
- United States: The IMF released a report on Friday that if the US raises the tariff rate on the remaining Chinese exports from 10% to 25%, it may drag China’s economic growth rate by 0.8 percentage points in the next year.
- Eurozone: Italian Deputy Prime Minister Salvini said that the government led by Prime Minister Conte no longer has majority support and needs to hold a general election in advance.
- Eurozone: The British minister, Michael Gove, who is responsible for planning Brexit, accused the EU of inaction in trying to reach a new agreement, which further deepening the diplomatic deadlock between the two sides.
- Eurozone: Italian Deputy Prime Minister Salvini said that if the promised investment and tax cuts are to be realized, the Italian government will not be able to keep the budget deficit below 2%.
- Japan: Japan’s Cabinet Office announced that after seasonal adjustments, Japan’s real GDP growth in the second quarter of this year slowed to 0.4% from 0.7% in the previous quarter, but it is still better than the market expectations of a 0.1% increase.
- Japan: Jibun Bank/Markit data showed that after the seasonal adjustment, Japan’s Service Purchasing Managers Index (PMI) unexpectedly fell to 51.8 in July from 51.9 in June, lower than the market expectation of 52.3.
- India: Statistics from the Indian Bureau of Statistics show that India’s industrial production index (IIP) slowed from 4.6% in May to 2% in June, but it is still higher than market expectations of a 1.5% increase.
|China Market Commentary|
|• The China Securities Regulatory Commission issued a Weibo statement saying that China will further expand the opening of the commodity futures market in an orderly manner. At present, there is no plan to significantly ease the investment restrictions on foreign investors in stock index futures.
• In the second quarter monetary policy implementation report, the People’s Bank of China stated that it will objectively understand the downward pressure on economic growth, strengthen macro-prudential management on the foreign exchange market when necessary, and stabilize investors’ expectations.
Will the US intervene the exchange rate?
Although the Chinese central bank governor Yi Gang indicated that China would not use the exchange rate as a weapon for trade war negotiations, the renminbi exchange rate increase over “7” level and the US president was greatly angry. Trump then issued a message by social media to announce that the renminbi was manipulated by China and continued to push the Fed to cut interest rates. More and more market participants believe that the United States will consider intervening in the exchange rate to avoid falling behind in the currency war.
Where does the dollar depreciation pressure come from?
China has given up the “7” level of the Renminbi, and the Sino-US trade war has escalated, which has intensified the pressure on the depreciation of emerging market currencies. On the day when the Renminbi broke “7”, the Korean won depreciated more than 1.5%. If risk appetite goes down, it means that the dollar will have more pressure to appreciate against a basket of emerging market currencies. More importantly, this week, many countries in emerging markets held interest-rate meetings, and they all lowered the benchmark interest rate. Among them, India cut the benchmark interest rate by 35 basis points, and the central banks of the Philippines and Indonesia cut interest rates by 25 basis points and 50 basis points respectively. The sluggish inflation has caused central banks in emerging markets to gain room to cut interest rates and increase the relative spread between the United States and themselves.
A more important potential danger lies in the next move by the European and Japanese central banks. Although the monetary policy of Europe and Japan are very limited, the two countries are pushing for a new round of stimulus measures. In particular, the European Central Bank is more willing to further cut the benchmark interest rate in September. Therefore, if the euro falls below the 1.10 mark, the pressure on the dollar to appreciate is even greater.
Trump is dissatisfied with the dollar is too strong
As early as mid-July, the United States declined to intervened the exchange rate. Trump’s chief economic adviser Kudlow and Finance Minister Mnuchin, both opposed the US intervention in the dollar. However, the situation may be different. Trump began to worry that the strength of the dollar will affect economic growth in 2020, thereby reducing his chances in election. At present, the weighted trade dollar exchange rate has risen to a high level close to 2002, reflecting that US product export competitiveness has been eroded by a strong dollar.
If Trump considers intervening in the exchange rate, it cannot be achieved solely by the Ministry of Finance. Research shows that the Treasury has 94 billion assets, but the foreign exchange market transaction amount is 5 trillion per day. Even if the Fed is willing to bear the cost of intervention, it is very limited in terms of market impact. It is also difficult for Trump to incite the independence of the Fed and ask the central bank to join the task. Therefore, the US president can only continue to pressure Powell, and even increase the numbers of dovish officials, affecting the Fed’s decision on interest rates.
The impact of the currency war
The currency war is a zero-sum game. When one side seeks to obtain additional benefit from the exchange rate, other parties will seek various ways to retaliate. If the United States joins the camp that intervenes in the exchange rate, the world economy will be under further pressure. The current exchange rate volatility has touched a new low for many years, which is conducive to enterprises to manage exchange rate risks. Changing this environment will adversely affect the market sentiment. For the time being, everyone will use the interest rate cut to depreciate and will not publicly claim to intervene in the exchange rate. Undoubtedly, in this environment, the price of gold will rise as the real interest rate falls.
上周美國聯儲局減息，相信將帶動其他國家央行採取寬鬆貨幣政策。市場的傳統智慧是「不要與央行對着幹」(don’t fight with the Fed)。既然央行放水救市，投資者便應乘搭順風車…..