16 September 2019, Issue 826
Global Market Commentary
- United States: Trump said he is holding an open attitude to have a temporary trade agreement with China. However, he claimed it is better to reach a permanent agreement with China. Over the week, the Dow rose 1.58 percent to 27,219.52 points. The S&P 500 index rose 0.96 percent to close at 3,007.39. The Nasdaq rose 0.91% to 8,176.71.
- Europe: The European Central Bank decided to further cut the negative deposit rate to -0.5%, and it will purchase 20 billion euros of bonds each month from November 1 to boost the economic growth of the euro zone. Over the week, the UK’s FTSE 100 index rose 1.17 percent, the German DAX index rose 2.27 percent, and the French CAC 40 index rose 0.92 percent. The STOXX 600 index rose 1.2% to 391.79 points.
- Asia: China’s social financing growth rate in August exceeded expectations, indicating that policy efforts to provide funding to companies may be gaining further momentum. Over the week, the Nikkei 225 index rose 3.72% to 21,988.29 points. The MSCI Asia Pacific Index rose 2.43% to 159.97 points.
- United States: Trump increased his pressure on the Federal Reserve, saying that the Fed should lower interest rates to zero or even lower. The former Federal Reserve economists considered this a “catastrophe formula.” For the whole week, the yield on the US 10-year government bond rose by 34 basis points to 1.896%.
- Eurozone: The British Parliament once again rejected the Prime Minister’s motion to advance the election. Before the vote, Johnson stressed that he would not ask the EU to extend the the Brexit deadline. Before the vote, Johnson stressed that he would not extend the EU’s extension to the EU.
- Oil price: Trump fired Bolton, the national security adviser, because they have disagreements on many issues. The news dragged down the oil prices, and investors speculated that the US foreign policy toward Iran and Venezuela would become less tough. Over the week, New York oil futures rose by -2.95% to close at $54.85 a barrel.
- US$: According to a survey by the New York Federal Reserve, US inflation expectations fell to a multi-year low in August, and the expected inflation rate fell to 2.4% in the coming year, the lowest level within last six years. For the entire week, the Dollar Index rose -0.139% to 98.257.
- The State Administration of Foreign Exchange of China announced that it has scrapped QFII and RQFII investments quota, opening its financial market to the outside world. Analysts pointed out that it is beneficial to the capital market in long term that China opens its financial market to the outside world. In the short-term, the good news in A-shares trends to be emotionally boosted, and the substantive impact on the bond market is limited. For the whole week, the yuan rose by 0.466% against the US dollar at 7.079.
- United States: US President Trump announced that the tariff increase deadline for China’s $250 billion worth of goods will be postponed from October 1 to October 15, showing goodwill to China.
- United States: Former Federal Reserve Chairman Yellen said although the US economy is in good condition, the threat to the economic outlook has increased, and inflation is far below the target.
- United States: The USDA confirmed that China has purchased more than 200,000 tons of soybeans.
- Eurozone: Germany’s trade surplus expanded in July, reached the highest level within last four months. The export of Germany was unexpectedly grew.
- Eurozone: Italian Prime Minister Conte’s new ruling coalition won the parliamentary confidence vote, which implies the political turmoil is over and the government can begin to set priority issues, including the 2020 budget.
- Eurozone: The UK government announced a No-Deal Brexit plan, which warned that if Hard Brexit happened, the UK will face food and fuel shortages, supply chain disruptions, public order disruption and huge pressure to return to the negotiating table.
- Japan: Japanese Prime Minister Shinzo Abe claimed the new cabinet will not change its policy toward South Korea. It is expected that the uncertainty of the global economic outlook will continue to increase. Shinzo Abe claimed that if downside risks become a reality, the government will take all feasible measures to deal with it.
- Japan: The July Conference Board leading economic index of Japan fell 0.2% month-on-month, falling for five consecutive months.
- Japan: Japan’s M2 money supply in August rose 2.4% year-on-year, in line with market expectations.
|China Market Commentary|
|• The Central Reform Commission announced that China must coordinate and promote various reforms and turn institutional advantages into governance effectiveness. It also announced that China will promote the high-quality development of trade, strengthen technological innovation, institutional innovation, and business innovation.
• China’s August CPI rose 2.8% year-on-year.
The takeaway or ECB’s new stimulus measures
In light of subdued macro-economic data and the escalation in the US-Chinese trade tension, the European Central Bank (ECB) announced a comprehensive easing package on 12 September as market expected. Despite the easing package fell short of expectations on near term rates, it surprised notably with a new round of open-ended asset purchase programme, and strengthened the interest rate forward guidance on policy rates by linking the first-rate hike in future to both realised and projection inflation. More details of the easing package are as follow:
1. An open-ended QE
As a very dovish surprise, the ECB will restart a new QE programme on 1 November with a monthly flow pace of EUR €20bn. Despite the EUR €20 bn is only at the lower end of market expectations, more crucially, the new QE will run for an unspecified time limit, which is totally different from previous QEs. The open-ended nature of the QE is significant and resulted in a pronounced flattening of the risk-free curve alongside a large tightening in peripheral spreads.
The new QE programme will not include new asset classes for this moment; therefore, it will essentially buy the same assets as under the previous QE programme. Also, the ECB announced that the possibility of buying assets with yields below the deposit facility, which also apply to covered bonds, asset-backed securities (ABS) and corporate bonds. However, sovereign bonds should remain the key asset to purchase and only a small share will be allocated to private sector.
2. Deposit rate cut
The ECB cut the deposit rate by 10bp to -0.5%, kept the refi rate at 0.0% and the marginal lending facility unchanged at +0.25%. The deposit rate cut was slightly below market pricing. President Draghi’s comments the room for further rate cut were limited, and emphasizes the adverse effects of negative rates.
The ECB announced the introduction of a tiered deposit rate, starting on 30 October. Under the two-tiered reserve system, banks’ reserves will be remunerated either at an annual rate of 0%, or at the prevailing Deposit Facility Rate (DFR) (i.e., -0.5%). The tier that is exempted for the DFR charge will be set as six times of minimum reserve requirement. With adopting of tiering system, European banks is likely to suffer less negative impact from interest rate cut in future, and overall the excess liquidity in the banking system should gradually be improved.
4. Interest rate forward guidance
In the new forward guidance, the ECB said that key interest rates are expected to remain at the present or lower levels until it need to see a sufficient improvement in both projected and realised inflation, but to below 2%, before raising policy rates. Regarding to the sequence of QE and interest rate hikes, the ECB clearly said that QE will have to end before rates will rise, meaning that the ECB’s interest rate forward guidance will now become the guidance on the time frame of QE too.
Market seesaw after ECB unveils new stimulus programme as doubt emerges since monetary policy is increasingly perceived as impotent and overburdened, especially global growth remain lacklustre after a decade of aggressive QE and dramatic cuts in interest rate. Besides, some studies also suggest that QE is distorting markets as well as exacerbating income disparities. In a nutshell, easing itself does not necessary change a country’s fundamentals. It is more about whether the country has real supply-side reforms to improve its competitiveness over the long-term.