23 September 2019, Issue 827
Global Market Commentary
- United States: The progress of Sino-US trade negotiation is unclear. The Chinese agricultural delegation canceled the scheduled visit to the US agricultural state of Montana, which weakened the market’s optimism towards the Sino-US trade negotiations, dragging down he stock markets. For the entire week, the Dow fell by 1.05 percent to 26,935.07. The S&P 500 index fell by 0.51% to 2,992.07. The Nasdaq fell by 0.72% to 8,117.67.
- Europe: The European Central Bank announced to cut the interest rate and to restart the quantitative easing policy. Over the week, the UK’s FTSE 100 index fell by 0.31%, the German DAX index rose by 0.00%, and the French CAC40 index rose by 0.62%. The STOXX 600 index rose by 0.30% for the week, to 392.95 points.
- Asia: The progress of Sino-US trade negotiation is unclear. The Chinese agricultural delegation canceled the scheduled visit to the US agricultural state of Montana, which weakened the market’s optimism towards the Sino-US trade negotiations, dragging down he stock markets. Over the week, the Nikkei 225 index rose by 0.41% to 22,079.09. The MSCI Asia Pacific Index fell by 0.37 percent to 159.38.
- United States: The Fed has injected funds into the market for two consecutive days. It is the first to launch a repurchase operation within last 10 years. For the whole week, the yield on the US 10-year government bond fell by 17 basis points to 1.722%.
- Eurozone: ECB President Draghi urged governments to increase spending last week. The market expects the government will introduce fiscal stimulus measures and funds flow into the stock markets. For the whole week, the German 10-year bond yield fell by 7 basis points to -0.523%.
- Oil price: The oil production facilities in Saudi Arabia were being attached, which reduced the global oil supplies by 5%, triggering market concerns about the oil supply . Over the week, New York oil futures rose by 6.00% to close at $58.09 a barrel.
- US Dollar: The Fed reduced the interest rate by 0.25% as expected, but it did not clearly indicate that it will cut interest rates again this year. For the whole week, the Dollar Index rose by0.261% to 98.513.
- Renminbi: The Chinese delegation suddenly canceled its scheduled visit to the US agricultural state . It is speculated that the progress of Sino-US trade negotiations is not optimistic. For the whole week, the yuan fell by 0.114% against the US dollar at 7.088.
- United States: The Fed will cut interest rates by 25 basis points for the second time this year and will cut the excess reserve rate. However, policymakers have different options over whether monetary easing is still needed. Chairman Powell said that “moderate” policy actions should be enough to sustain the growth of the US economy.
- United States: Trump instructed the US Treasury to substantially increase sanctions against Iran and said it would announce its decision within 48 hours.
- United States: Trump hinted that he would not end the trade war with China by only reaching a partial agreement. The Chinese delegation suddenly cancelled its farm visit plan. However, the Chinese Ministry of Commerce claimed that the trade consultation between China and the US was “constructive”.
- Eurozone: Chief Economist of the European Central Bank (ECB) claimed that the ECB can implement quantitative easing (QE) for a long time before reaching the upper limit. It is still far from the buffer that set previously.
- Eurozone: Europe reiterates that it will retaliate against any of Trump’s vehicle tariffs. According to Kyodo News, in the US-Japan trade agreement that will be signed this week, the United States will continue to retain tariffs on Japan’s automobile components.
- Eurozone: Sky News reported that the European Commission believes that the UK government’s latest draft Brexit proposal failed to meet all the goals of Ireland’s reserve plans.
- Japan: The Bank of Japan kept interest rates and asset purchase plans unchanged, policy rates remained at -0.1%, while 10-year Japanese government bond yields remained at around 0%.
- Japan: Japan’s Ministry of Internal Affairs and Communications announced that Japan’s August Consumer Price Index (CPI) slowed from 0.5% yoy in previous month to 0.3%, in line with market expectations.
- Taiwan: According to statistics from the Statistics Department of the Ministry of Economic Affairs of Taiwan, Taiwan’s August export orders fell by 1.2% month-on-month to only US$40.05 billion, and the decline rate was unexpectedly expanded to 8.3% year-on-year, much higher than the market expectations of 2.6% decrease.
|China Market Commentary|
|• According to CCTV reports, Chinese President Xi Jinping requested to strengthen major infrastructure constructions during his inspection in Henan Province.
• US Federal Communications Commission officials claimed that there are serious security loopholes in the equipment that produced by Huawei and other Chinese manufacturers, the United States “may” have to remove Huawei devices from the communication network.
US Fed announces second interest rate cut in the year
The Fed cut interest rates again by 25 basis points on Wednesday, continuing to stimulate economic expansion, but hinted that the threshold for further interest rate cuts will increase. The decision to cut interest rates was opposed by three voting officials, two officials called for no interest rate cuts, and one official wanted to cut interest rates by 50 basis points.
Powell believes that the US economy is good, and interest rate cuts are only for prevent current risks, including weak global growth and trade war risk. However, the Fed will rely heavily on data to make interest rate decisions on a case-by-case basis. When the Fed believes that it has done enough, the Fed will stop cutting interest rates.
Hawks interest rate cut action
The market believes that this week’s interest rate cuts are slightly hawkish. The median interest rate projections of the Fed policymakers show that there will be no interest rate cuts this year, although some officials hold different opinions. However, traders in interest rate futures still bet that there will be another 25 basis point cuts this year.
US consumption is the backbone of the global economy
There are more and more warnings about global economic activities. The German economy is under pressure from recession, and the Japanese economy is about to face the challenge of consumption tax. Personal consumption in China and India continued to decline, and Chinese auto sales recorded a year-on-year decline for 14 consecutive months. In the face of the downside risks of the global economy, why is the Fed still emboldened? The answer is consumption.
Consumption is the backbone of the US economy and even the world economy. US personal consumption expenditure reached 14.5 trillion, accounting for about 68% of GDP, and accounting for about 30% of global personal consumption. The total wealth of American households reached 108.6 trillion. The current low unemployment rate, average salary growth, and low savings rate make the US personal consumption expenditure higher than other countries.
Year-to-date, US consumption still maintains a strong trend. First, US gasoline prices have fallen sharply from 2018. As of September 9, a gallon of gasoline was $2.56, down 11.1% from the same period in 2018. Falling energy prices ease the burden on consumers and make more disposable income available in other consumer sectors. Recently, the Saudi oilfield may cause energy price shocks, but the US local shale gas supply can further increase production and maintain domestic supply.
The US home sales market is also showing signs of warming. With the fall in US 10-year bond yields, US home mortgage rates fell to their lowest level since October 2016. The current 30-year mortgage rate is 3.49%, down more than 1% from 4.54% a year ago. The decline in housing refinancing rates will not only benefit home sales, but also help consumers get more loans and increase consumption.