Oil Surges, Central Banks Galore

September 16, 2019 — Mitul Kotecha

Oil prices jumped following drone attacks on Saudi Arabian oil facilities over the weekend.  Oil rose by around 20% to just shy of $72, before halving its gain later.  Even after failing to hold onto initial gains the rise in oil prices still marks one if its biggest one day gains.  Concerns about reduced oil supply have risen as a result of the attacks as they could reduce Saudi oil production for a prolonged period, with around 5% of global oil supply impacted.  Additionally the attacks could raise geopolitical tensions in the region.

As markets digest the impact of the drone attacks, there will also be several central bank decisions globally to focus on this week.  The main event is the Fed FOMC meeting mid-week, where a 25bp cut is largely priced in by the market.  Given that a rate cut is well flagged markets will pay close attention to the Fed’s summary of economic projections, in particular the Fed’s dot plot.  It seems unlikely that Fed Chair Powell is going to sound too dovish, with little to suggest that the Fed is on path for a more aggressive easing path.

Another major central bank meeting this week is the Bank of Japan (BoJ) on Thursday.  While a policy move by the BoJ at is unlikely this week BoJ policy makers have sounded more open to easing.  A consumption tax hike planned for next month together with a strong JPY have increased the pressure for the BoJ to act. Separately easier policy from other major central banks amid slowing global growth are unlikely be ignored.  However, policy is already ultra- easy and the BoJ remains cognisant of the adverse secondary impact of policy on Japanese Banks.

The Bank of England deliberates on policy this week too but it seems highly unlikely that they would adjust policy given all the uncertainties on how Brexit developments will pan out.  Until there is some clarity, the BoE is likely to remain firmly on hold, with the base rate remaining at 0.75%.  GBP has rallied over recent weeks as markets have stepped back from expectations of a hard Brexit, but this does not mean that a deal is any closer than it has been over the past months.  Elsewhere the SNB in Switzerland and Norges Bank in Norway are also expected to keep policy rates on hold this week.

Several emerging markets central banks will also deliberate on policy this week including in Brazil, South Africa, Indonesia and Taiwan.  The consensus (Bloomberg) expects a 50bp rate cut in Brazil, no change in South Africa and Taiwan and a 25bp rate cut in Indonesia.  Overall many emerging markets continue to ease policy amid slowing growth, lower US policy rates and declining inflation pressures.

 

Posted in Asia, Bank of England, Bank of Japan, Brexit, central banks, Currencies, ECB, Economics, Economy, emerging markets, Federal Reserve, FX, Indonesia, Interest rates, Monetary Policy, Switzerland, Taiwan, UK, US. Tags: , , , , , , , , , , . Leave a Comment »

Tariffs Implemented, Talks Awaited

September 2, 2019 — Mitul Kotecha

US and China went ahead with their tariffs implementation over the weekend, with the US adding 15% tariffs on around $110bn of Chinese imports, mainly aimed at consumer goods. Another $160bn of goods will be hit by 15% tariffs on December 15, with the implementation delayed to avoid a big impact on holiday spending.

China retaliated by implementing $75bn of tariffs on US goods on Sunday, much of which was aimed at agricultural goods including 10% on various meat, an additional 5% on top of the existing 25% on soybeans and a further 10% on sorghum and cotton and 5% on crude oil.  Chinese tariffs on US autos will resume in December.  China’s currency is likely to continue to weaken further given the tariffs intensification.

Against this background markets will closely monitor comments from both China and the US on the potential for trade talks over coming weeks, with President Trump stating that face to face talks are “still on”.  Meanwhile Chinese economic data continues to worsen, with China’s official August manufacturing PMI released on Saturday dropping to 49.5 in August from 49.7 in July, indicating ongoing contraction in China’s manufacturing sector.

There are plenty of events and data on tap this week including the August US ISM manufacturing survey, August non-farm payrolls and a slew of Fed speakers including Fed Chairman Powell.   The ISM index is forecast to remain steady around 51.2, reflecting the pressure on US manufacturers, although the index is still likely to remain in expansion.  Meanwhile consensus forecasts look for a 158k increase in August payrolls and for the unemployment rate to remain at 3.7%.

Events in the UK will also garner plenty of interest as parliament returns from their summer break, albeit only for a few days as Parliament will be prorogued in the following week.  The opposition Labour Party will aim to present legislation to prevent the country from crashing out of the EU without a deal against the background of protests against the decision to suspend parliament.  The potential for fresh elections is also in prospect.  GBP will remain volatile against this background.

Posted in Asia, Asian currencies, Brexit, China, Currencies, Economics, Economy, emerging markets, Federal Reserve, FX, Trade, Trump, UK, US, US administration. Tags: , , , , . Leave a Comment »

US-China Trade War: The Gloves Are Off

August 26, 2019 — Mitul Kotecha

The US-China trade war took another step for the worse over the weekend. China announced tariffs on the US of between 5- 10% on $75bn of US imports from September.  Chinese tariffs target 5,078 products including agriculture and small aircraft as well as crude oil. The US responded by increasing its tariffs on $250bn of Chinese imports from 25% to 30% while increasing duties from 10% to 15% on $300bn of Chinese imports to the US from September 1.   President Trump initially said he had “second thoughts” on additional tariffs, but these were clarified to state that “he regrets not raising the tariffs higher”.

The gloves are off on both sides. As indicated by the editorial in China’s People’s Daily states that China will fight the trade war to the end while influential Chinese journalist Hu Xijin said that “we have nothing more to lose, while the US is starting to lose China”, highlights China’s tougher stance.  Meanwhile President Trump is looking at the “Emergency Economic Powers Act of 1977” in forcing US companies to quit China.

Asia’s markets have responded in pain, with stocks and currencies falling while safe havens such as US Treasuries have been in demand.  Indeed the 10-year US Treasury yield has fallen to a three-year low.  Markets have priced in even further easing by the Fed FOMC, with almost three rate cuts by the PBoC discounted in by the end of this year.  Equity futures point to a weak opening in US equities today.

One casualty is the Chinese yuan, which took another leg lower today, having fallen by close to 7% since mid-April.  Further pressure on the yuan is likely, but China may not be too concerned as long as the pace of weakness does not get out of hand. China may try to control the pace of the decline to prevent a repeat of the FX reserves drain seen in mid-2015 and Jan 2016. At the least yuan depreciation will act as a buffer for Chinese exporters against increased US tariffs.  However, expect further yuan depreciation to be met with increased criticism and perhaps more US action, with the US already having labeled China a currency manipulator.

Posted in Asia, Asian currencies, China, Commodities, Currencies, Economics, Economy, emerging markets, equity markets, Federal Reserve, Financial crisis, FX, Interest rates, Monetary Policy, Trade, Trump, US, US administration. Tags: , , . Leave a Comment »

Taking Stock

August 16, 2019 — Mitul Kotecha

As we get to the end of the week trade headlines are still continuing to capture most attention. However, it has been increasingly difficult for anyone to guess what comes next in the long running trade war between the US and China.  Most investors and analysts think the trade war will persist for a long while but President Trump tweeted that it would “fairly short” and that talks with China were on track to resume next months.

Markets are not convinced and becoming increasingly desensitised to the news flow over trade, which seems to shift from good to bad news on a regular basis.  For example, the decision to delay the imposition of tariffs on around $156bn of Chinese exports until December failed to fuel a bounce in US equities. The decision has also left Chinese officials unperturbed.  China has vowed to retaliate, stating that the US had “deviated from the correct track of consultation and settlement of differences”.

The situation in Hong Kong is adding another dimension to the trade war.   President Trump has said that believed China’s President Xi could “work that out in a humane fashion” while in contrast many in the US Congress are pushing for a stronger stance. The eventual reaction will depend on whether demonstrations persist and how China moves going forward.

Hong Kong’s economy and markets are under pressure too, unsurprisingly. The economy is now facing the prospect of a technical recession, with growth in the third quarter likely to be negative following a -0.3% q/q drop in GDP in the second quarter.   Industry bodies have revealed that tourism has dropped sharply, with double digit declines in hotel occupancy and sharp reductions in purchases by mainland tourists. The number of tour groups from mainland China have declined by close to 30% in June compared to the average this year while hotel occupancy rates are expected to drop 40% y/y in July.

Posted in Asia, China, Economics, emerging markets, Trump, US, US administration. Tags: , , , . Leave a Comment »

A Host Of Global Risks

August 13, 2019 — Mitul Kotecha

Last week was a tumultuous one to say the least.  It’s been a long time since so many risk factors have come together at the same time.  The list is a long one and includes the escalation of the US-China trade war, which last week saw President Trump announce further tariffs on the remaining $300bn of Chinese exports to the US that do not already have tariffs levied on them, a break of USDCNY 7.00 and the US officially naming China as a currency manipulator.

The list of risk factors afflicting sentiment also includes intensifying Japan-Korea trade tensions, growing potential for a no-deal Brexit, demonstrations in Hong Kong, risks of a fresh election in Italy, growing fears of another Argentina default, ongoing tensions with Iran and escalating tensions between India and Pakistan over Kashmir.

All of this is taking place against the background of weakening global growth, with officials globally cutting their growth forecasts and sharply lower yields in G10 bond markets.  The latest country to miss its growth estimates is Singapore, a highly trade driven economy and bellwether of global trade, which today slashed its GDP forecasts.

Central banks are reacting by easing policy.  Last week, the New Zealand’s RBNZ, cut its policy rate by a bigger than expected 50 basis points, India cut its policy rate by a bigger than expected 35 basis points and Thailand surprisingly cutting by 25 basis points.  More rate cuts/policy easing is in the pipeline globally in the weeks and months ahead, with all eyes on the next moves by the Fed.  Moving into focus in this respect will be the Jackson Hole central bankers’ symposium on 22/23 August and Fed FOMC minutes on 21 August.

After the abrupt and sharp depreciation in China’s currency CNY, last week and break of USDCNY 7.00 there is evidence that China wants to control/slow the pace of depreciation to avoid a repeat, even as the overall path of the currency remains a weaker one. Firstly, CNY fixings have been generally stronger than expected over recent days and secondly, the spread between CNY and CNH has widened sharply, with the former stronger than the latter by a wider margin than usual.  Thirdly, comments from Chinese officials suggest that they are no keen on sharp pace of depreciation.

Markets will remain on tenterhooks given all the factors above and it finally seems that equity markets are succumbing to pressure, with stocks broadly lower over the last month, even as gains for the year remain relatively healthy.  The US dollar has remained a beneficiary of higher risk aversion though safe havens including Japanese yen and Swiss Franc are the main gainers in line with the move into safe assets globally.  Unfortunately there is little chance of any turnaround anytime soon given the potential for any one or more of the above risk factors to worsen.

Posted in Asia, Asian currencies, central banks, China, Currencies, Economics, emerging markets, equity markets, eurozone, Federal Reserve, FX, India, Interest rates, Japan, Politics, Singapore, Taiwan, Thailand, Trade, Trump, UK, US. Tags: , , , , , , , , , . Leave a Comment »
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