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.

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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 »

Fed’s Powell, China trade, Japan-Korea tensions

July 12, 2019 — Mitul Kotecha

Markets cheered Fed Chair Powell’s testimony to the US Congress this week, with Powell all but confirming that the Fed will cut interest rates in the US by 25bps later this month.  Powell’s comments yesterday and Wednesday highlighted the risks to the US economy including the threats from persistently low inflation, worsening global trade outlook, weak global growth, and possibility that Congress does not raise the debt ceiling, even as he saw “the economy as being in a good place”.  His comments highlight that any easing this month, would be an insurance cut, but markets are expecting the Fed to ease further in the months ahead, with at least one more priced in by the market this year.

Meanwhile attention remains focused on trade tensions. On this front, president Trump complained overnight that China hasn’t increased its purchases of US farm products, something that he said China had pledged to do at the G20 meeting when he met with China’s President Xi.  Data released yesterday showed that Chinese purchases of US agricultural good have actually slowed.  According to the US department of Agriculture China bought 127,800 metric tons of US soybeans last week and 76 tons of US pork, both sharp reductions compared to previous weeks.  Chinese media for its part says that the country had not committed to increasing purchases, but rather that Trump had hoped China would buy more goods.  Clearly, there is has left plenty of confusion about what was actually agreed upon.

Trade tensions have also risen in Asia, with tensions between South Korea and Japan intensifying.  Japan is implementing restrictions on exports to Korea of chemicals essential for chip making in retaliation over a ruling by Korea’s Supreme court awarding damages against Japanese companies for forced labour during the second world war. Japan says that such claims were settled under a 1965 treaty and is seeking arbitration. Korea evidently disagrees. The trade spat could also have widespread implications given the wide range of products that South Korean chips are used in, impacting supply chains globally.  Meetings between Japanese and Korean officials today will be watched for any rapprochement but any near term solution looks unlikely.

Posted in Asia, Asian currencies, central banks, China, Economics, Economy, emerging markets, Federal Reserve, Interest rates, Japan, Monetary Policy, South Korea, Trade, Trump, US, US administration. Tags: , , , , . Leave a Comment »

US-China Trade Truce Boosts Sentiment

July 1, 2019 — Mitul Kotecha

Weekend developments will help set up the markets for a risk on day.  However, any improvement in sentiment will likely be capped. The good news was that the US and China agreed to a trade truce at the G20 summit, President Trump and North Korean leader Kim Jong Un met at the demilitarised zone while separately the EU and Mercosur agreed upon a trade deal in a strong retort against the rising trend of protectionism.

Presidents Trump and Xi agreed to delay the implementation of new tariffs (on the remaining $300bn of Chinese exports to the US) while agreeing to restart trade talks, albeit with no time table scheduled as yet.  The delay in tariffs escalation and restart of trade talks was in line with expectations but concessions on Huawei were not.   Trump stated that US companies can sell equipment to Huawei without giving details on what can be sold while China also agreed to buy more US agricultural goods.

The chances of a US-China trade deal have risen, but it could still take several months before various remaining structural issues (forced technology transfers, state subsidies, discrimination against foreign companies, regulations on intellectual property etc)
are ironed out. The lack of time frame on US-China trade talks, ongoing structural issues, lack of details on what equipment US suppliers can sell to Huawei and a host of data releases, will limit the improvement in sentiment and reduce the likelihood of any near term deal.

Looking ahead, sentiment may be clouded somewhat by the disappointing China purchasing managers’ index (PMI) yesterday, with the manufacturing PMI coming in at 49.4 in June, the same as in May, with manufacturing continuing to contract.  However, markets may be willing to overlook this as trade tensions were likely a prime reason for the continued weakness in manufacturing confidence.   As such, China’s currency CNY and asset markets will likely react positively overall.

The events over the weekend will likely reduce the chances of a 50bps rate by the Fed at their next meeting, but much will depend on upcoming data.   This includes the June US ISM survey today and employment report on Friday.  Markets expect a 160k bounce back in payrolls in June after the surprisingly weak 75k increase in the previous month.  Assuming the data is line with expectations it seems unlikely that the Fed will feel the need to ease policy by more than 25bp when they meet at the end of the month.

Posted in Asia, central banks, China, Currencies, Economics, emerging markets, eurozone, Federal Reserve, FX, Interest rates, Monetary Policy, Trump, US, US administration. Tags: , , , , , , . 1 Comment »

G20, Fed and Iran

June 24, 2019 — Mitul Kotecha

Market attention this week will focus on Fed speakers, the G20 meeting and tensions between the US and Iran.  Here are my thoughts on all three:

Federal Reserve Chairman Powell and Vice Chair Williams are both scheduled to speak tomorrow.  Investors will be looking for any further clues on the path, timing and magnitude of Fed interest rates in the months ahead and whether they validate market expectations of easing at the July FOMC meeting.   Markets are already pricing in several cuts and a result the USD has weakened sharply over recent months, suggesting that the bar to an even more dovish stance is high.  Nonetheless, the Fed is at least likely to deliver a 25bp rate cut at the July meeting followed by at least one or two further hikes this year.

The main event this week (Fri-Sat) is the G20 meeting in Japan and in particular the potential meeting between Presidents Trump and Xi on the sidelines.  Expectations/optimism towards some form of progress on trade talks appears high.  Markets are set to remain upbeat heading into the G20, suggesting that risk assets will maintain their rally this week, which will bode well for equities. However, the reality is that the gap between both sides remain wide and there may be some positive noises emanating from the G20 on trade, concrete progress is likely to be limited.

Trump and Xi are likely to discuss a range of issues, with trade teams from both sides preparing the topics for discussion, after talks broke down last month.  It is likely that both Trump and Xi will agree to continue more formal talks, with both leaders sounding positive in the run up to the G20.  However, the threat of additional 25% US tariffs on the remaining $300bn of Chinese exports to the US, remains in place and it is unlikely that this will be taken off the table without some major concessions from China.  As I’ve previously stated it could take months before a concrete deal is agreed upon.  In the meantime global trade will continue to deteriorate.

Elsewhere geopolitical tensions remain in focus as President Trump threatens Iran with additional sanctions in an effort to force Iran to renegotiate the 2015 nuclear accord, as early as today. This follows Trump’s decision to call off planned air strikes in response to Iran’s shooting down of an unmanned drone.  Iranian oil exports have plunged as a result of sanctions and oil prices continue to react, rallying by around 8.7% in just under a week.  Markets will remain nervous over the risks of any further escalation, leaving oil prices susceptible to a further push higher.

 

Posted in Asian currencies, central banks, Currencies, Economics, Federal Reserve, Japan, Trade, Trump, US, US administration. Tags: , , , , , , . 1 Comment »
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