The story this week is pretty much the same as ever: more concerns about US-China trade, a market whipsawed by Trump’s tweets, and concerns about the strength of the global economy amidst signs that the trade dispute (plus Brexit, probably) is beginning to spill over into the real economy.
Quite a change to see GBP at the top of the performance list! Two things boosted the beleagured pound yesterday: 1) Better-than-expected retail sales. They were expected to be -0.2% mom, instead they were +0.2% mom. This suggests consumer spending is still holding up and still supporting the economy even though overall output (GDP) contracted in Q2. It ties in with the relatively high wage growth that we saw earlier in the week (highest yoy pace of growth since the Global Financial Crisis).
It’s really hard to predict the markets when so much of the price action comes down to what some crazy guy in Washington says on Twitter. Trump unexpectedly put off new tariffs on many Chinese goods, including cellphones, laptop computers and toys, until Dec. 15 – well after the start of the Christmas shopping season. “Just in case they might have an impact on people, what we’ve done is we’ve delayed it so that they won’t be relevant for the Christmas shopping season,” he said.
A relatively quiet day in the FX market, especially compared with the dramatic moves in rates (more about that later). GBP was the best performing currency on the report that I mentioned yesterday about UK MPs manuevering to prevent a no-deal Brexit. But the risk reversals show that the market doesn’t have that much confidence; even the one-month risk reversal has just kept coming down.
It’s generally a “risk off” day in the FX market this morning even though stocks are generally higher throughout Asia. Markets are closed in Japan, Singapore and India for national holidays, leading to reduced liquidity. That may be exaggerating the moves somewhat.
WTI and Brent crude oil prices rebounded in Thursday morning by 3% at $52.60 and $57.50 per barrel respectively after a report from Bloomberg that Saudi Arabia spoke with other oil producers to take actions for ending the recent heavy sell-off in the oil prices amid the escalated trade tensions between US and China.
NZD collapsed as the Reserve Bank of New Zealand (RBNZ) exceeded anyone’s wildest imagination. Gov. Orr surprise the market with a 50 bps cut rather than the 25 bps cut that was expected, he also shocked the market by emphasizing the potential for further easing, including saying he could “easily” see negative rates, which he said would be “business as usual” for the central bank, as well as quantitative easing and other unspecified measures. He said the RBNZ is consulting with the government and with unspecified counterparties abroad on optimal contingency planning.
A much calmer day. Although stock markets are still in shock (the US market was down 3% yesterday, Tokyo is down 0.6% at the time of writing, Hong Kong down 0.9% and Shanghai off 1.4%), the currency market seems to have recovered somewhat, as shown by the more “risk on” mood. The main reason is that the PBoC fixed the daily reference rate for the onshore yuan at 6.9683 (vs. 6.9871 expected). This signaled that they wanted to see the currency’s weakness contained. Asian stocks pared their losses after this, and as you can see from the graph, other currencies followed as well.
Asian equity markets collapsed by over -2%, US Futures fell by -1% and Gold rallied by +1% this Monday morning amid the escalation of the trade war between the US and China, the rising fear for a global economic slowdown which sent the investors away from the risky assets and towards safe-haven assets such as Gold, Bonds and Bitcoin.
Remember that graph I included Friday showing how the yuan had plunged? Well, that was nothing compared to what happened this morning. The onshore CNY and offshore CNH have both weakened substantially. The People’s Bank of China (PBoC) attributed the moves to expectations about tariffs and protectionism and said it’s ready to crack down on short-term speculation to keep the currency stable. However it’s important to note how the currency blew past the 7.0 line (red line in the graph) for the first time since 2008. The authorities had explicitly capped a move past 7.0 following the May 5th breakdown in talks, so that was seen as a kind of “line in the sand” that they would protect.
Markets were just recovering after Fed Chair Powell’s “hawkish cut” when Trump pulled the rug out from underneath everyone by suddenly announcing an additional 10% tariff on the remaining $300bn worth of Chinese imports that weren’t being tariffed already. This caused a huge risk-off move that sent JPY soaring and the commodity currencies plunging.
Well, the Fed cut rates 25 bps, but Fed Chair Powell made it clear that this was not necessarily the start of a rate cutting cycle. “We’re thinking of it essentially as a mid-cycle adjustment to policy,” Powell said. “I’m contrasting it there with the beginning, for example, the beginning of a lengthy cutting cycle. That’s not what we’re seeing now. That’s not our perspective now, or outlook.” Previous examples of “mid-cycle adjustments” are 1995 and 1998, when the Fed cut rates 75 bps each time (albeit from a much higher starting level – 6.0% and 5.5%, respectively). There were also two dissenting votes (Esther George and Eric Rosengren), which increases the difficulty of further cuts unless things get a lot worse.