Talks between the United States and China over trade have taken an unexpected turn for the worst side in recent days due to the reason that China had taken a hard-line stance over the discussion. After that, the President Trump will impose new tariffs in Chinese goods of USD 200 billion, from 10% to 25%. These tariffs will be enacted tomorrow. On the other hand, the Chinese team with Vice Premier Liu will arrive in US today. If talks fail, it means that future talks will be more difficult (tariffs in this scenario active).
Same same: stock markets down, AUD down, JPY up. However the large fall in AUD deserves some attention, particularly on a day when iron or futures in Singapore were up 1% to the hightest level of the year. It appears that speculators are still taking positions against the currency, perhaps in anticipation of some new insight from the Monetary Policy Statement (MPS) that’s due out overnight.
My “first shall be last” paradigm broke down yesterday --- JPY, the 2nd-to-last currency when I wrote Tuesday morning, was indeed the best-performing currency today, but AUD, which was the best performing currency yesterday, did well today too -- #2. But we’re looking at the trade-weighted indices and so AUD’s good performance is probably more of a reflection of NZD’s bad performance after the Reserve Bank of New Zealand cut rates 25 bps, the first G10 central bank to take that step in this stage of the economic cycle.
Stock markets continued to fall yesterday, and this morning in Asia they’re down further in early trading. But most of the damage to currencies was done in early Asian trading time yesterday in any case. Generally speaking, they recovered somewhat during European and US trading, and now it’s what we might call a “biblical market,” as in “first will be last and the last, first.” Just to refresh your mind, here’s the order of the currencies when I wrote this comment yesterday:
US President Donald Trump shocked the global markets after he tweeted last night that he would sharply hike tariffs on Chinese goods next Friday, increasing the risk-off sentiment of the market sending the investors to more safe-haven assets such as Gold, Bonds and Japanese Yen.
The market got Trumped again – Trump tweeted threats to raise tariffs on Chinese goods next Friday, when trade talks were set to resume on Wednesday. Chinese officials now say they are thinking of cancelling the talks entirely. A great surprise for Chinese markets coming back after the holidays. The CSI 300 index is down 5.5% at the time of writing, Shanghai down 5.2%. The CNY also fell substantially (at least, substantially by the standards of the CNY).
WTI and Brent oil contracts prices are trading near one month lows, at $61.30 and $70 per barrel respectively during the European trading session amid the surge of the US crude production, the unexpected increase of the US crude inventories despite the supply concerns from the end of waivers to Iranian oil exports and from the conflicts in Venezuela and Libya.
Further repricing of Fed rate cut possibilities, plus talk of an impasse in US-China trade talks, sent bond yields higher and equity prices lower. That caused a typical “risk off” move in the FX market, with JPY gaining and the commodity currencies falling.
The week just ending saw relatively few major moves among the G10 currencies. GBP was the biggest winner as investors relax a bit about Brexit. Both the Conservatives and the Labour Party indicated that they may be close to a compromise agreement on Brexit. PM May apparently hopes to finish the talks next week. May signaled flexibility on the issue of a permanent customs union with the EU, which has been one of her key “red lines,” and indicated that she no longer believes that “"no deal was better than a bad deal."
• FED leaves target range unchanged. Moreover, the inflation remains below 2% and repeated patience. Fed’s Powell states that he does not see a strong case for moving rates in either direction. • ECB’s Scholz said that the ‘’large European banks operating in Germany” are needed. “The banks need to be stable; they need to be able to give out loans and they need to have income. The banks must work on this”.
USD initially lost ground following the FOMC meeting, but jumped higher after Fed Chair Powell’s press conference. He refused repeatedly to be drawn into a discussion on possible scenarios in which the Fed might cut rates, instead repeatedly referring to the “transient” nature of recent inflation weakness and stressing that the Fed is sticking with its “patient” stance of keeping rates steady as it watches the incoming data.
Gold and Silver prices are moving higher by +0.4% during the early US trading session at $1.285/oz and $14.98/oz respectively after the weaker-than expected Chinese Manufacturing data, the weaker US dollar and US Treasury yields and some short covering trades.