Global manufacturing and trade continue to show signs of weakness. Last week’s Japanese balance of trade in goods for January showed a deficit, versus expectations for a surplus. The fall was caused by a sharp decline in nominal exports. Those to China dropped 17.4% y/y and trade with Europe decelerated as well, but to a lesser extent. Understandably, markets jumped onto the favourable US-China news with both feet. There are some signs from the periphery, though, that real data is improving. The euro area February composite output was higher, but a worrying collapse in German activity actually contained a minor but real uptick. And French data indicated that the social tensions at the heart of the weakness might be ebbing. This would suggest that the Euro-Area PMI could stabilize.
That said, outside the EU core, signs of recovery offer scant grounds for optimism. The spectrum of Brexit-fuelled chaos weighs on overall sentiment. The uncertainty is highlighted by recent news of Prime Minister May’s brinkmanship with the March 12th parliament vote and reports of EU chiefs drawing up a plan to delay Brexit until 2021. The ECB seems to understand that any planning needs to wait until EU-UK relations are settled, opting for now to limit planning on targeted longer-term refinancing operations (TLTRO). Interestingly, markets are catching on, with one-month EUR/GBP volatility climbing higher. We remain of the position that forecasting Brexit outcomes is futile and the play would be to go long on GBP volatility.
Yuan in demand as trade tariffs fears ease
After six days of intensive trade discussions that extended over the weekend, the US and China appear to have made significant progress. President Donald Trump has announced that the US will delay imposing further trade tariffs on Chinese goods. Following this headline, Asian markets have been rallying forcefully across the board, with China’s mainland CSI 300 bouncing +5.95% to 3,729 — back to June 2018 highs, its biggest rise since July 2015. Hong Kong’s Hang Seng closed +0.50% at 28,959. No details of the breakthrough have been communicated, suggesting that both sides are still working on an enforcement mechanism to guarantee structural reform commitments.
Both CNH and CNY have been bouncing at seven-month highs, while a global risk-on sentiment among G10 currencies is emerging. Despite this easing, which should support a Chinese economy that faces a slowdown, we remain highly doubtful as to the sustainability of the current trend since the Chinese authorities are expected to continue deleveraging which, looking forward, should support the opposite. Although both sides have agreed to keep the pair stable, a decline in the Chinese yuan is not ruled out.
Currently trading at 6.6894, USD/CNY is heading along 6.68 short-term.
