Glimmer of hope from Germany
Globally all eyes are on Germany. The engine of economic growth in Europe is damaged after two years of trade tension taking its toll on global economic activity. Global trade volumes have contracted 1.2% y/y in August, the third consecutive monthly annual fall and global manufacturing PMI remains below 50 thresholds. Germany stands as a bellwether for the global trade war, providing markets an insight into the real effects of protectionism. Most recent data suggest the worst is possibly over (barring an escalation in trade tensions). Industrial production in Germany dropped by -0.6% m/m in September, below the consensus for a -0.4% decline. The annual rate fell to -4.3% from an upwardly revised -3.9% in August. In the data net trade was the likely culprit in driving the German economy into recession in 2Q and 3Q. However, production in energy and constitution rebounded with energy output also recovering. While yesterday, factory orders rose by 1.3% m/m in September, above the consensus for a 0.1% rise driven primarily by a 3.1% m/m surge in new orders for capital goods. Growth in German factory orders has now steadied, though at a weak rate, suggesting soft output growth at the start of 4Q. This small bright spot could indicate a bottom for Germany. Overall manufacturing sentiments and industrial production trends are not encouraging but a small increase in leaders could signal a reversal in outlook. It too early for the EURUSD to stage a meaningful recovery with market monitoring key of support at 1.1060.
Trade war headlines no longer impress
The move is surprising, yet it seems that the latest rumors confirming that a Sino-American interim deal should not be signed until December does not turn in favor of the greenback and maintains the yuan in advance as market participants decide to take profits on long USD positions. Still, the question of upcoming tariffs on $156 billion Chinese imports officially due on 15 December 2019 is still on the table as Chinese negotiators request to rollback existing tariffs should be partially endorsed. Similarly, the introduction by the US legislature of a bill to prohibit the investment of a federal pension fund in mainland China shares for security reasons should not make the situation any easier. Despite the release of disappointing productivity data and considering that the Fed is not expected to intervene by next year, greenback strength will remain.
Constructive US – China trade talks and a lull in tariffs disruptions continue to support the case of stronger foreign investments into Chinese equities, as shown by September foreign holdings of Chinese equities rising for the fourth straight month to an historical high of CNY 1.77 trillion ($253 billion). The latter is also likely supported by the People’s Bank of China strong signal that it is ready to implement further monetary policy easing to support growth following the five basis points cut in the medium-term lending facility rate to 3.25%, a measure that should also reduce the prime rate for personal loans. Therefore, an equivalent reduction in existing tariffs on both sides should support both economies, as Chinese exporters were forced to reduce their prices by an average of 8% in the second half of the year, while US end consumers had to pay the bill.
USD/CNY (+1.63 year-to-date) is currently trading at 6.9739, largely above 7.0008 fixing and breaking psychological support of 7. The pair is expected to bounce back.
