Gold’s up tend extended to as high as 1510.48 last week before forming a temporary top there and turned into consolidation. Downside of retreat should be contained by 1452.94 resistance turned support to bring rally resumption.
Break of 1510.48 will resume the up trend and target 161.8% projection of 1160.17 to 1346.71 from 1266.26 at 1568.08.
In the bigger picture, we’d be cautious on topping ahead of 61.8% retracement of 1920.70 to 1046.37 at 1586.70, at least on first attempt.
German Ifo World Economic Climate Indicator dropped from -2.4 to -10.1 in Q1. Current Situation Indicator dropped from 1.4 to -5.4. Expectations Indicator dropped from -6.1 to -14.7.
Ifo President Clemens Fuest warned that “experts expect significantly weaker growth in world trade”. And, “trade expectations are at their lowest level since the outbreak of the trade conflict last year.” “Respondents also expect weaker private consumption, lower investment activity, and declining short- and long-term interest rates.
German Finance Minister Olaf Scholz emphasized today that the government ” can fulfill the tasks that we’re tackling without new debt”. The comments came after Reuters reported last week that the finance ministry was considering issuance of new debt. Scholz noted policies could be implemented by abolishing an income tax surcharge for most employees, etc.
Chancellor Angela Merkel’s spokesman Steffen Seibert also said “the chancellor has never left any doubt … that she stands by the principle of a balanced budget.” And, “we have a policy that is not being called into question that we had balanced budgets in recent years and we continue to strive for those.”
South Korea announced to move Japan to a newly created export category, away from the so fast-tack trade “white list”, starting September. It’s an expected tit-for-tat move in response to Japan’s measures on South Korea. In short, companies exporting strategic materials and products to Japan are required to submit five documents — up from three — with the process taking up to 15 days, as opposed to the current five.
At this point, Japan is the only country in the category. Industry Minister Sung Yun-mo said, “since it’s hard to work closely with a country that frequently violates the basic rules… we need an export control system that addresses this,” Sung also said, “we are pushing for this regulation revision according to our own examinations… we are doing this legitimately in line with both domestic and international laws.”
Italy’s chairman of the House Budget Committee Claudio Borghi told La Stampa newspaper, as the party’s plan for 2020 elections, there will be cut in personal income tax and freeze in VAT. And, budget deficit will stand at 3% of GDP.
He said that the 15% tax cut must be “achieved gradually”. Though, he added “we must start immediately and guarantee it to many”. He’s aiming at net tax savings of EUR 10-15B.
League leader Matteo Salvinin pulled the plug on coalition government with 5-Star Movement last week. Borghi said the possible government of the League is “already ready”.
UK Prime Minister Boris Johnson and Irish Prime Minister Leo Varadkar are scheduled to meet in early September. But ahead of that, Varadkar’s spokesman clearly indicated there is no prospect of renegotiating the Irish backstop in Brexit withdrawal agreement. The spokesman noted that the discussions “would give both sides an opportunity to gain a better understanding of their respective positions. As has repeatedly been made clear, the withdrawal agreement and the backstop are not up for negotiation.”
In the other hand, Johnson’s chief EU adviser, David Frost, is expected to visit Brussels again in the coming days. Previously, it’s reported that Frost has told EU of the new, central scenario of no-deal Brexit of Johnson. But that was denied by Downing Street. Johnson will also meet the European commission president, Jean-Claude Juncker, for the first time at a G7 meeting in Biarritz at the end of this month.
Goldman Sachs warned in a note released on Sunday that they expect tariffs targeting the remaining USD 300B of US imports from China to go into effect on September 1. And, a trade deal between US and China is no longer expected before 2020 US presidential election. Also, it expects a 0.6% drag on the US economy while “fears that the trade war will trigger a recession are growing.” For Q4, Goldman Sachs lowered US GDP growth forecast by 20 basis points to 1.8% annualized.
The note added “overall, we have increased our estimate of the growth impact of the trade war”. Supply chain disruption could lead US companies to reduce their domestic activity. “The drivers of this modest change are that we now include an estimate of the sentiment and uncertainty effects and that financial markets have responded notably to recent trade news.”
Also, “relatedly, the business sentiment effect of increased pessimism about the outlook from trade war news may lead firms to invest, hire, or produce less.”
According to a Bloomberg report, RBNZ has begun scoping a project to refresh its unconventional monetary policy strategy and implementation this year. Though it’s said o be “at a very early stage” and the central bank declined to made no further comment, nor release any further information.
On interest rate, RBNZ expected rates could drop to as low as -0.35%”before risking the hoarding of physical cash. And this will “only partially mitigate any large economic shock”. Large scale asset purchase is another option but such measures are unlikely to fully delivered the desired results in a major downturn. “targeted use of fiscal policy” is likely required to support any unconventional policy.
NZD/USD dropped through 0.6424 last week after RBNZ’s surprised -50bps rate cut. It’s on track to 100% projection of 0.6938 to 0.6481 from 0.6790 at 0.6333 and then, 0.6102 (2015 low).
Canada employment dropped -24.2k in July, worse than expectation of 10.0k. Unemployment rate rose to 5.7%, up from 5.5%, above expectation of 5.5%. Also from Canada housing starts dropped to 222k in July, above expectation of 210k.
From US, PPI rose 0.2% mom, 1.7% yoy in July, matched expectation. PPI core dropped -0.1% mom, slowed to 2.1% yoy in July, below expectation of 0.2% mom, 2.3% yoy.
USD/CAD recovers notably after the releases but it’s staying below 1.3345 temporary top. Intraday bias remains neutral and some more consolidative trading could be seen. But as long as 1.3177 support holds, further rally is expected in the pair through 1.3345 in a later stage.
German exports dropped -8.0% yoy to EUR 106.1B in June. Imports dropped -4.4% yoy to EUR 89.3B. Trade surplus came in at EUR 16.8B. In calendar and seasonally adjusted, trade surplus narrowed to EUR 18.1B.
After Federal Statistical Office’s release, German Chamber of Industry and Commerce (DIHK) warned that export cannot do more to the economy in the second half. Ending the year with a “weak zero” growth in export is already a “success”.
Foreign trade chief of DIHK,Volker Treier, said “increasing protectionism and a noticeably weakening global economy are placing a direct burden on the export-strong German economy”. In particular, “US trade conflict with China and the tenacious struggle for Brexit are unsettling investors worldwide – and are clouding prospects, especially for the many German capital goods producers.”
And, “if we were to end the year with a weak zero – and thus with the worst result since the financial crisis – that would be a great success considering the conflict-laden and crisis-ridden global economy.”
UK GDP surprisingly contracted by -0.2% qoq in Q2, worse than expectation of 0.0% qoq. That’s also the first quarterly contraction since 2012. Over the year, GDP grew 1.2% yoy, slowed from Q1’s 1.8% yoy and missed expectation of 1.4% yoy. Looking at some details, services sector provided the only positive contribution to GDP growth, with 0.1% qoq growth. Production sector contracted sharply by -1.4% qoq, driving by sharp decline in manufacturing output. In June, GDP rose 0.0% mom, below expectation of 0.1% mom.
Chancellor of the Exchequer Sajid Javid said, “this is a challenging period across the global economy, with growth slowing in many countries. But the fundamentals of the British economy are strong – wages are growing, employment is at a record high and we’re forecast to grow faster than Germany, Italy and Japan this year.” And, “the government is determined to provide certainty to people and businesses on Brexit – that’s why we are clear that the UK is leaving the EU on October 31.”
Also released from UK, industrial production dropped -0.1% mom, -0.6% yoy in June, versus expectation of -0.2% mom, -0.3% yoy. Manufacturing production dropped -0.2% mom, -1.4% yoy, versus expectation of -0.2% mom, -1.1% yoy. Visible trade deficit narrowed to GBP -7.0B in June versus expectation of GBP -11.3B.
Japan GDP grew 0.4% qoq in Q2, well above expectation of 0.1% qoq. Annualize growth rate slowed from 2.8% to 1.8%, but beat expectation of 0.5%. Looking at some details, private consumption, which accounts for around 60% of GDP, grew 0.6% qoq. Capital expenditure was solid and grew 1.5% qoq, accelerated from 0.4% qoq in Q1. Exports were weak but contracted just 0.1% qoq.
The set of data argues that uncertainty from global trade war has relatively controlled impacts on the economy. In particular, companies were not prompted to rein in investment spending. This echoed BoJ’s assessment that global uncertainties had so far limited impact on the Japanese economy. Though, domestic demand would weaken ahead later in the year due to the planned sales tax hike. That’s something BoJ policymakers need to continue to monitor.
In the “Opening Statement to the House of Representatives Standing Committee on Economics“, RBA Governor Philip Lowe said “there are signs the economy may have reached a gentle turning point”. The economic outlook is supported by lower interest rates, tax cuts, weaker exchange rate, stabilization of housing markets, improvement in resources sector and infrastructure spending. Thus, “consistent with this, we are expecting the quarterly GDP growth outcomes to strengthen gradually after a run of disappointing numbers,” Lowe said.
Though, for now, Lowe reiterated that “It is reasonable to expect an extended period of low rates will be needed to achieve the Board’s employment and inflation objectives,.” And, at the Q&A session, Lowe also noted that “it’s possible we end up at the zero lower bound” on interest rates. He added “it’s unlikely but it is possible” and RBA is “prepared to do unconventional things if circumstances warranted.”.
In the new economic forecasts, 2019 year end growth was revised down from 2.75% to 2.50%. 2020 year-end growth was unchanged at 2020%. 2021 year-end growth was expected to pick up to 3.00%. Unemployment rate forecasts for 2019 and 2002 year-end were revised up from 5.00% to 5.25%. Unemployment was expected to drop to 5.00% in 2021 year end. Headline CPI forecasts were also revised down from 2.00% to 1.75% at both 2019 and 2020 year-end, before picking up to 2.00% at 2021 year-end.
UK Foreign Minister Dominic Raab warned in a Reuters interview that it’s EU’s call on no-deal Brexit. And, it’s EU’s responsibility to take if that happens. He also reiterated that UK will leave at the end of October “preferably with a deal”. But, if “there’s no movement or flexibility from the EU side, then we’ll leave on what’s called WTO terms.”
Raab said, “If the position from the EU is that the withdrawal agreement can’t be changed – whether it’s add-ons or subtractions – full stop, which is their position today, then let’s face it, they will be taking the decision to see the UK leave on no-deal terms, and that’s a responsibility they will have to bear.”
He also reiterated the new government’s stance that “the backstop, certainly in its current form, is undemocratic and it’s something that will have to be removed.” The alternative is to move toward an “operational backstop” that ensured that “any checks that are done wouldn’t be at the border” but could be managed with “technology and goodwill and operational cooperation.”
US initial jobless claims dropped -8k to 209k in the week ending August 3, below expectation of 217k. Four week moving average of initial claims rose 0.25k to 212.25k.
Continuing claims dropped -15k to 1.684m. Four-week moving average of continuing claims dropped -11k to 1.687m.
In ECB’s monthly economic bulletin, it’s noted the recent data and survey results suggest “somewhat weaker growth” in Q2 and Q3. The softening of growth can be ” primarily attributed to weak global trade and the prolonged presence of uncertainties.
The Governing Council underlined the need for “highly accommodative” monetary policy stance for a “prolonged period of time”. And if medium-term inflation outlook continues to fall short, ECB is “determined to act”, in line with the commitment to “symmetry” in inflation target.
ECB also reiterated it “stands ready” to adjust all of its instruments”. And the Governing Council has tasked the relevant Eurosystem Committees with examining options, including ways to reinforce forward guidance on policy rates, mitigating measures such as the design of a tiered system for reserve remuneration, and options for the size and composition of potential new net asset purchases.
As noted in the latest Bank of France Business Survey report, the monthly index of business activity suggests that the country’s GDP would growth 0.3% in Q3.
Manufacturing industry business sentiment indicator stood at 95. Industrial production rose “moderately” and staff levels were “stable”. Activity is expected to continue to grow at the same pace in August.
Services business sentiment indicator stood at 100. Service sector activity “picked up slightly” and is expected to continue to growth at same pace in August.
In construction, the business sentiment indicator stood at 104. Construction sector activity bounced back, both in structural and finishing works. Construction sector growth is expected to “return towards its long-term average in August.”
China’s trade data came in better than expected and helped stabilize market sentiments. At least there was recovery in exports in July while imports contracted less than expected.
Total with US continued to show contraction, with year-to-July trade dropped -13.4% yoy. Imports from US also contracted -28.3% yoy. On the other hand, total trade with EU grew 4.6% yoy from January to July, with exports increased 6.1% yoy and import increased 2.3% yoy.
Nevertheless, the real tests will come later in the year as US tariffs on USD 300B in Chinese goods take effect on September 1.
Here are some details.
In July, in USD terms:
Year-to-day from January to July:
Year-to-day from January to July, with EU:
Year-to-day from January to July, with US:
Year-to-day from January to July, with AU:
RBNZ Assistant Governor Christian Hawkesby said in an interview that, after yesterday’s 50bps rate cut, “we’ve got a more balanced outlook for the OCR now”. However, he added, “even within those projections there’s some probability in there that we will need to reduce the OCR from where it is at the moment.”
Hawkesby explained that markets have already priced in a smaller 25bps before yesterday’s announce. And the New Zealand Dollar faced downward pressure after the decision, which could give an extra boost to exports. He added “it’s all part of the story of us getting back to our targets.” He hoped that the larger cut could help avoid further policy easing. But RBNA is “complete” open to use negative interest rates and other unconventional tools if necessary.
The main consideration for any next move is on global outlook. He said, “the obvious one is the global environment where we feel like the risks are tilted to the downside, and that was one of the factors that prompted us to ease with the 50 basis points this time around.”
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US 30-year yield nearing historical low after huge plunge
Risk aversion dominated the US session overnight and carried forward in Asian session. DOW closed down -1.48%. S&P 500 dropped -1.22%. NASDAQ lost -1.20%. Technically, all three indices were rejected by 55 day EMAs, suggesting more near term downside pressure.
More importantly, treasury yields dived again on massive safe haven flows. 30-year yield took a big plunge by -0.118 to close at 2.130. TYX is now just inch above historical low of 2.102 made back in 2016. A break there is inevitable.
10-year yield also dropped -0.095 to 1.639. TNX is now below 78.6% retracement of 1.336 to 3.248 at 1.745. We’d still pay attention to bottoming above 1.336. But a firm break of 2.102 in TYX could likely drag TNX through this 1.336 low at least.