EU-US joint statement to lower tariffs and barriers, target China for unfair practices

    Below is the full text of the joint statement following the meeting between European President Jean-Claude Juncker and US President Donald Trump. In short, both sides agreed to strengthen the trade relationship and make trade fairer and more reciprocal. The agreed to worked together toward ” zero tariffs, zero non-tariff barriers, and zero subsidies on non-auto industrial goods” and increase trade and services, soybeans and other products. The agricultural sector will be opened and energy partnership strengthened.

    And, both sides agreed to join forces against “unfair global trade practices”. And specifically, they the practices include “intellectual property theft, forced technology transfer, industrial subsidies, distortions created by state owned enterprises, and overcapacity.” That’s exactly talking about China.

    Here is the full statement.

    Joint U.S.-EU Statement following President Juncker’s visit to the White House

    We met today in Washington, D.C. to launch a new phase in the relationship between the United States and the European Union – a phase of close friendship, of strong trade relations in which both of us will win, of working better together for global security and prosperity, and of fighting jointly against terrorism.

    The United States and the European Union together count more than 830 million citizens and more than 50 percent of global GDP. If we team up, we can make our planet a better, more secure, and more prosperous place.

    Already today, the United States and the European Union have a $1 trillion bilateral trade relationship – the largest economic relationship in the world. We want to further strengthen this trade relationship to the benefit of all American and European citizens.

    This is why we agreed today, first of all, to work together toward zero tariffs, zero non-tariff barriers, and zero subsidies on non-auto industrial goods. We will also work to reduce barriers and increase trade in services, chemicals, pharmaceuticals, medical products, as well as soybeans.

    This will open markets for farmers and workers, increase investment, and lead to greater prosperity in both the United States and the European Union. It will also make trade fairer and more reciprocal.

    Secondly, we agreed today to strengthen our strategic cooperation with respect to energy. The European Union wants to import more liquefied natural gas (LNG) from the United States to diversify its energy supply.

    Thirdly, we agreed today to launch a close dialogue on standards in order to ease trade, reduce bureaucratic obstacles, and slash costs.

    Fourthly, we agreed today to join forces to protect American and European companies better from unfair global trade practices. We will therefore work closely together with like-minded partners to reform the WTO and to address unfair trading practices, including intellectual property theft, forced technology transfer, industrial subsidies, distortions created by state owned enterprises, and overcapacity.

    We decided to set up immediately an Executive Working Group of our closest advisors to carry this joint agenda forward. In addition, it will identify short-term measures to facilitate commercial exchanges and assess existing tariff measures. While we are working on this, we will not go against the spirit of this agreement, unless either party terminates the negotiations.

    We also want to resolve the steel and aluminum tariff issues and retaliatory tariffs.

    Trump to insist on auto tariffs, Euro bothered but not too bothered

      Euro seems to be troubled by a Washington Post story that Trump insists on, ignoring the outcries from Republicans and business executives, pushing through 25% auto tariffs. That came just ahead of the meeting with EU Juncker. Earlier today, there was an ABC story saying that Juncker is bringing offers to Trump to avert a trade war. But that’s on condition that Trump has to drop tariffs on steel and aluminum first.

      As we pointed out before, there is no common ground for negotiation between Trump and the EU. From his recent tweets and talks, Trump will continue to play victim and request EU to act before he drops the tariff threats. EU, on the other hand, will insist on Trump dropping the gun first before starting the talk.

      But most importantly, Trump, and to a certain extent his supporters, views BOTH EU and China as threat to the US hegemony. When national security can be used as an excuse to impose tariffs on the closest allies in Canada, tariffs can be also used as a excuse for some agenda other than trade. It’s widely known that tariffs won’t solve global imbalances. The economists know it. Trump’s advisors and himself certainly know it. So, it’s totally unsurprising for Trump to insist on auto tariffs.

      But after all, we’d like to emphasize that while EUR/USD’s dip may look wild in a 1 min chart, but it’s peanut, nothing, in an hourly chart, not to mention a 4H chart. Always look at the big picture. EUR/USD is in consolidation. And anything goes inside a corrective pattern.

      EUR/JPY’s is an extension of the decline from 131.97. We’ve mentioned in the technical outlook that EUR/JPY is heading back towards 127.13 support because the rebound form 124.61 has completed with three waves up to 131.97, on bearish divergence condition in 4 hour MACD. So the decline is not a surprise neither.

      And, EUR/GBP is just having some jitters!

      Gold recovery capped by 1238 resistance, more downside still in favor in near term

        Gold turned sideway after hitting 1211.65 last week. There seems to be some support from 1205.20 support level, which is close to 1200 psychological level. Oversold condition, as seen in daily MACD was also limiting downside momentum.

        However, the recovery is so far limited below 1238.00 support turned resistance. Hence, there is no confirmation of near term bottoming yet. We’re viewing the fall from 1365.24 as a leg in the pattern from 2015 low at 1046.54. And further fall would be seen to 61.8% retracement of 1046.54 to 1375.15 at 1172.06 and possibly below.

        Nonetheless, break of 1238.00 resistance will likely bring stronger rebound back to 55 day EMA (now at 1267.53) before staging another fall.

        Into US session: Euro and Dollar both weak ahead of Juncker-Trump meeting

          Entering into US session, Australian dollar remains the weakest one for today, as continues to be weighed down by CPI miss. Dollar and Euro are trading as the second and the third weakest one. Markets are having their eyes on the meeting between Trump and European Commission President Jean-Claude Juncker today. But it’s unlikely for the “master of deal” and the “brutal killer” to achieve anything of significance. Meanwhile, Canadian Dollar and Swiss Franc are the strongest two today.

          For the week, Yen remains on the strongest one so far. 10 year JGB drops slightly to 0.070 today, below this week’s high at 0.090. But it’s still way higher than last week’s high at 0.49. Sterling is trading as the second strongest one as traders were happy with UK PM Theresa May’s take over of Brexit negotiation. Euro is the weakest one followed by Australian Dollar.

          EU preparing tariffs on USD 20B in US imports, as counter measures to auto tariffs

            Ahead of the meeting with Trump, European Trade Commissioner Cecilia Malmstrom said that “we hope that it doesn’t come to that and that we can find a solution. If not, the EU Commission is preparing a rather long list of many American goods. It would be around $20 billion.” But the next round of EU tariffs will not target specific US states. Malmstrom said “it’s more general goods such as agricultural products, machinery, high-tech products and other things.”

            According to reports, the EU originally considered tariffs on EUR 9B of US imports. But now, they’re looking at going after double that amount, but at half the tariff rate. Also, such tariffs are expected to come into effect at least after US completes its section 232 national security probe on autos. It’s expected to be completed in weeks, probably by late August/early September.

            German Ifo dropped 0.1 to 101.7 in July, match expectations

              German Ifo Business Climate dropped 0.1 to 101.7 in July, inline with expectation. Current Assessment, on the other hand, rose 0.2 to 105.3, above consensus of 105.1. But Expectations dropped 0.4 to 98.2, below expectation of 98.7.

              Ifo President Clemens Fuest said in the release that “companies were slightly more satisfied with their current business situation, but scaled back their business expectations slightly. The German economy continues to expand, but at a slower pace.”

              Also, “the business climate index fell in trade. Traders were increasingly sceptical about their six-month business outlook, but more satisfied with their current business situation. This effect was particularly marked in retailing.”

              Full release here.

              EU Oettinger to Trump: Drop your punitive tariffs, and we can talk about all tariff reductions

                European Union Budget Commissioner Guenther Oettinger commented regarding EU-US trade relationship, ahead of European Commission President Jean-Claude Juncker’s meeting with Trump. Oettinger said “firstly, our common line is that we expect the existing punitive tariffs to be lifted”, referring the section 232 national security steel and aluminum tariffs. And, “then we are ready to discuss a reduction and restructuring of all tariffs in all sectors.”

                He added that “in this way, we want to avoid a further escalation of the trade conflict, and to avoid a trade war/” And, “one could try to untangle the existing tariffs and then … reduce tariffs for various goods and services.” He added that ” would be a negotiation that would be possible in half a year, and which we could start with the U.S. in the autumn.”

                Australian dollar lower after CPI miss, NZD down on trade deficit

                  Both Australian Dollar and New Zealand Dollar are trading lower today after release of economic data.

                  Australia CPI rose 0.4% qoq, 2.1% yoy in Q2. The annual rate accelerated from Q1’s 1.9% yoy but missed expectation of 2.2% yoy. RBA trimmed mean CPI was unchanged at 1.9%, inline with expectation. RBA weighted median CPI slowed to 1.9% yoy, down from 2.0% yoy, matched expectation.

                  RBA is very clear with its stance that there is no compelling reason to raise interest rate in near term. And the inflation data certainly won’t alter that position.

                  New Zealand trade balance came in at surprised NZD -113m deficit in June, versus expectation of NZD 200m surplus. Exports dropped from NZD 5.35B to NZD 4.91B. Imports also dropped from NZD 5.15B to 5.02B.

                  AUD/NZD has been stuck in range of 1.0884/0991 since early July and there is no sign of a breakout yet. While 61.8% retracement of 1.1289 to 1.0486 at 1.0982 looks like a strong resistance. But the cross is holding above 55 day EMA as well as 1.0844 support, thus maintains near term bullishness. For now, further rise remains in favor.

                  Trump called for dropping all tariffs ahead of meeting with EU Juncker

                    European Commission President Jean-Claude Juncker’s visit to the US and meeting with Trump is an highly anticipated event today. Ahead of that Trump continued to play victim with his provocational tweets and said “tariffs are the greatest! Either a country which has treated the United States unfairly on Trade negotiates a fair deal, or it gets hit with Tariffs. It’s as simple as that – and everybody’s talking! Remember, we are the “piggy bank” that’s being robbed. All will be Great!”

                    And he added later that “the European Union is coming to Washington tomorrow to negotiate a deal on Trade. I have an idea for them. Both the U.S. and the E.U. drop all Tariffs, Barriers and Subsidies! That would finally be called Free Market and Fair Trade! Hope they do it, we are ready – but they won’t!

                    According to European Union trade commissioner Cecilia Malmstrom, who’s in the visit too, the meeting is to seek to ” de-escalate the present situation and prevent it from worsening”. Commission spokesman Margaritis Schinas said yesterday that ” there are no offers.”

                    Trump’s USD 12B aid to tariffs affected farmers … very temporary bandage to a self-inflicted wound

                      Overnight, Trump administration announced to offer up to USD 12B in aid to farmers that are affected by the the US trade war with other countries, notably China. The program included a mix of measures overseen by the USDA, including director payments to soybean producers, distribution assistance and international marketing. Trump said in the farmers will be the “biggest beneficiary” in what he’s doing on trade and ” watch, we are opening up markets, you watch what is going to happen, just be a little patient.”

                      The program is not generally welcomed by the industry though. Zippy Duvall, president of the American Farm Bureau Federation, the largest American farmer group said, “we cannot overstate the dire consequences that farmers and ranchers are facing in relation to lost export markets … and we will continue to push for a swift and sure end to the trade war.”

                      American Soybean Association said in a statement that “the announced plan provides only short-term assistance … ASA continues to call for a longer-term strategy to alleviate mounting soybean surpluses and continued low prices, including a plan to remove the harmful tariffs.”

                      Blake Hurst, a corn and soybean farmer and president of the Missouri Farm Bureau said “the payments will be helpful to farmers facing overdue loans and angry bankers, but are completely insufficient if they mean that tariffs and the trade war will last for the foreseeable future”. “They are a very temporary bandage to a self-inflicted wound.”

                      IMF: Escalation of protectionist policies will not help current account imbalances

                        IMF warns in its latest 2018 External Sector Report (ESR) that “excess imbalances are increasingly concentrated in advanced economies” that “both deficits and surpluses—pose risks for individual countries, and for the global economy.” Global current account surpluses and deficits “remained relatively unchanged over the past five years” at around 3.25% of global GDP. And 40-50% is concentrated in advanced economies.

                        Higher-than-desirable current account balances prevail in northern Europe—in countries such as Germany, the Netherlands, and Sweden—as well as in parts of Asia—in economies like China, Korea, and Singapore. Lower-than-desirable balances remain largely concentrated in the United States and the United Kingdom.

                        IMF also pointed out that “persistence of global imbalances and mounting perceptions of an uneven playing field for trade are fueling protectionist sentiment.” And “these impulses are misguided. It warned that “escalation of protectionist policies would mainly hurt domestic and global growth, without much of an effect on current account imbalances, as this year’s report also finds.”

                        It urged countries to tackle imbalances together. In particular:

                        • Countries with lower-than-warranted external current account balances should reduce fiscal deficits and encourage household saving, while monetary normalization proceeds gradually.
                        • Where current account balances are higher than warranted, the use of fiscal space, if available, may be appropriate to reduce excess surpluses.
                        • Well-tailored structural policies should play a more prominent role in tackling external imbalances, while boosting domestic potential growth. In general, reforms that encourage investment and discourage excessive saving—through the removal of entry barriers or stronger social safety nets—could support external rebalancing in excess surplus countries, while reforms that improve productivity and workers’ skill base are appropriate in countries with excess external deficits.

                        Also from the report, the Real effective exchange rate (REER) gap average in “2017” were:

                        • USD was moderately overvalued by 8-16%, compared with the level
                          implied by medium-term fundamentals and desirable policies.
                        • EUR REER gap average in 2017 was in the range of -8% to 0% for Eurozone as a whole. But it ranged from undervaluation of 10-20% in Germany to overvaluation of 0-10% in small to mid-sized Eurozone member states.
                        • GBP was 0-15% overvalued. But it noted the assessment is subject to a greater margin of uncertainty due to trade relationship with the EU.
                        • JPY REER gap in the range of -13% to 6%. Broadly in line with medium-term fundamentals and desirable policies.
                        • CHF REER gap average in 2017 was in the range of -5.3% to 2.3%.
                        • Canada was overvalued by 1-13% relative to medium-term fundamentals and desirable policies.
                        • AUD overvalued by 0-17%, above the level implied by medium-term fundamentals and desirable policy settings. 1
                        • China: The REER to be broadly consistent with fundamentals and desirable policies, with the gap being in the range of -13 to +7 percent.

                        The blog post can be found here.

                        The full report here.

                        UK PM May takes over Brexit negotiations from now on

                          UK Prime Minister Theresa May said she will lead the Brexit negotiation with EU from now on.

                          In a written statement to the Parliament, May said that “I will lead the negotiations with the European Union, with the Secretary of State for Exiting the European Union deputizing on my behalf.”

                          “DExEU (Department for Exiting the EU) will continue to lead on all of the government’s preparations for Brexit: domestic preparations in both a deal and a no deal scenario, all of the necessary legislation, and preparations for the negotiations to implement the detail of the Future Framework.”

                          US PMIs: Economy sustained strong growth momentum

                            US Markit PMI manufacturing rose 0.1 to 55.5 in July, matched expectation. PMI services dropped 0.3 to 56.2, slightly below expectation of 56.3. PMI composite dropped 0.3 to 55.9, hit a 3-month low.

                            Commenting on the flash PMI data, Chris Williamson, Chief Business Economist at IHS Markit said:

                            “The July survey data indicate that the US economy sustained strong growth momentum after what looks to have been a solid second quarter, representing a good start to the second half of 2018. Although down from June, the July flash PMI is in line with the average for the second quarter and indicative of the economy growing at an annualised rate of approximately 3%.

                            “Buoyant domestic demand helped the service sector maintain particularly impressive growth and has helped cushion the goods producing sector from wilting demand in export markets, with goods export orders down for a second successive month in July.

                            “Trade frictions have clearly become a major cause of concern, especially among manufacturers. Firms have become increasingly worried about the impact of tariff and trade wars on demand, prices and supply chains. July saw the steepest rise in prices charged for goods and services yet recorded by the surveys as firms passed rising costs on to customers, in turn frequently linked to tariffs. What’s more, supply chain delays also hit a record high amid rising shortages of key inputs, which is usually a harbinger of further price rises.”

                            EU to pay EUR 6000 per migrant taken in for volunteering member state

                              As follow up to the agreement at June EU summit regarding control of immigration, the European Commission released the proposal of a plan on expanding the disembarkation and controlled center concepts. The primary aim of the controlled centers is to “improve the process of distinguishing between individuals in need of international protection, and irregular migrants with no right to remain in the EU, while speeding up returns.”

                              And under the proposal, host member states will receive full support from EU and EU agencies, including full operational support; rapid, secure and effective processing that prevents secondary movements. In additiona, volunteering member states will recent full financial support on instrature and operation. Also, there will be EUR 6000 per person for the member states accepting transfers of those disembarked.

                              The European Commission will push for a pilot phase with flexible approach to start as soon as possible. The proposal will be discussed tomorrow on July 25.

                              Commissioner Avramopoulos said: “Now more than ever we need common, European solutions on migration. We are ready to support Member States and third countries in better cooperating on disembarkation of those rescued at sea. But for this to work immediately on the ground, we need to be united – not just now, but also in the long run. We need to work towards sustainable solutions.”

                              Full release here.

                              Into US session: Dollar fails to hold gains, Yen stays firm

                                Entering into US session, Dollar turned weak earlier today and failed to sustain gains. On the other hand, the Japanese Yen is holding broadly firm. Australian Dollar and New Zealand Dollar turned the corner. Much focus will be on US treasury yields and some solid gain there is needed to give the greenback some support. Otherwise, recent correction will likely continue with some more downside potential in the greenback.

                                In other markets, Europe indices are trading generally higher, with DAX up 1.34%, CAC up 0.81% and FTSE up 0.81% at the time of writing. That follows the strong rally in Asian equities. China Shanghai Composite jumped 1.61% to 2905.56 as boosted by the governments stimulus policies. While the announce measures are just fine-tunings and are hardly anything dramatic, that’s seen as a sign of the director where the Chinese government is heading towards. That is do more to support growth.

                                The SSE’s rebound is set to extend to 55 day EMA (now at 2944.64) and above. But for now, we’re seeing no reason for it to regain 3000 handle.

                                Nikkei also rose 0.51% to close at 22510.48 and pared back much of Monday’s loss. However, the day high was seen at the open at 22555.05 and there was no follow through momentum back then. Overall strength of support from the 55 day EMA is rather weak. We’ll keep monitor this level, which will decide whether Nikkei would head for test on 21462.94 support before an upside breakout.

                                Eurozone PMI dropped to 2-month low, growth to slow to 0.4%

                                  Eurozone PMI manufacturing rose to 55.1 in July, up from 54.9 and beat expectation of 54.6. However, PMI services dropped to 54.4, down form 55.2 and missed expectation of 55.1. PMI composite dropped to 54.3, down from 54.9 and hit a 2-month low.

                                  Commenting on the flash PMI data, Chris Williamson, Chief Business Economist at IHS Markit said:

                                  “The flash PMI suggests the eurozone started the second half of the year on a relatively soft footing, indicative of GDP growth slowing in the third quarter. The July reading is consistent with quarterly GDP growth of 0.4%, down from a 0.5% expansion indicated by the surveys for the second quarter.

                                  “The renewed slowdown comes as a disappointment, confirming suspicions that June’s rebound was temporary, largely due to businesses in some countries making up for an unusually high number of public holidays in May.

                                  “Given the waning growth of new business and further slide in business optimism, the outlook has also deteriorated, notably in manufacturing, where the surveys saw worries about trade wars intensify markedly in July.

                                  “While there are signs that improving domestic demand in many countries is helping drive robust service sector expansion and support manufacturing, a worsening picture for export growth is clearly having an increasingly detrimental effect on manufacturing.

                                  “The big question going forward will be the extent to which domestic demand can remain sufficiently resilient to cushion the eurozone economy from the potential adverse impact of an escalating trade war on exports. For now, the health of domestic demand seems encouragingly solid, but any feedthrough of trade worries to other sectors will be a key area of concern to an already cloudier-looking outlook.”

                                  Full release here.

                                  German PMI hit 5 month high, growth regains momentum

                                    German PMI manufacturing rose to 57.3 in July, up from 55.9, way above expectation of 55.7. PMI services dropped to 54.4, down from 54.5 and missed expectation of 54.5. PMI composite rose to 55.2, up from 54.8, and hit a 5- month high.

                                    Commenting on the flash PMI data, Trevor Balchin, Economics Director at IHS Markit said:

                                    “Private sector output growth in Germany continued to regain momentum in July, having previously sank to a 20-month low in May. The manufacturing sector was the source of stronger growth in the latest month, after services had driven the expansion in June.

                                    “Private sector employment continued to expand at a historically sharp rate in July, with the pace unchanged from June’s five-month high. Manufacturers added staff at a faster pace than service providers for the seventeenth consecutive month.

                                    “Data on new business were less positive than the trends for total activity and jobs, however. This mainly reflected new orders in manufacturing not rising as fast as output, resulting in the slowest rise in backlogs in the sector for two years.

                                    “The latest survey also signalled greater inflationary pressures in July, with both input and output prices rising more steeply. Manufacturers widely reported higher steel prices, and supply shortages from China in general. Meanwhile, service providers hiked their own charges at the second-fastest rate on record.”

                                    Full release here.

                                    France PMIs: Growth at a decent lick at the start Q3

                                      France PMI manufacturing rose to 53.1 in July, up from 52.5 but missed expectation of 53.9. PMI services dropped to 55.3, down from 55.9, but beat expectation of 54.3. PMI composite dropped 0.4 to 54.5, hitting a two month low.

                                      Commenting on the Flash PMI data, Alex Gill, Economist at IHS Markit said:

                                      “The French private sector continued to grow at a decent lick at the start of the third quarter. The rate of expansion, however, remains far weaker than seen around the turn of the year.

                                      “Diverging trends remained between the two main sectors, with activity growth at manufactures lagging behind service providers. A notable trend in this regard was a fall in goods exports for the first time in 22 months amid reports that global trade tensions is weighing on external demand.

                                      “Nevertheless, the rate of job creation and degree of business confidence remained strong at both manufacturers and service providers, suggesting the French private sector is poised for further solid near-term growth.”

                                      Full release here.

                                      Yen and Dollar strong on treasury yields, shrug off risk appetite

                                        Yen and Dollar are trading as the two strongest ones today, and for the week, as supported by strength in treasure yields. 10 year JGB yield opened higher at 0.088 today and stays firm at 0.085 at the time of writing. It was bounded between 0.023 and 0.049 in July up until this Monday. Judging from the current momentum, 10 year JGB yield is having 1% in sight. Note that Yen is having little reaction to the China led Asian markets rally. It will continue to “listen” more to JGB yield than stocks/risk sentiments.

                                        Meanwhile, US 10 year yield gained 0.70 overnight to close at 2.965. The strong rise, as led by 30 year yield’s jump since last Friday, should set the stage for 3.000 handle and above. For now, we’d not seeing any decisiveness for a break of 3.115 high yet. But it’s something that’s worth monitoring. While Dollar seemed to be talked down by Trump’s comment last week, surging yield would bring it back to life.

                                        China unveiled fine-tuning policies measures to boost growth

                                          China unveiled fine-tuning policies measures to boost growth yesterday. Firstly, there will be targeted tax reduction for research and development spending, that could lower around CNY 65B in taxes. Secondly, monetary policy have to ensure ample liquidity in the markets. Financial institutions will be guided to use the RRR cuts to support small and micro businesses. Thirdly, the funding of the National Financing Guarantee fund will be speeded up to achieve the goal of supporting 150,000 small and micro businesses with CNY 140B in loans per annum. Fourthly, “zombie businesses” will be cleared out resolutely to manage systematic risks.

                                          Here is the full announcement in simplified Chinese.