Another Trade-induced meltdown
New Curbs on China investment!
Another barrage of potential tariffs along with the US administration looking to impose International Emergency Economic Powers Act of 1977 to prohibit Chinese firms from investing in the US technology sectors has again spooked global equity market in early trade while inducing a yet another risk meltdown.
Indeed the trade war hawks are circling, but the question is fade or trade but by all appearance were undoubtedly nearing that bridge too far and extreme caution should be exercised as the market awaits the rebuttal from China. Be nimble!
No rest for the weary
No rest for weary as the markets will get bombarded by events risk from virtually every angle this week. Trade war, elections, US data, Fedspeak, Eurozone inflation and the Bank of Canada (BoC)Business Outlook Survey all wrapped up in month end portfolio rebalance to add more confusion to the fray. Although a sense of trader fatigue is setting as trade war noise drags on, it will be a week” to be nimble best be quick” as markets are apt to be jumpy.
The Euro has found itself stirred but not shaken by new threats from US President Trump who announced auto tariffs of 20%directed at German automakers. But shares in German and other European car manufactures predictably hit the skids Friday. Indeed, this import tax would be a knockout blow and could wipe out the business of importing German cars to the US. But worst of all, this move risks spiralling into a protracted trade war with the EU.
Turkish elections are seldom a delight to trade given that on any surprise it will turn in to a game of risk transfer at ridiculous high spread premiums. While President Erdogan has declared himself the winner, the opposition CHP are questioning the official result. No precise details on this dispute, but the Turkish Lira is trading 1 % higher in early trade.
On the US front, Housing, GDP, Manufacturing and PCE data make for useful data week, but with the FOMC members taking to the airways on masse it usually provides some moments of confusion as trader’s digest Fedspeak which is generally an exercise in verbal gymnastics.
Big week on the Bank of Canada front with traders very keen to hear Poloz speech and BoC business outlook survey from one of the most hawkish CB’s on the planet. Traders view the Canadian dollar as a reliable barometer for USD sentiment, and we will see some good action around these risk events.
Equity Market
Investors pulled out a record $8.1bn from global equities in the past week with Emerging Markets seeing outflows of $6bn as the trade tension between China and the US threatened to escalate as China vowed in-kind retaliation for any US trade tariffs. These are pretty damning numbers suggesting investors are voting with their feet and will take a lot convincing to get that money out of money market funds, which are the preferred parking spot for retail to wait this trade war mess out. But with US administration is in some form of a trade dispute with everyone, this could undoubtedly drag on for some time to come. And predictably equity futures wobbled at the open before stabilising. However, traders do appear to be better sellers in early markets
Oil Market
Oil prices are opening lower as the market is refocusing on the escalating trade war theme and the obvious concerns around global growth. The Pboc move to reduce RRR suggests mainland is concerned about the recent economic slowdown along with the prospects of a protracted trade war, so traders are taking notice.
But on Friday, WTI rallied above $ 69.00 post-OPEC decision and reversing out much of the bearishness leading up to the much-anticipated Vienna meeting. The bottom line is that given the global demand-supply of the equation and knowing the markets are little more than one supply shock away from surging higher. The perception that the production increase may not offset the production decreases from Venezuela and sanctions impacts from Iran after OPEC surprised the market with a higher output increase than expected.
But the devil is in the details since only four members (Russia Saudi, UAE and Kuwait) have the immediate spare capacity, so the supply increases will not occur instantaneously, and as suggested by Nigeria energy minister Kachikwu, the rise is closer to a 700 K bdp risk. And perhaps even less when factoring in new disruptions in Libya and scheduled North Sea maintenance. And so, the market has swung aggressively from a sell the rumour to buy the news reaction on the OPEC decision.
Also, a report that a 350,000 bpd Canadian oil sands upgrader could be offline for the next month or so has added to the rally as short positions decided to pack it in.
Gold Market
Gold prices exhibited weakness all last week, but there are subtle signs the meltdown may have stopped as the US dollar closed below technical support lines on Friday. And while a technical downtrend remains intact for, Gold markets are looking increasing oversold and very susceptible to safe-haven buying that could ignite at any time but more likely to further weakness in the USD. Local Singapore gold dealers were reporting brisk retail demand for coins and wafers but also saying Jewellers were only buyers on request to fill immediate needs suggesting they want to see gold fall lower before committing to a longer-term purchase.
Asia market
To stabilise plummeting markets China will lower some banks’ reserve requirement ratios (RRR) by 50 basis points on July 5, the country’s central bank said Sunday. This monetary adjustment should not be interpreted as a policy shift designed to weaken the Yuan and further escalate trade tensions, but rather a case of policy fine-tuning intended to calm investors nerves which are fraying due to escalation trade tensions.
To put it bluntly, it was a brutal week for Asia with risk monitors flashing red. China has been the centre of attention with equity market melting down and breaching key support levels like a hot knife through butter and USDCNH is pressing 6.52 in early trade. The market remains vigilante as both trade concerns and a slowdown in China markets. Thus, traders will be more disposed to fade rallies. On the currency front, with no trade war relief in sight selling Yuan on prospects of a more aggressive Pboc policy shift could be a path of least resistance.
In Malaysia, Nor Shamsiah will be the new BNM governor, the market was happy with this welcome announcement as it suggests a policy status quo, while other headlines that PM Mahathir sees fair value for USDMYR at 3.8. Spot adjusted lower on the implication the new government does favour a stronger Ringgit but remain above the critical 4.0 level. Also, higher oil prices post OPEC is lending some support, but the local markets will stay under tremendous stress from capital outflow and the prospect of waning equity markets given trade war risks. As such, my risk-reward index remains in the extremely negative territory for local investments.
Currency market
Directionally, the USD could struggle after the dollar failed to close on solid footing vs EURUSD, GBPUSD and USDCAD on Friday Last weeks robust EUR PMIs are massive and do suggest that EU data pendulum may be swinging back in neutral to positive territory. Traders will continue to put significant weight on the observable data this week, so we should have a busy response from dealers of crucial data prints.
The EURUSD looks happy enough in early trade at 1.1665, but traders will be very much focused on economic data and fed speak.
However, all eyes will be on EMFX which rallied into weeks end and was one of the critical currency markets highlights on Friday. The EM FX reversal was spurred on by rising energy prices, a softer dollar and some squaring of overextending bearish positioning. And the G10 betas like the Australian dollar put in a healthy day for similar reasons. But all eyes today’s market opens as ZTE is back in the middle of the
EUR: With the EURUSD failing to take out 1.1525 convincingly and the subsequent move above 1.1600, the short-term portfolios going long and it’s all about the decent EU PMI prints on Friday. Given the short-term market remains in oversold conditions, any combination of US data wobble or solid Ifo or EU inflation print could trigger a squeeze higher to 1.1740 with a possible extension to 1.1820.
AUD: While I’d still favour being short the AUD, the break above the previous lows at 0.7412 may suggest more shorts will get pared.
JPY: Topside continues to be weighted down by trade war escalations but differential keep dollar supported. Remains a currency pair out of favour.
GBP: The close above 1.3250 Friday suggest the GBP remains supported post-BOE after the surprise dissenter, Haldane, has increased expectations for a rate hike in August.
Cryptocurrencies
Bitcoin fell below the key psychological $6000 mark over the weekend but has since recovered and traded just above that critical level. Investors were back on the regulatory watch after Japan’s Financial Services Agency ordered six of the country’s biggest crypto trading venues to improve measures to prevent money laundering. While the non-stop regulatory oversight continues to weigh on sentiment, there wasn’t enough selling momentum for the move to stick. However, on a subsequent test, all bets are off as if we can clear this support level it should be clear sailing to $5000
