RMB to trend lower
Asian stocks gained marginally yet trade worries have held down sentiment. News flow indicates that, Chinese officials disagreed with President Trump’s version of restarting trade talks between Washington and Beijing. The conflicting signals are potentially more worrying then actuals status of trade talks. So far, the RMB has been used to offset US import tariffs more than representing weakening fundamentals. A fact that seems to infuriate US President Trump. The President has long rallied against the use of the Chinese currency as a tool to gain an advantage in trade. In our view, Trump tweets mentioning the Fed are less about actual interest rates (Trump has functioned as t borrower with significantly higher rates) but the positioning of the USD. Clearly, he is envious of China’s ability to set currency prices. Given the new round of tariffs on Chinese imports, USDCNY should keep rising. Estimates indicate that if all 30% tariffs on Chinese goods in the recent announcement are enforced USDCNY will potentially need to appreciate to 7.95. In general, we had expected a reduction of trade tension as in past escalations. However, this has not occurred yet. Trump’s order for Americana companies to relocate, citing powers granted by the International Emergency Economic Powers Act of 1977, has shifted the battle lines. We doubt the Act provides the President to pull current companies out of China, but can provide the tools to make relocation and current business extremely difficult. This escalation, out of the trade into investments, will not go unanswered by the Chinese. There are a few logical options but a weaker RMB must be high on the list.
Italian alternative coalition talks reassure
The latest developments have been reassuring for Italian assets. Optimism continues to be felt on the front of Italian BTPs with 2y yield falling from 0.009% on Monday to -0.120% (-1’463%) on Tuesday while longer-ends treasuries remain less impacted (resp. -14% and -7.50% for 10 and 30 years). Similar effects are noticeable on equities, with Milan’s FTSE MIB (+14% year-to-date) taking the lead among EU markets in this week’s session and trading +2.25% higher since Monday as an alternative coalition is likely to be formed before Wednesday morning. Negotiations between both Luigi Di Maio’s Five Star Movement and Nicola Zingaretti’s Democratic Party seem on the verge to reaching a consensus, which would confirm Giuseppe Conte re-appointment as Prime Minister. Yet the remaining impediments concerning the 2020 budget should stay despite Economy Minister Giovanni Tria optimistic sounding when stating that the budget should “substantially go below 2.10% GDP”, by 0.30%, still surpassing EU Commission budget deficit limit set at 2.04% for FY 2019. Concrete talks about the matter with the EU are planned for October 2019.
Both PD and M5S appear willing to make concessions and re-appoint PM Giuseppe Conte, a nonpartisan technocrat, for a second term in this newly formed coalition expected to be announced until Wednesday morning. While the M5S is willing to establish a minimum wage, reduce parliament size from current 945 to 600, implement tax reduction, justice reforms and green policies, the PD wants to improve refugee policy and seeks to receive significant government departments in counterpart, paving the way to further contentious talks looking forward. The single currency should react positively following the announcement, although most of the move should occur on fixed-income and equities, as the EUR appears less affected by the recent turmoil in Italian politics.
