August 28, 2019

Daily Observations:

Asian stocks were mixed Wednesday as investors assessed the latest in the unpredictable path of trade talks between the US and China. Treasuries steadied after gains. Indices nudged higher in Sydney and Seoul, were little changed in Hong Kong and Tokyo, and slipped in China. US futures climbed after shares closed lower in New York Tuesday in a seesaw session.

US-China Trade Talks Detail Remain Murky:

The majority of negotiators in Beijing tasked with navigating trade tensions with the US are less than convinced that a deal will actually materialize ahead of the 2020 US elections, according to Chinese officials familiar with the talks.

Trump’s on-again, off-again attitude towards China is being seen as a real obstacle, they said, in a signal that they are concurrently girding for a decoupling from the world’s biggest economy. They added that it is dangerous for any official to advise President Xi Jinping to sign a deal that Trump may eventually break.

Trump’s recent assertion that Beijing had over the weekend made a phone call to his administration to discuss trade is yet to be confirmed by China, and is the latest in a series of claims that has added to Chinese skepticism.

According to Bloomberg news, 2 Chinese officials likened the country’s approach to the US during the Korean War, saying it consisted of fighting while talking, and using fights to speed up talks. China has prepared contingency plans in case of a no-deal scenario, three officials said, including putting US companies on its unreliable entity list and stimulating the economy.

While officials in Beijing are still willing to engage in trade talks, they are concurrently girding for a decoupling from the world’s biggest economy, an effort made all the more acute when Trump “ordered” US companies via Twitter to look for alternatives to China. After trade talks broke down in May, Xi renewed calls for China to pursue “self-reliance” in key technologies and even called on citizens to join a “new Long March.”

HK Investors Choosing Malaysia & Taiwan over Singapore:

According to a news report from Bloomberg earlier today, Singapore’s housing market isn’t turning out to be the beneficiary many may have thought from Hong Kong’s increasingly fraught protests. Instead, investors are looking to cheaper property markets like Malaysia, Thailand and Taiwan.

As anti-government demonstrations approach their fourth month, many people with the means in Hong Kong have been looking at contingency plans. They can range from shifting funds abroad to physically moving from the city. Hong Kong has held the title of the world’s least affordable real estate for nine years in a row now, and unhappiness over property prices is one factor fueling the unrest.

Singapore is particularly expensive when extra costs, like additional buyer’s stamp duty, are factored in. Foreigners buying residential property in the city-state since July 2018 pay stamp duty of 20%, up from 15% before the government cooling measures were introduced. Hong Kong citizens purchased just 12 apartments in Singapore in the first half of 2019, down from 32 in the first six months of 2018. From July through mid-August, when street protests turned violent, that dwindled to just 4, data from ERA Research & Consultancy show.

Ex-Fed Dudley’s Comments Spark Debate :

Former New York Fed President Bill Dudley suggested the Fed rejects interest-rate cuts that would help Donald Trump’s 2020 reelection prospects, drawing swift criticism that such an approach would jeopardize the independence of a Fed already under fierce attack from the U.S. president.

In his Bloomberg Opinion column, published Tuesday, Dudley argued the central bank risks enabling further escalation by the president in the trade war with China and officials should state explicitly that they “won’t bail out an administration that keeps making bad choices on trade policy.”

“There’s even an argument that the election itself falls within the Fed’s purview. After all, Trump’s reelection arguably presents a threat to the US and global economy,” wrote Dudley, who headed the New York Fed from 2009 to 2018 and was previously a Goldman Sachs Group Inc. economist. “If the goal of monetary policy is to achieve the best long-term economic outcome, then Fed officials should consider how their decisions will affect the political outcome in 2020.” The Fed rejected the suggestion that it would play politics with monetary policy.

Fed Chairman Jerome Powell and his colleagues have been careful to not criticize the president’s trade policy choices, and they insist that their decisions are blind to politics. But they have made clear that the uncertainty being created by the escalating dispute with China, plus Trump’s on-again-off-again threat of tariffs against Mexico, and allies in Europe and Japan, were dampening US business investment and had cooled global growth.

Powell, in a speech Friday in Jackson Hole, Wyoming, signaled the Fed was open to cutting interest rates again next month to help offset the headwinds from a cooling world economy, while cautioning that that there are “no recent precedents to guide any policy response to the current situation.”

Real Interest Rates Turn Negative, Gold Shines:

Gold investors are finding that the growing list of negatives in financial markets this year adds up to a very positive outlook. Among the most potent are negative real interest rates, which strengthen the case for holding the precious metal and underpin expectations for further gains.

Bullion has hit the highest level in more than six years as the Fed and other central banks cut interest rates amid the trade war, while inflation remains stable. With bond prices on the rise as investors seek havens, that means the yields they now pay are lower than the pace of consumer price gains. That’s a tremendous boon for gold, which doesn’t pay interest.

The real rate represents the opportunity cost of holding non-yielding assets such as gold. Gold has rallied more than 20% in 2019, topping $1,500/oz, on a surge in demand being fanned by festering global trade tensions, slowing economic growth and investors seeking alternatives to risk assets, including equities. The troubled backdrop has prompted the Fed to reduce US borrowing costs for the first time in more than a decade. And around the world, the pile of debt that’s negative-yielding climbed to more than $16 trillion this month.

The yield on 10yr Treasuries was at 1.4711% on Tuesday, the lowest since mid-2016 and less than the pace of inflation. That means US real yields, taken as the difference between the two, are negative. The figure fell below zero earlier this month and it’s still dropping, according to a Bloomberg gauge.

Fed policy makers next meet in September and investors expect another reduction in borrowing costs as the trade war drags on. Fed Chairman Jerome Powell said this month that while the U.S. economy is in a favorable place it faces “significant risks,” stoking bets on another cut.

Asian Governments’ Fiscal Push:

Asian governments are trickling out fiscal stimulus amid a deepening exports slump, bolstering central bank efforts to shore up their economies as the global mood darkens.

From South Korea to Thailand, authorities have this month either allocated or pledged extra spending and cut taxes to offset the damage the US-China trade war is inflicting on the world’s manufacturing region. With relatively low public debt compared to peers globally, governments in South Korea and Indonesia are targeting record spending next year, while in Hong Kong, a raft of stimulus measures have been announced to prevent the economy tipping into recession.

Yet the room to maneuver is mixed. While countries like China and Singapore have space to spend more, others, like Indonesia and India, are constrained by fiscal and current account deficits. In any case, rolling out effective fiscal policy isn’t easy given bureaucratic lags and the risk of choosing inefficient programs.

The fiscal push comes as central banks run up against policy limits in their rush to cut interest rates. With borrowing costs already low in most places, central bankers like Bank of Korea’s Governor Lee Ju-yeol are calling for fiscal levers to be deployed as well.

Expect BoC Dovish Shift, Goldman Says:

Investors should bet on declines in the loonie against the U.S. dollar and the yen as the Bank of Canada may soon join other central banks in a dovish shift. That’s the view of Goldman Sachs & Co. strategists Zach Pandl and Karen Fishman. They said in a note Tuesday that while Canada’s economy has held up well, it’s exposed to slower US growth and the trade conflict that’s been heating up between America and China.

The BOC’s next decision comes Sept. 4. It will need to incorporate the latest tit-for-tat tariff announcement in its growth outlook, and is likely to lay the groundwork for an interest-rate cut the following month, the Goldman analysts said. “Unlike most of its G-10 peers, the BOC has not signaled a readiness to ease policy — but we think that shift will be coming soon,” the strategists wrote. “As an open economy with a substantial commodity sector, any further weakness in global growth should eventually weigh on Canadian output.”

At their last meeting, in July, BOC officials left rates unchanged for a sixth straight decision and showed little willingness to consider easing any time soon. But amid the escalating trade war, markets are pricing in a 68% probability that Canada’s central bank will cut rates in October.

Sources: Bloomberg

FX Updates:

USD/SGD:

Spot: 1.3890

USDSGD breached the key 1.3900 handle earlier this week, although the pair has since retreated back below. The Singapore dollar’s nominal effective exchange rate (NEER) is trading around the middle of its estimated policy band as investors wait on further developments in US-China trade talks. The NEER fell below the midpoint earlier this point for the first time since June 2018; it has typically declined below the midpoint when there’s speculation the MAS would ease currency policy.

AUD/USD

Spot: 0.6742

AUDUSD slipped into negative territory for the day following the release of weaker-than-expected 2Q construction date, prompting speculation that 2Q Australian GDP data might disappoint expectations. The RBA has eased policy twice since June to a record low of 1% and the financial markets are pricing in another RBA cut later this year and a follow-on move to 0.5% in February, according to Reuters. A retest of 0.6700 over the near term is likely.

USD/CAD:

Spot: 1.3302

USDCAD seems likely to may another run to break the 200-day moving average, currently at 1.3313, following the pair’s rise earlier today past the 1.3300 handle amid a stronger US dollar. Goldman has recently recommended shorting the Canadian dollar, citing its expectations that the Bank of Canada could join other central banks in a dovish shift.

USD/CNH:

Spot: 7.1630

USDCNH was little changed earlier today, while USDCNY looks set to halt a 9-day positive streak, after the PBOC set its daily fixing stronger than expected. From a technical analysis point of view, the USDCNH looks overbought; a retracement back to 7.1000 is highly possible. Recent upbeat industrial profits from China and fiscal measures from the government is likely to exert further downside pressure.

USD/JPY:

Spot: 105.88

USDJPY continues to remain capped at the 106 level, despite recovering from an almost-3 year low of 104.46 earlier this week. A strong clean break below 104.50 could trigger a rapid move back towards 100. Continued fears of a global slowdown, ongoing trade disputes and volatile markets spur demand for safe haven assets such as the yen.

GBP/USD:

Spot: 1.2273

While receding odds of a no-deal Brexit propelled the GBPUSD pair to a monthly high on Tuesday, prices fail to hold on to recovery gains as registering a pullback earlier today amid the UK’s political pessimism. The Guardian and the Huffington Post both cite speculations of an early general election based on the UK Finance Minister’s surprise cancellation of the press conference concerning the announcement of an annual spending plan. In a separate news report, The Guardian raises doubts over the UK Government’s capacity to come up with a workable solution for the Irish backstop even if the EU is ready to discuss the sticking point. A GBPUSD rebound in the coming week is possible, with the previous support-turned-resistance around 1.2400 a likely target.