January 30, 2019

Daily Observations:

Stocks in Asia struggled for traction on Wednesday as the earnings season rolled on and investors awaited the Fed’s policy meeting. The yuan climbed to the highest since July offshore as US-China trade talks get underway in Washington. Gains waned in American equity futures, having earlier been buoyed by Apple Inc.’s forecast that showed stability after a tough end to last year.

US Equities Remain Afloat Despite Mostly Lacklustre Earnings :

According to a Bloomberg analytical piece today, US companies’ profits are coming in worse relative to analyst projections than any time in almost 2 years, but December’s rout in equities was so brutal that stocks are having no problem shaking off that performance to rally the most at this stage of the reporting cycle since 2015.

The S&P 500 Index plunged 14% between October and December, its worst quarterly decline since 2011. Meanwhile analysts pared their forecasts for earnings by much less: only 2.2%. The differing trajectories has left companies with a bigger margin of error than they usually have.

Examples abound, Advanced Micro Devices Inc. being the latest. The company reported sales that were about $20 million below analyst estimates Tuesday night while earnings failed to beat forecasts for the first time since the middle of 2015. For the stock, no problem. After falling 38% since the end of the third quarter, it jumped as much as 11% Tuesday night.

Apple Inc. can be framed similarly. Its first-quarter earnings of $4.18 a share were a hair above Wall Street’s much-deflated estimates, but the margin of the beat was the smallest since 2016. Nevertheless, the stock jumped, rising as much as 6.6%.

3M Co. may have beaten analyst forecasts on the top and bottom line for the fourth quarter, but the company slashed its full-year profit forecast. Still, the industrial firm’s shares rallied almost 2%. And although Caterpillar Inc. plunged Monday after the bellwether’s biggest quarterly profit miss in at least a decade, the selling was limited to a single trading session.

UK PM May to Renegotiate Brexit Deal:

UK PM Theresa May promised to renegotiate the most contentious part of her Brexit deal after it was ripped up by Parliament. She will now head to Brussels to face a steadfast EU with the threat of economic chaos still looming over her country.

In a series of votes on Tuesday evening, the House of Commons chose to dispatch May with a mission to change the so-called Irish backstop section of the Withdrawal Agreement she spent 18 months stitching together. The UK leader has 2 weeks to make progress and placate enough of her divided Conservative Party before facing Parliament again.

Members of Parliament also voted against leaving the EU without an agreement in place, the “no-deal Brexit” that’s causing panic among executives and some in her government. But they did so in the weakest way possible, simply saying that they didn’t want that scenario. The pound fell, a recognition that such an outcome had become more likely.

Top of her list of changes is an overhaul of the back-up plan for the Irish border. This was always the most testy part of the exit package and minutes after the votes May received a sharp reality check. EU President Donald Tusk reiterated that the deal, including the much-loathed backstop, is “not open for renegotiation.” But he left the door open to changes to the non-binding declaration on future relations, if the UK changes its red lines. Among the conditions May has refused to give up are a refusal to be part of EU’s customs union or accept free movement of people.

Mnuchin Hints at US-China Trade Resolution:

US Treasury Secretary Steven Mnuchin said that if China presents enough trade concessions to President Donald Trump, there’s a chance the administration may lift all tariffs. “Everything is on the table,” Mnuchin said early Tuesday during an interview on Fox Business Network. The Treasury chief is set to meet with top Chinese officials in Washington on Wednesday and Thursday alongside US Trade Representative Robert Lighthizer about a month before the US is set to escalate its trade war with China with fresh tariffs.

Trump and China’s Xi Jinping gave their officials until March 1 to work out a deal on “structural changes” to China’s economic model. If they fail, Trump has promised to raise the tariff rate on $200 billion in Chinese imports to 25% from 10%. The collapse of talks would dash hopes of a lasting truce that would remove one of the darkest clouds hanging over the world economy.

China is facing added urgency to end the trade spat amid the weakest domestic growth since 2009. Divisions remain within Trump’s trade team, with hawks including Lighthizer and National Trade Council Director Peter Navarro seeking tougher terms from China, and Mnuchin and White House economic adviser Larry Kudlow prioritizing preserving US growth. Mnuchin pushed back on speculation that the US’s latest actions against Huawei Technologies Co. were tied to the trade talks.

Calls to Delay Brexit Reduces Risk of No-Deal:

The risk of a no-deal Brexit appears to be receding after calls for a delay to the UK’s exit from the European Union won powerful backing in London and other EU capitals. The pound rose. Senior figures in the French and German governments said they’d be open to extending the Brexit deadline as momentum built for a delay in the UK Parliament.

Yet the issue remains toxic for Theresa May. The UK prime minister is caught in the crossfire between pro-EU members of her Conservative Party who are seeking to force her to postpone Brexit, and staunch euroskeptics who are threatening to bring down her government if she does.

Time for reaching a decision is running out. If the UK can’t agree to a deal in the next 9 weeks, the country will leave the EU on March 29 in a disorderly split that British authorities warn will risk a recession, and a hit to the pound of as much as 25%. May herself remains unpersuaded of the case for a delay, although she stopped short of ruling out an extension to the withdrawal deadline, set out in Article 50 of the EU’s Lisbon Treaty.

The question of a delay could be taken out of May’s hands. Next week Parliament is slated to vote on a series of options for Brexit’s next steps, including a proposal to force the government to ask the EU to extend Article 50. Opposition Labour Party Leader Jeremy Corbyn met with Yvette Cooper, the architect of the cross-party move that would mandate a delay if there’s no deal Parliament can support.

Labour’s Cooper has drafted the proposal with Nick Boles, a Tory. So far, at least 58 politicians from five parties have put their names to the plan. If Corbyn’s Labour Party formally backs it, the Cooper-Boles option is almost certain to succeed. The party’s Brexit spokesman, Keir Starmer, suggested the party might well swing in behind the plan.

China Slowdown Set to Drag Asian Growth:

China’s weakening economy is roiling export markets in the rest of Asia and, according to Bloomberg analysts, there’s more pain to come. From Hong Kong to Japan, exports data for December showed a marked downturn as supply-chain disruptions triggered by US-China tensions and a cyclical slowdown in the world economy, led by China, hit the trade-reliant region.

Bloomberg Economics’ early indicator shows China’s economy slowed further this month, while Thursday’s purchasing managers index is set to show another decline in factory output. Nikkei PMIs for 7 of the region’s economies are due Friday, with 4 of them already in contraction or less than half a point from contraction. A separate business survey on Wednesday showed South Korea manufacturers’ confidence for February at the most depressed level since the global financial crisis a decade ago.

Hong Kong’s worse-than-expected plunge in exports was telling for its broadly subdued demand from the rest of Asia, especially mainland China. Trade-dependent Singapore posted its biggest fall in exports in more than 2 years, while in Indonesia, the biggest economy in Southeast Asia, the drop in shipments was the worst since mid-2017.

South Korea and Taiwan had a pair of ugly exports reports last week, and Japan followed with the second decline in four months. January data for Vietnam, where trade accounts for twice the nation’s gross domestic product, showed a 1.3% contraction in exports from a year ago, the worst performance in 5 years.

Beyond China, exports in the region are also being hit by a cooling technology sector, which had buoyed powerhouses like Taiwan and Singapore for much of the past couple of years. Bloomberg Intelligence analysts point to other economic data showing worsening conditions – smaller dry bulk ships, which are “workhorses of global trade and not just China-dependent,” are signaling an unprecedented decline in activity, which probably means a deepening global industrial slowdown. 

US Prosecutors Charge Huawei:

US prosecutors filed criminal charges against Huawei Technologies Co., China’s largest technology company, alleging it stole trade secrets from an American rival and committed bank fraud by violating sanctions against doing business with Iran. Huawei has been the target of a broad US crackdown, including allegations it sold telecommunications equipment that could be used by China’s Communist Party for spying. The charges filed Monday also mark an escalation of tensions between the world’s 2 largest economies, which are mired in a trade war that has roiled markets.

In a 13-count indictment in Brooklyn, New York, the government alleged Huawei, two affiliated companies and Chief Financial Officer Meng Wanzhou engaged in bank and wire fraud as well as conspiracy in connection with business in Iran. Separately, charges filed in Washington state accuse the company of stealing trade secrets from T-Mobile USA Inc. and offering bonuses to employees who succeeded in getting technology from rivals.   

The cases “expose Huawei’s brazen and persistent actions to exploit American companies and financial institutions, and to threaten the free and fair global marketplace,” Christopher Wray, director of the FBI, said at a press conference in Washington announcing the charges. Separately, Canada’s justice department confirmed it received a formal request to extradite Meng to the US.

Huawei issued a statement that it had done nothing wrong in either case. The Chinese government, which has defended the company and accused the US of trying to curtail the rise of its technology industry, demanded Washington immediately revoke her arrest warrant.

FX Updates:

USD/SGD:

Spot: 1.3514

USDSGD looks poised to retest its key 1.3500 support for the second time this month,  amid recent USD weakness. A failure to regain above the 200-day moving average last week has increased downside risk. A break below 1.3500 is likely to push the pair lower, with the next support lying at 1.3313.

AUD/USD

Spot: 0.7192

AUDUSD climbed to the 0.7200 handle, rising against all its major peers Wednesday, as better-than-expected inflation data released earlier undermined the case for lower interest rates. Over a longer-term perspective, AUDUSD’s 2018 downtrend remains intact, but runs risk of getting broken; a break above the 200-day moving average of 0.7297 could change that.

USD/CAD:

Spot: 1.3263

USDCAD failed to build on Monday’s gains, fluctuating in a tight 30-pip range yesterday, and is currently almost unchanged from last night’s close of 1.3260. The market is probably waiting for the highly anticipated FOMC monetary policy update later tonight. Despite USDCAD’s sharp decline in early-Jan, the longer-term trend remains to the upside. 1.3200 continues to act as a strong base of support.

USD/CNH:

Spot: 6.7296

USDCNH slipped to its lowest level since July last year, as optimism over US-China trade talks boosts appeal of the yuan. The yuan has rallied by more than 2% this year and is the second-best performer out of 11 Asian exchange rates tracked by Bloomberg.

USD/JPY:

Spot: 109.34

USDJPY remained largely unchanged earlier this morning, despite a beat in Japan retail sales, as investors continue stay cautious as focus shifts onto the Fed’s policy meeting later today, Fed Chair Powell’s press conference and US-China trade talks. With risk aversion mainly the theme in Asia this morning, USDJPY is expected to be weighed down closer to the 109 handle.

GBP/USD:

Spot: 1.3091

GBPUSD fell sharply after failing to break above 1.3200, as lawmakers voted against a key proposal that sought to rule out the prospect of the UK crashing out of the EU without a deal. The pair is currently being supported by its 200-day moving average of 1.3049, having just broken above it last Friday.   

Sources: Bloomberg