Spot values at a glance:
Asian equities were mixed Tuesday as investors assess whether corporate earnings can deliver on high expectations against a backdrop of trade tensions. Indices in Tokyo and Singapore gained, while equities in Shanghai, Hong Kong and Sydney traded lower. Treasuries and the dollar were steady ahead of testimony from Federal Reserve Chairman Jerome Powell.
IMF Sounds Warning Bells:
Escalating trade tensions are threatening to derail a global upswing that’s already losing momentum amid weaker-than-expected growth in Europe and Japan as financial markets seem complacent to the mounting risks, the International Monetary Fund warned.
The IMF kept its global forecast unchanged Monday in the latest update to its Global Economic Outlook. The world economy will grow 3.9% this year and next, said the Washington-based fund. The pace this year would be the fastest since 2011. But cracks are forming in the growth picture.
The global expansion is becoming less balanced, with growth sputtering in the euro area and Japan. Growth appears to have peaked in some major economies, and the boost from US tax cuts and spending increases is expected to fade, according to the IMF. At the same time, downside risks to the global economy are growing, led by the threat of a further ratcheting up of trade tensions, the IMF said.
If threatened trade barriers become reality, global output could drop by about 0.5% below its projected level by 2020, IMF Chief Economist Maurice Obstfeld said. The US economy would be “especially vulnerable,” given it would be the focus of retaliation in a tit-for-tat conflict, Obstfeld added.
BlackRock CEO Fears Broad Market Rout:
BlackRock Inc. CEO Larry Fink said that intensifying global trade tensions may spur a broad market downturn and a slowdown in the US economy. Stocks could drop 10% to 15% and US gross domestic product would start slowing in 2019 if the Trump administration sees through its threat to levy tariffs on an additional $200 billion of Chinese imports, Fink said, adding that would elevate the current tensions to a full-blown trade war.
“The market’s having a hard time digesting the whole change in globalization and trade,” Fink said in an interview Monday on Bloomberg Television. “The foundations of international trade are being raised and being questioned.” Trade worries are already causing investors to “pause,” he added, despite record deal-making and stock repurchases. That effect has been compounded by the fact that for the first time in a decade investors can earn a return by keeping money in cash. Fink also said he expects the yield curve to invert this year, yet he doesn’t think it signals an imminent recession.
China GDP Growth Concern:
China’s economic expansion slowed in line with expectations, signaling broadly stable output as the trade conflict with the US intensifies. Gross domestic product increased 6.7% in the second quarter from a year earlier. That was the slowest pace since 2016 and down slightly from the previous quarter. Retail sales increased by a better-than-expected 9% in June from a year earlier, while industrial output slowed to a 6% rise, and the 6% increase in fixed-asset investment in the first 6 months was slower than through the end of May.
Steady growth heading into the second half of the year provides support on 2 policy fronts: Withstanding the potential negative effects of higher barriers to trade with the US, and continuing with a multi-year campaign to control debt and clean-up the financial system. After an acceleration in 2017, the world’s second-largest economy is forecast to moderate this year, with the government targeting expansion of 6.5%.
Trump Sparks Backlash After Backing Putin:
US President Donald Trump refused at a news conference on Monday in Helsinki to blame Russian leader Vladimir Putin for meddling in the 2016 US election, casting doubt on the findings of his own intelligence agencies and sparking a storm of criticism at home.
Although he faced pressure from critics, allied countries and even his own staff to take a tough line, Trump spoke not a single disparaging word in public about Moscow on any of the issues that have brought relations between the 2 powers to the lowest ebb since the Cold War. Instead, he denounced the “stupidity” of his own country’s policies, especially the decision to investigate Russian interference in the 2016 election. Just 3 days ago, the US Justice Department announced an indictment of 12 Russian spies for hacking into Democratic Party computer networks.
Trump’s remarks stirred a wave of condemnation in the United States, including criticism from within his own Republican Party. The White House has struggled for months to dispel suggestions that Trump was unwilling to stand up to Russia.
Dan Coats, Trump’s director of national intelligence, promptly made clear he did not share the president’s view. “We have been clear in our assessments of Russian meddling in the 2016 election and their ongoing, pervasive efforts to undermine our democracy, and we will continue to provide unvarnished and objective intelligence in support of our national security,” he said in a statement.
The news conference also rattled some officials in the State and Defense Departments and in US intelligence agencies, according to officials in 5 government offices.
Crude Oil Trades Near 3-Week Low:
Oil held a loss and traded near the lowest level in more than 3 weeks on signs of increased supply from Saudi Arabia and the US. Futures in New York were little changed earlier today after a 4.2% plunge Monday. Saudi Arabia is offering extra crude volumes on top of its contractual supplies to some buyers in Asia, people with knowledge of the matter said. Meanwhile, US President Donald Trump’s administration is said to be actively considering tapping into the nation’s emergency oil supply to cool rising fuel prices.
Oil has tumbled about 8% after touching a 3-year high last month amid concern an escalating trade spat between the US and China will crimp global economic growth and reduce crude demand. Investors are also looking for signs that OPEC and allies are boosting output to offset disruptions from Venezuela to Canada even as renewed US sanctions aimed at reducing Iran’s oil exports add to supply risks.
Brexit Woes Persist:
UK Prime Minister Theresa May’s Brexit strategy is in disarray after she infuriated pro-European Tories by bowing to pressure from their euroskeptic colleagues to re-write her plans.
May’s majority was cut to just 3 votes after she adopted Brexiteer amendments to a key piece of customs legislation, and the proposals were narrowly voted through the House of Commons late Monday. A tenth member of her government is reported to have quit in order to vote against her and she needed the backing of 3 rebels from the opposition Labour Party to win.
May’s team is split down the middle over how to handle the biggest issue facing the UK – negotiating the terms of its withdrawal from the EU. Time is running out with just 3 months left before a self-imposed October deadline to secure an exit deal ahead of the country’s formal departure on March 29 next year.
RBA Sees Strong Growth Cutting Unemployment, Lifting Inflation:
Australia’s central bank expects a strengthening economy to gradually cut unemployment and lift inflation, reiterating there’s no strong case for a near-term policy move.
“Inflation remained low, reflecting low growth in labor costs and strong competition in retailing,” policy makers said in minutes of their July 3 meeting released in Sydney Tuesday. “The board assessed that it would be appropriate to hold the cash rate steady.”
The RBA also noted that trade tensions had extended beyond the US and China and could escalate through “non-tariff measures such as administrative delays.” It warned that rising protectionism could damage global growth by undermining confidence and delaying investment decisions.
Australia has kept rates unchanged for almost 2 years at a record-low 1.5%, a pause designed to bolster financial stability and reflecting the reality of diminishing returns from any further easing. The RBA is playing an anchor role in the economy as it tries to boost confidence and provide time to soak up spare capacity in the jobs market and for inflation pressure to build. That process is taking longer than expected and traders see little chance of a rate hike in the next year or so.
USDSGD steadied above the 1.3600 handle and is expected to consolidate further between the 1.3500-1.3700 range over the near term.
According to analysts from JPMorgan Chase & Co., the Singapore dollar is one of the few currencies to own during a US or global recession; the other currencies are the Swiss franc, US dollar and Japanese yen.
AUDUSD retreated back to its 0.7400 earlier today after the RBA towed the regular line of wait-and-see, nothing higher household debt and sluggish wage growth in its released minutes.
The longer-term trend remains skewed to the downside; the support lies at the pair’s year-to-date low of 0.7311. A climb back above 0.7600, which seems unlikely at this point, signals a possible reversal.
USDCAD slipped to a 3-day low last night following greenback weakness, despite crude oil’s sell off. Support for the FX pair remains around the 1.3050 level; the longer-term trend direction continues to remain to the upside.
USDCNH fluctuated around the 6.7000 handle, as US-Sino trade war concerns continue to weigh on the yuan. A break above the recent high of 6.7332 is likely to drive the currency pair higher to its next resistance target of 6.8000.
UBS has abandoned its forecast for the yuan to appreciate this year, anticipating that the trade war will continue to put pressure on the currency. The bank now sees the yuan dropping to 6.8 for year-end, versus 6.4 previously.
USDJPY continues to linger near its 6-month high earlier today, as higher Treasury yields and strong US economic data underscored yield differentials ahead of Fed Chairman Jerome Powell’s testimony to Congress tonight.
Following the breakout above the key resistance at 111.40 last week, the next key resistance target lies at 114.45.
After nearing the 1.3300 level, GBPUSD trimmed all of its previous session’s gains last night and entered negative territory, as the uncertainty around UK PM May’s Brexit strategy keeps weighing on the pound. A retest of the year-to-date low at 1.3050 is possible over the coming week.