July 29, 2019

Daily Observations:

Asian stocks dipped at the start of an event-filled week that features the resumption of US-China trade talks, an expected Federal Reserve interest-rate cut, further corporate-earnings releases and the monthly American payrolls report. Hong Kong equities declined as increasing concern about ongoing protests hit real estate and transport operators. Futures on the S&P 500 dipped after the index closed at a fresh record high Friday. 2-year Treasury yields are around their average for the month ahead of the anticipated Fed rate cut.

China Plans to Brief on Hong Kong Protests.:

China’s top office for Hong Kong affairs plans a briefing on the city’s unrest, after a weekend of demonstrations illustrated the challenge of quelling a protest movement that’s leaderless, unpredictable and widespread.

Police deployed tear gas and rubber bullets throughout downtown Hong Kong Sunday to clear thousands of protesters who gathered to air their grievances for the eighth straight weekend. Demonstrators marched east through the city’s central business district, then west, before splitting in two. The tactics seemed to catch police off guard as demonstrators again focused their anger at officers following a day of clashes in Yuen Long near the mainland Chinese border.

By Sunday night, clouds of tear gas hovered over the normally buzzing downtown area of Sai Ying Pun, which also hosts the Chinese government’s main office in Hong Kong. Protesters vandalized the building last week, drawing stern warnings from Beijing and sparking fears that China’s military would be called in to restore order. At least 49 people were arrested following Sunday’s unrest, where bricks, glass bottles and paint bombs were hurled at police officers, and traffic signs were removed.

The chaotic weekend also showed that Hong Kong’s protesters are sustaining momentum for a protracted fight against embattled Chief Executive Carrie Lam and her supporters in Beijing, drawing comparisons with France’s Yellow Vests movement. The question now is whether she, or Chinese President Xi Jinpin, can make any more concessions to deflate the uprising, which threatens to paralyze policy making and scare away businesses from the financial hub.

US-China Talks Set to Resume:

Almost 3 months after their trade talks broke down in acrimony, Chinese and US negotiators meet again in Shanghai this week amid tempered expectations for breakthroughs in their year-long trade war.

Two days of talks are scheduled to restart Tuesday after a truce reached by Presidents Donald Trump and Xi Jinping on the sidelines of the Group of 20 summit in Osaka, Japan, last month. Deep tensions remain, though, and recent days have brought mixed signals from both sides, with neither showing an urge to compromise.

China has purchased millions of tons of soybeans from the U.S. and Chinese companies will continue to seek US agricultural products including soybean, cotton, pork, sorghum, wheat, corn and diary, state media Xinhua News Agency said on Sunday. The People’s Daily newspaper said in a commentary on Monday the move is a “concrete”, “goodwill” step to implement the consensus reached by Xi and Trump in Japan, calling the US to reciprocate and meet China halfway.

Nevertheless, Beijing has also called the US the “black hand” behind anti-government protests in Hong Kong and said Friday an investigation into FedEx Corp.’s claims it mistakenly rerouted Huawei Technologies Co. packages to the US found additional legal violations. Trump has spoken with tech executives about the ban on selling products to Huawei and potentially easing that prohibition while other US officials played down the possibility of a quick trade deal.

China is holding to its three key demands: The immediate removal of all existing tariffs, a balanced agreement, and realistic targets for additional Chinese purchases of American products. No achievements would be made if the US sticks to its existing stance during the Shanghai talks, Taoran Notes, a blog run by the state-owned Economic Daily newspaper, said Friday. Among the US’s demands are structural reforms to China’s economy, greater protection of intellectual property rights and a more balanced trading relationship.

Fed Expected to Cut Rate This Week, First Time in a Decade:

Investors are bracing themselves for what might be the busiest week for the world economy this year. The highlight is Wednesday’s decision by the Federal Reserve with markets and economists virtually united in predicting Chairman Jerome Powell and colleagues will cut interest rates for the first time in more than a decade.

Some Fed watchers predict officials will cut their benchmark by half a percentage point, but the signal is that they will eschew a bigger move in favor of a quarter point reduction. They will likely also leave open the possibility of further action down the road as they seek to sustain the record-long US expansion and kick start inflation.

The Fed isn’t the only event with the ability to shape the outlook for the global economy this year. Later today, US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin are set to travel to China for the first high-level, face-to-face trade negotiations between the world’s 2 biggest economies since talks broke down in May. Then on Friday, the monthly payrolls report will shed light on whether the Fed’s move was necessary. Economists surveyed by Bloomberg predict a 166,000 gain in non-farm jobs in July, slower than the 224,000 of June.

BOJ policy makers meet on Tuesday amid calls to reinforce their commitment to low rates, while Brazil’s central bank may cut rates on Wednesday. Thursday sees the release of global manufacturing data amid concerns many industries are already suffering recession.

US Government Debt Continues to Climb:

The Treasury Department is expected to hold its quarterly note and bond sales at record levels for the third straight time as Washington’s latest budget deal shows that the US’s debt binge will continue. President Donald Trump once said he would eliminate the national debt, but now he’s set to approve a budget that will help usher in trillion-dollar annual deficits. In part because of that, Wall Street securities firms predict that a boost in Treasury issuance may be coming in a year’s time.

Bond dealers see the status quo prevailing at Wednesday’s quarterly refunding announcement. Forecasts are coalescing around the view that the Treasury will keep auction sizes of 3-, 10- and 30-year debt unchanged at a record total of $84 billion, in sales scheduled from Aug. 6-8. To put it in perspective, the tally was $62 billion at the time of the 2016 US Presidential election.

But there’s general agreement among analysts that the plateau in issuance can last only so long. The bipartisan deal to suspend the debt limit for 2 years also paves the way for a $324 billion increase in government spending over the period above existing budget caps. That’s emboldening most dealers to pencil in increases in debt sales by fiscal 2021, which starts in October 2020.

With the president shoving aside past Republican orthodoxy on fiscal restraint and the issue not prominent among Democrats campaigning to take his job, Washington is showing no signs of slowing spending. The House passed the debt-ceiling expansion and budget bill on July 25 and Senate Majority Leader Mitch McConnell said he expects his chamber to clear it this week for Trump’s signature.

Singapore Home Prices Rise Again:

Private-home prices in Singapore are on the rise again just one year after the government introduced curbs to cool the market. Dwelling values jumped 1.5% in the three months through June 30, the steepest gain since the second quarter of 2018 and more than the 1.3% in the government’s earlier flash estimate, according to final data from the Urban Redevelopment Authority released last Friday.

The price recovery was mainly driven by apartments in the city-state’s prime central regions. The higher launch prices of new homes are “within expectation due to the higher land cost and many projects commanding a price premium due to their excellent location, freehold status and distinctive designs,” according to Christine Sun, the head of research at OrangeTee & Tie Pte.

The government introduced cooling measures to slow price increases just over a year ago, in early July 2018. They included raising stamp duties for second homes and tightening loan-to-value limits for housing loans granted by financial institutions. The curbs didn’t take long to have an impact, with home prices falling for a second straight quarter in the three months through March 31.

No-Deal Brexit Possibility Intensifies:

UK Prime Minister Boris Johnson’s high-level Brexit cabinet holds its first meeting Monday, and will gather every day to ensure the country leaves the European Union on Oct. 31.

Michael Gove, named to a job that makes him Johnson’s top aide, will lead the sessions as the government steps up preparations for a no-deal Brexit, the premier’s office said Sunday in a statement. Unless the EU agrees to re-open negotiations, that’s the most likely outcome, he said.  “We still hope they will change their minds, but must operate on the assumption that they will not,” Gove wrote in the Sunday Times. “No deal is now a very real prospect, and we must make sure we are ready.”

Johnson’s special cabinet of 6 senior ministers will oversee the revamped exit preparations. They will meet weekdays and weekends until ties with the EU are cut. Dominic Cummings, a key leader in the 2016 Brexit campaign, called advisers to the prime minister’s residence Friday night and told them Brexit will happen “by any means necessary,” the Times said. Cummings said Johnson is prepared to suspend Parliament or hold an election to thwart those who may seek to block a no-deal Brexit.

Johnson’s war cabinet are all Brexiteers who support no deal, the Times reported. It includes Gove, Chancellor Sajid Javid, Foreign Secretary Dominic Raab, Brexit Secretary Steve Barclay and Attorney General Geoffrey Cox.

Sluggish Australian Inflation Expected to Weigh on Currency:

Australia’s dollar took a beating last week and worse may be to come in the form of quarterly inflation data due Wednesday. The currency slid about 1.5% over the 5 days through Friday as influential Westpac Banking Corp. economist Bill Evans brought forward his forecast for the next interest-rate cut to October, and Reserve Bank of Australia Governor Philip Lowe said he was ready to ease again to revive economic growth.

The one-two punch put an end to a one-month rally in the Aussie and ensured the currency remained in a long-term downtrend, capped by its 200-day moving average. Slow stochastics, an indicator of momentum, suggests more weakness lies ahead at least in the short term.

The next leg down in the Aussie may be triggered by Wednesday’s inflation data. Economists predict the trimmed mean reading will fall to 1.5% for the second quarter, which would be the lowest since December 2016. The gauge has remained stubbornly below the central bank’s 2%-to-3% target range for more than 3 years.

Speaking last Thursday, Lowe flagged the importance of keeping borrowing costs low until inflation recovers. “On current projections, it will be some time before inflation is comfortably back within the target range,” he said at a speech in Sydney

Sources: Bloomberg

FX Updates:

USD/SGD:

Spot: 1.3717

USDSGD approached a 1-month high, as the Singapore dollar continues to weaken as forecasts for policy easing by the MAS in October gathering steam. The pair should find some short-term resistance at 1.3725. Though any major move is likely to be after the Fed’s policy meeting concludes on Thursday this week.

AUD/USD

Spot: 0.6905

AUDUSD slipped to a 4-week low, close to its 0.6900 handle, as futures markets are suggesting the RBA will cut the cash rate twice more in the next 12 months, with the next cut potentially coming as soon as next week, should core inflation comes in considerably weaker than expected on Wednesday. The longer-term trend remains to the downside, but a break above 0.7100 could change that.  The support below remains along 0.6828.

USD/CAD:

Spot: 1.3168

USDCAD has recently recovered back above its previously-broken 1.3069 support, reaching 1.3200 last Friday, although a move back towards 1.3000 is possible this week. Canada’s monthly GDP report is due Wednesday, but that is likely to overshadowed by Thursday’s Fed policy decision.

USD/CNH:

Spot: 6.8973

USDCNH soared earlier today to end a long spell of subdued trading. Offshore yuan weakened 0.21% to 6.8978 a dollar, while yuan traded onshore was down 0.19% as the worst performer among 31 major currencies. The currency pair is set to be affected by a few key events this week, namely the ongoing protests in Hong Kong, trade talks between US and China officials, and the Fed’s rate decision.

USD/JPY:

Spot: 108.58

USDJPY slipped from a 2-week high today, as the yen climbed against all of its G-10 peers following an increase in haven demand ahead of key risk events this week. The BOJ is also expected to keep its policy unchanged this week, while other major central banks ease. A revisit of the June lows around 106.75 could be on the cards, especially if the risk-off sentiment intensifies.

GBP/USD:

Spot: 1.2382

GBPUSD fell to a fresh 26-month low earlier today, breaking below its 1.2400 handle, as odds of a no-deal Brexit soared after the hard Brexiteer Boris Johnson recently became the UK’s Prime Minister. Mr. Johnson reshuffled the cabinet with the key characteristic of the newly arrived lawmakers being their preference to leave the bloc by October 31, with or without a deal. Some of his policymakers, like Finance Minister Sajid Javid, have started announcing hefty packages to safeguard against the no-deal Brexit. Morgan Stanley has recently predicted the pound to fall to parity with the dollar in the event of a no-deal Brexit.