June 22, 2018

Daily Observations:

Asian stocks pared earlier losses to trade mixed amid ongoing concern global trade restrictions will curb growth. Declines in Japanese and Hong Kong equities were offset by advances in their Chinese and Korean counterparts. U.S. futures pointed to gains after the S&P 500 Index closed lower and the Dow Jones Industrial Average posted its eighth straight drop. The dollar steadied with Treasuries. West Texas oil rose above $66 as OPEC and its allies reached a preliminary agreement despite strong opposition from Iran to boost production.

Trade Fears Dominate Markets:

Daimler AG became the first prominent company to cut its profit outlook due to escalating trade tensions between the US and China, claiming Chinese customers will now buy fewer cars after Beijing slaps tariffs on US auto imports. Shares of the Mercedes-Benz manufacturer dropped the most since April after it said late Wednesday its full-year earnings excluding some items will be slightly lower than last year. Many SUVs are built in Alabama and then shipped to China. Those vehicles are now caught up in retaliatory tariffs announced in China in response to President Donald Trump’s levies on $50 billion in Chinese goods.

The rising tensions threaten to upend a global production system built over decades amid falling trade barriers and the rise of China and other low-cost producers. Trade flows are so complex that large companies will be challenged to quickly adapt to a shifting political climate.

US Commerce Secretary Brushes Off Trade Concerns:

Commerce Secretary Wilbur Ross disputed concerns raised by Federal Reserve Chairman Jerome Powell and others that US companies are becoming so anxious about the prospect of a trade war, they’re postponing investment and hiring decisions. “Anyone who thinks the economy is being wrecked doesn’t know what they’re talking about,” Ross said in a Bloomberg Television interview Thursday. News reports on the Trump administration have been negative and have played up the troubles smaller companies are encountering with tariffs, he said.

China Headed for Bear Market Territory:

China’s benchmark Shanghai Composite Index is headed for bear market territory as concern over a slowing economy and trade tension with the US shows no sign of abating.

The Shanghai gauge fell by as much as 1.34% earlier today, taking its loss since January to over 20%, entering bear market territory before the index reversed losses to climb back towards Thursday’s close.

Some $1.6 trillion has been wiped from Chinese stocks since Jan. 24. Morgan Stanley expects the CSI 300 Index, which is down 19% since a January peak, to enter a bear market that could last a year, weighed by slowing momentum in China’s economy and liquidity tightness. If US President Donald Trump goes through with a threat to put tariffs on another $200 billion of Chinese imports, it could cut as much as half a percentage point from the nation’s economic growth, according to economists surveyed by Bloomberg.

Chinese policy makers have tried to soothe investor concern. People’s Bank of China Governor Yi Gang pledged on June 19 to use monetary policy comprehensively to keep liquidity appropriate and stable, a view echoed in a subsequent cabinet meeting chaired by Premier Li Keqiang.

BOE Ups Capital, Will Provide Liquidity If Need Be:

Mark Carney said the BOE needs to adapt to the unprecedented changes in the global economy and the financial system as he unveiled another overhaul of the institution’s powers. Under a new framework outlined Thursday, the UK Treasury will pump 1.2 billion pounds of capital into the BOE, which in turn will have the ability to take on greater risk if it needs to act to keep the banking system and the economy on an even keel.

The move further embeds the expanded crisis-fighting role of the BOE since the 2008 recession, while it could also enhance its ability to deal with upheaval related to Brexit. Governor Carney, who leaves the bank at the end of June 2019, has repeatedly said the BOE is ready for whatever happens with the UK’s exit from the European Union.

“Today marks a step change in our ability to provide the liquidity that the new finance may eventually require…. We now have a balance sheet fit for purpose. One that reflects the Bank’s much wider range of responsibilities including banking supervision, macro-prudential policy and resolution.” – BOE Governor Mark Carney.

OPEC Supply to be Raised?

OPEC and its allies reached a preliminary agreement in the face of strong opposition from Iran to boost production by a theoretical 1 million barrels a day although the actual increase will be smaller as several countries are unable to raise output.

In a night of drama in Vienna, the Joint Ministerial Monitoring Committee, which recommends policy to the group, reached an agreement despite Bijan Zanganeh, the Iranian oil minister, walking out of the meeting and predicting OPEC won’t reach a final deal when it meets formally on Friday.

The real production increase would be around 600,000 barrels a day, a delegate familiar with OPEC’s internal calculations said. Among OPEC countries, Venezuela is all but certain to be unable to boost output with its industry suffering because of an economic crisis. Among those outside the group, Mexico is unlikely to be able to pump more.

OPEC would need to ratify the recommendation on Friday at its formal meeting. It’s not uncommon for the cartel to deviate from the preliminary agreement, and Iran can still scupper the deal as the group’s decisions typically have to be unanimous. Still, Riyadh can bypass the veto by assembling a coalition of countries ready to pump more.

Sources: Bloomberg

USD/SGD:

Spot: 1.3588

USDSGD retraced from a 7-month high reached Thursday, amid ongoing concerns US-China trade disputes will hit Singapore’s open economy. From a technical perspective, 1.3600 represents a key Fibonacci level of the pair’s 1-year decline that started in Jan 2017. Some resistance is expected around current levels, although worsening trade war concerns could drive the pair closer towards 1.3700.

AUD/USD

Spot: 0.7389

AUDUSD seems to have found some footing around the 0.7350 level, recovering earlier today to 0.7400 following an overnight loss in traction of the US dollar. The longer-term momentum remains to the downside though; a failure to hold above 0.7350 is likely to lead to a possible revisit to the 0.7160 region, last tested in early Jan 2017.

USD/CAD:

Spot: 1.3296

USDCAD slipped from a 1-year high, as a weaker USD weighed down the FX pair. The Canadian dollar however has been buoyed today, as investors expect OPEC to agree to a production increase at a meeting later today. From a technical point of view, the bias is to the upside with 1.3500 a realistic target over the coming weeks.

USD/CNH:

Spot: 6.5104

USDCNH lingered near a 6-month high, with the pair poised for its biggest weekly rise since Nov 2016 on concern that escalating trade tension will slow China’s economic expansion and weigh on the yuan.

USD/JPY:

Spot: 109.95

USDJPY traded lower, falling below 110 earlier after a weaker USD overnight weighed on the pair. Then yen is set to outperform its G-10 peers this week following renewed trade tensions between the US and China.

GBP/USD:

Spot: 1.3274

GBPUSD soared, erasing declines over the past 3 days, after the BOE Chief Economist Andy Haldane unexpectedly joined rate hike camp and increasing the probability of a rate hike in August. Near-term support and resistance comes in at 1.3100 and 1.3450 respectively.