Spot values at a glance:
Most Asian indices drifted lower Wednesday as a risk-off mood took over markets. A volatile pound pared earlier losses, as traders awaited its fate ahead of yet another make-or-break parliamentary vote on Brexit. Treasuries steadied after yields dropped Tuesday in the wake of softer inflation data that bolstered bets the Fed will remain patient with future rate hikes.
Theresa May’s Brexit Deal Rejected by Parliament Again:
Parliament rejected Theresa May’s Brexit deal by a vote of 391 to 242. After the unsurprising defeat, the PM confirmed that there will be a vote today on a no-deal withdrawal, and if that fails, another Thursday on delaying the divorce. Attorney General Geoffrey Cox, whose damning assessment helped defeat the latest proposal, said a delay to the divorce is now “inevitable.”
If, as expected, Parliament rejects leaving without an accord on March 29, there will be another vote Thursday on whether to ask the EU for more time and delay departure day. An extension, which markets would welcome, could however provoke furious pro-Brexit officials to quit May’s administration, and even set in train a chain of events that could bring her government down.
The stakes could hardly be higher, and the future looks uncertain, after May failed for a second time to get Parliament to sign off on a divorce deal that was the culmination of 2 years of tortured negotiations.
The crisis was triggered when Geoffrey Cox, the attorney general, dramatically announced his legal advice on the new terms that May agreed to with European Commission President Jean-Claude Juncker. Instead of endorsing the new guarantees on the Irish border backstop, Cox said the risk that it will trap Britain inside the EU customs regime indefinitely was still there. This killed any hope May had of persuading pro-Brexit Tories to abandon their opposition to the deal and vote for it.
If the Commons votes to stop a no-deal Brexit and to extend the deadline, members of Parliament will have to explain to the EU what the extra time will be used for. Will it be to cancel Brexit, hold another referendum, or choose a different kind of divorce deal, May said in the House of Commons yesterday.
BOJ Expected to Provide More Stimulus:
According to Bloomberg news, an increasing number of economists see additional stimulus as the Bank of Japan’s next policy step, while they are unanimous in forecasting no change at this week’s board meeting.
Some 37% of 46 economists surveyed by Bloomberg this month forecast the next policy change will be additional easing, a jump from 18% in January. All of them expect the BOJ to maintain its current policy settings when a 2-day meeting ends Friday, according to the March 4-7 poll.
Most of the surveyed economists still expect the BOJ to tighten policy, though they have been pushing back the timing for this change. Only one sees it coming this year, compared with 14 in a survey done in December. Since then the Federal Reserve has made clear it is no rush to raise interest rates, a message Fed chair Jerome Powell reiterated Sunday. The ECB last week announced a new round of loans to banks and promised interest rates won’t be lifted from record lows until 2020.
Any further easing or strongly dovish signals by major central banks could intensify pressure for the yen to rise. Governor Haruhiko Kuroda last month said that the BOJ would have to consider bolstering stimulus if a stronger yen threatened the path toward its 2% inflation target. The BOJ is likely to discuss downgrading its assessment of exports, production and overseas economies this week, according to people familiar with the matter. Exports dropped the most since 2016 in January, feeding into weak production, both important driving forces of the economy.
Lighthizer Keeps China Tariff Threat Open:
President Donald Trump’s top trade negotiator, Robert Lighthizer, said the US must keep the option of raising tariffs on Chinese imports as a way to ensure Beijing lives up to a trade agreement that could be finalized in a matter of weeks.
“We have to maintain the right to be able to — whatever happens to the current tariffs — to raise tariffs in situations where there’s violations of the agreement,” Lighthizer said Tuesday in testimony before the Senate Finance Committee. “I can’t predict success at this point, but we’re working hard and we have made real progress.” Lighthizer also declined to say if the administration will roll back US tariffs if it reaches a deal with the Chinese.
His comments push back against speculation that a deal between the U.S. and China could see them reverse tariffs on roughly $360 billion of goods they’ve imposed on each other’s imports since July.
US Inflation Gains Less than Expected:
A key measure of underlying US inflation unexpectedly eased in February amid falling prices for autos and prescription drugs, giving the Fed more room to stick to its plan for being patient on raising interest rates.
Excluding food and energy, the so-called core consumer price index rose 0.1% from the prior month and 2.1% from a year earlier, according to a Labor Department report Tuesday. Those figures trailed the median estimates of economists. The broader CPI rose 0.2% from January, the first increase in 4 months, though the 1.5% annual gain missed projections and was the smallest rise since 2016.
Treasuries rose after the report while the dollar fell, as the data suggest there’s a greater chance that inflation won’t hold up around the Fed’s 2% objective, a development that would discourage policy makers from additional rate increases amid rising risks from weakening global growth.
Fed Chairman Jerome Powell made clear Friday that he and his colleagues are in no hurry to adjust interest rates as growth slows and inflation stays subdued. “With nothing in the outlook demanding an immediate policy response and particularly given muted inflation pressures, the committee has adopted a patient, wait-and-see approach,” he said in a speech in California.
Gundlach Uses Japan Example as Risks to Super Long Rallies:
Jeffrey Gundlach, the chief investment officer of DoubleLine Capital, said Japan may hold the key to why decades-long stock rallies are not a sure bet, singling out the nation’s equities as a cautionary tale for investors who believe that shares have to go up over a long period of time.
The benchmark Topix index has slumped about 30% over the 3 decades following the burst of Japan’s bubble economy in the 1990s. That stands in stark contrast with gauges in the U.S. and Europe; the S&P 500 Index has increased tenfold, while the Stoxx Europe 600 has more than quadrupled since 1989.
Global Economy Weakest in 10 years:
The global economy’s sharp loss of speed through 2018 has left the pace of expansion the weakest since the global financial crisis a decade ago, according to Bloomberg Economics. Growth in 1Q is running at just 2.1%, sharply down from around 4% in mid-2018.
One silver lining is that the Fed Reserve rate hike pause, US-China trade truce and dissipating shocks in Europe may bring stabilization in 2Q. The risk is that downward momentum will be self-sustaining.
According to the study, the cyclical upswing that took hold of the global economy in mid-2017 was never going to last. Even so, the extent of the slowdown since late last year has surprised many economists. Global GDP growth slowed to around 3% in 2H18 from about 4% earlier in the year.
China Targets Local Hidden Debt:
China’s multi-year campaign to contain financial risk is re-focusing on the so-called “hidden debt” owed by local governments, as officials seek to reduce repayment pressures amid falling tax revenues. Provinces and cities from Jiangsu in the east to Qinghai in the west are looking for means to pay-off or restructure their implicit borrowings, a term which includes off-book funding via financing vehicles. Some authorities are seeking cheap refinancing from the nation’s largest policy lender, the China Development Bank, and others are selling off state-owned assets such as office buildings and housing.
Efforts to address the chronic issue are gaining urgency as the government pledges to cut taxes by 2 trillion yuan this year, further draining local coffers and adding to the possibility of missed repayments. The fact that there is no official estimate of the size of the implicit debt, which usually carries higher rates than on-book ones, makes the issue even trickier.
Such probes are under way, and so far they’ve shown that hidden debt in some places exceeds the on-book borrowing, a lawmaker of the National People’s Congress Zhu Mingchun said over the weekend, without naming places directly.
Payments due for local-government financing vehicle debt, just part of the off-book borrowing, could reach 2.3 trillion yuan this year, according to estimates by Industrial Securities Co. Local authorities will have to carry that burden at a time of slowing revenue growth due to tax cuts and shrinking receipts from land sales, unless they can restructure.
USDSGD currently remains supported above its 50-day moving average of 1.3552, having retreated from the 1.3600 resistance handle earlier this week on the back of a weaker USD. A failure to hold above the 50-DMA may result in another leg lower, with the next support region lying around 1.3500
AUDUSD slid from a 1-week high as worse-than-expected sentiment data added to speculation the central bank will cut interest rates sometime this year. A further fall below the psychological 0.7000 is likely to lead to a retest of the 0.6800 support region.
USDCAD extended its retreat from the 2-month high at 1.3468, reached last Friday, as crude oil futures neared a 4-month high and in turn, boosting the Canadian dollar. The longer-term trend for USDCAD remains to the upside, although the pair’s recent failure to regain above 1.3500 could signal a potential pause in direction over the medium term.
USDCNH was largely unchanged on the day, as investors await fresh developments on US-China trade talks. Longer-term technical indicators point to more downside for USDCNH. A decline back below 6.7000 is probable, especially if a trade deal between US and China can be reached.
USDJPY failed to hold above 112 last week, and has retreated back below its 200-day moving average of 111.39. The currency pair has been sandwiched between the 200-DMA and 111 handle over the past 3 days. A break in either direction is likely to lead to either a retest of 112 or 110.
GBPUSD pared earlier losses Wednesday after turbulence following the defeat of UK PM May’s Brexit deal, as investors brace for more volatility this week ahead of additional Brexit votes. Having rallied to the 1.3300 region, the pair witnessed a sharp intraday turnaround last night that took it back to the 1.2900 support region. Additional negative Brexit news could drag GBPUSD back below 1.2900, after which, 1.2700 would be the next level to keep watch for.