Spot values at a glance:
Asian stocks traded mixed Wednesday after their US peers struggled to make headway in the absence of market-moving catalysts. The Australian dollar sank after weak data on the economy spurred traders to raise bets on interest-rate cuts. Shares in Japan and Korea slipped, while stocks in Australia, Hong Kong and China posted modest gains, after the S&P 500 Index closed little changed. Investors continue to wait for firm details regarding a possible US-China trade deal that’s helped drive a surge in equities over the past 2 months.
Australia Grows Less Than Expected:
Australia’s economic growth slowed in the final 3 months of 2018 as consumption remained subdued and residential construction fell, with government spending being the key support. GDP rose 0.2% from the third quarter, less than the 0.3% growth expected by economists; it gained 2.3% year-on-year, missing out on the median forecast of 2.6%. Household spending gained 0.4% in the fourth quarter, while the savings ratio was 2.5%.
Policy makers are looking closely at household spending, which accounts for almost 60% of GDP, amid signs that consumers are holding back in response to falling property prices and persistently weak wages. A sustained weakening in the labor market could force the RBA to resume interest-rate cuts; indeed, money markets are betting on one by year’s end.
The economy has been bolstered by public spending. Both national and state governments have opened their check-books as lower unemployment boosted the tax take and reduced expenses. The building of roads, bridges and railways has supported growth. The property slump suggests that the pipeline of residential projects that’s boosted employment could rapidly shrink as developers bow to the reality of insufficient demand and excess supply.
Brexit Vote On Tightrope:
UK Prime Minister Theresa May could be on course for another Brexit defeat in Parliament as her chief whip warned he wasn’t confident he had the numbers. Julian Smith is the man charged with trying to rustle up enough support for her divorce package from the EU, and he told her top ministers on Tuesday that the vote next week will be tight, according to 3 people who spoke on condition of anonymity, Bloomberg news reported.
He predicted that in the votes that follow, a no-deal Brexit would be taken off the table, and the government would be instructed to seek an extension to talks. He also said he expected lawmakers to put down further amendments that would pass and put the UK on course to staying in the customs union.
May has no majority in Parliament, and so needs as many lawmakers in her Conservative Party as possible to back her deal. As some are implacably opposed, either because they don’t want Brexit or they think she’s staying too close to the EU, she also needs votes from the opposition Labour Party.
US Confirms China Tariff Delay:
The US has confirmed the country is postponing “until further notice” a scheduled tariff increase on Chinese goods, the latest sign that the world’s two largest economies could be headed toward a de-escalation of their trade dispute.
Formalizing a plan President Donald Trump announced last week, the U.S. Trade Representative’s office published a statement in the Federal Register stating it was “postponing the date on which the rate of the additional duties will increase to 25% for the products of China covered by the September 2018 Action in this investigation.”
The new tariffs had been set to take effect March 1, but now the rate will remain at 10%, according to the statement. The US and China are said to be close to a trade deal that could lift most or all US tariffs as long as Beijing follows through on pledges ranging from better protecting intellectual-property rights to buying a significant amount of American products.
US-Japan Trade Talks Set to Shift Spotlight on Yen:
The US says it wants a currency clause in any trade agreement with Japan. As the 2 sides prepare to sit down, Japanese officials say there is no need to talk about currencies. Masatsugu Asakawa, the nation’s currency chief, has indicated opposition to a currency clause, saying recently that the link between the yen’s exchange rate and Japanese exports has been “severed.”
With President Donald Trump often focused on exchange rates, the US got a currency clause in its revamped trade deal with Canada and Mexico and is said to be seeking one from China now. From the US point of view, Japan is next. How the US-Japan talks play out on currencies could determine how much freedom the BOJ has during the next economic downturn. A currency clause could tie the BOJ’s hands, preventing it from taking action that might weaken the yen, even indirectly.
Huawei Meets a Roadblock in Germany:
Hardliners in Chancellor Angela Merkel’s government are fighting for the powers to keep Huawei Technologies Co. out of Germany’s fifth-generation mobile networks.
The cyber-security hawks are concerned that Huawei could help China steal secrets from German companies or even the state and are pushing for strict criteria on equipment suppliers before the government begins the process of issuing 5G licenses in 2 weeks’ time, according to three people familiar with talks in Berlin, Bloomberg news reported. While the cabinet has decided that an outright ban on the Chinese equipment maker would be legally impossible, officials across the administration are demanding tools that would allow them to block Huawei equipment from being used all the same, the people said.
The interior ministry, the foreign ministry and German intelligence are all pushing back against the economy ministry and industry lobby groups, which have said that sidelining Huawei would delay the roll-out of 5G by years and cost the country billions. Economy Minister Peter Altmaier has said any restrictions can’t involve targeting specific companies, but will have to involve security standards for all potential service providers.
Capital Flows to EM Turn Positive:
Investors of almost every stripe appear to be turning more bullish on emerging markets after withdrawing funds last year, according to the Institute of International Finance.
High frequency flow trackers suggest a “wall of money” is coming back to developing markets due to a dovish Federal Reserve, thawing trade relations and easing concerns over global economic growth, IIF’s analysts Jonathan Fortun and Tariq Khan wrote in a research note published on March 1. “The hunt for yield is clearly underway again,” the report said.
Net capital flows, which cover portfolios, banking, direct investment, and other components of the financial account in a nation’s balance of payments, turned positive in January for the first time since July, IIF estimates show. The latest available data shows that EM portfolio inflows totaled $25.6 billion during February, a fourth consecutive month of net buying.
The improvement in sentiment has already helped emerging market stocks rebound 9% this year after slumping 17% in 2018. More than $10 trillion in equity value was wiped out from global markets in the last quarter of 2018 amid the ongoing trade spat between the US and China.
Traders Trim Bets on BOC Hikes:
According to Bloomberg news, the spread between Canadian and US 2-year government-debt yields is the widest since 2007 before Wednesday’s Bank of Canada meeting, a sign traders are paring expectations for interest-rate hikes this year from America’s northern neighbor.
Canada’s 2-year obligation yielded 1.74% Tuesday, compared with 2.55% for its US counterpart, for a gap of 81 basis points. Since Thursday, the difference has widened 7 basis points, after data showed Canada’s economy practically came to a halt last quarter, indicating that traders are becoming less convinced of a BOC hike.
The recovery in oil since the turn of the year and optimism surrounding US-China trade talks had some market strategists betting the BOC wasn’t done tightening, after 5 hikes since mid-2017. But deteriorating economic data have traders shifting gears, sending the probability of a rate hike by July below 15%, from about 26% a month ago.
BOC Governor Stephen Poloz and fellow policy makers are expected to keep rates on hold Wednesday, and traders’ the focus will shift to the forward guidance. At its last meeting, the bank said the “policy interest rate will need to rise over time,” with a pace dependent on developments in oil and housing markets and global trade policy, according to a Jan. 9 statement.
USDSGD added 0.2% earlier today to reach its highest in 2 weeks, as a shift in market views on the potential outcome of Singapore’s monetary policy next month sees a weaker currency and higher borrowing costs, according to Bloomberg news. The resistance remains at the 200-day moving average of 1.3650. To the downside, the 8-month low of 1.3443 continues to act as support.
AUDUSD slid to a 2-month low, declining by as much as 0.6% earlier following disappointing GDP data which dimmed the outlook of future RBA rate hikes. A further fall below the psychological 0.7000 is likely to lead to a retest of the 0.6800 support region.
USDCAD approached its 2-month high near the 1.3400 handle, ahead of tonight’s monetary policy rate decision by the BOC. A more-dovish-than expected tone is expected to push the currency pair back towards the 1.3500 region.
USDCNH extended its recent rebound from a 7-month low, putting more distance between itself and the 6.7000 handle, on the back of recent USD strength. The rebound is expected to be short-lived though, with the main longer-term trend continuing to point to the downside. A decline back below 6.7000 is expected over the longer-term.
USDJPY failed to hold above 112 overnight, and looks set for a technical retracement back to the 200-day moving average at 111.35 over the short term. The pair is showing signs of fatigue, following its sharp rebound from sub-106 in early January. Traders believe recent positive developments in US-China trade talks and in the Chinese economic front have been largely priced in, and unless fresh positive news hit headlines, the pair is due for a pullback.
GBPUSD extended its recent pullback from the 1.3300 region, looking poised to register a fourth straight day of declines, following the recent lack of progress in Brexit negotiations. A decline back to the 200-day moving average of 1.2989 is expected.