Danger ahead as markets look for clues on trade

Week of May 13-17

Despite risk appetite improving, market waits for further trade clues

The Sino-U.S trade war is heating up, continued worries about conflict in the Middle East and concerns over global growth have sent investors rushing to own over-weighted risk aversion trading strategies – ¥, CHF, gold, and bonds have been added to many portfolios. Global sovereign bond yields are trading atop of three-year low yields, and this despite China’s holdings of U.S treasuries having started to fall for the first time in eight-months.

As comments between the Trump and China continue to dominate the main stage, China is seen becoming more aggressive saying that if the U.S continues on their path, they will have to take necessary countermeasures. They also urge the U.S to cancel the tariffs on Chinese goods to avoid causing a recession like impact on the world economy.

Nevertheless, President Trump keeps on prodding, he signed an executive order that would let the U.S ban telecommunications gear from “foreign adversaries,” underscoring tensions with China even as the U.S said it would likely resume trade talks soon in Beijing after reaching an impasse last week.

Despite the ongoings with China, the White House has delayed for six month a decision about whether to impose levies on foreign cars and car parts – especially aimed at Japan and Europe – Trump is trying to minimize the number of trade war front that the U.S are engaged in. Even Mnuchin and co. are closing in on an agreement with Mexico and Canada to roll back tariffs on steel and aluminum, which were imposed last year – a plus for CAD and MXN.

Central Banks positioning

This week, Poland’s Central Bank (NBP) left their base rate unchanged at +1.50%, as expected. It was their 46th consecutive pause in their easing cycle. While the Hungarian Central Bank (MNB) April minutes indicated that all nine-rate setters backed holding rates steady for the foreseeable future. Elsewhere, the Philippines central bank also followed up last week’s rate cut with a RRR cut of -2%. The additional cut is aimed at easing a liquidity crunch that is accelerating in Manila.

Bitcoin no flash in the pan

Japanese, Chinese and other Asian investors are piling up on bitcoin as the cryptocurrency price surges to its highest in 10-months. Proprietary trading firms and Asian brokers are behind the increase in trading activity. LMAX Digital, an exchange platform has seen volumes quadruple over the past four-weeks to +$2.2B.

Currencies in the spotlight

AUD and Aussie bond yields have taken a hit this week as June interest rate cut bets rise after disappointing April unemployment data. The unexpected jump in Australia’s unemployment rate to +5.2% in April can be partly explained by an increase in the participation rate to +65.8% from 65.7% in March. Other parts of the employment report were mixed. The headline change in jobs looked good, an addition of a net +28.4K, but the details showed a loss of -6.3K full-time positions and an increase of +34.7K part-time ones.

Brexit woes ongoing

In the U.K. PM May is due to meet senior Conservative MP’s who are demanding she sets a date for her departure from Downing Street. The PM, who is under growing pressure from her own MP’s to stand aside, will meet the executive of the backbench 1922 Committee to discuss her future – if there is another vote on rule changes could allow May’s leadership to be challenged before December.

Sterling is trading atop of its three-month lows and the GBP ‘bears’ see further losses as concerns grow about the U.K political instability and the shakiness of May’s position.

People’s Bank of China (PBoC) remains wary of Yuan weakness

The 2% fall in the renminbi since the US-China trade war flared up again reflects market pressure more than a deliberate policy choice – Chinese policymakers have actually been trying to slow its slide. If trade talks break down entirely, they would have less incentive to keep doing so. Consensus to date believe it’s unlikely that they would go further and actively try to weaken the renminbi to hit back at the U.S.

Italy is heading for another clash with the EU

Recent comments by Italy’s deputy prime minister have increased the risk that Italy is placed in an E.U disciplinary procedure later this year. A number of developments have increased the risk of a re-run of last year’s spat between Italy and the EU. The European Commission’s (EC’s) updated forecasts, published last week, showed Italy’s budget deficit rising to 3.5% of GDP next year, breaching the EU’s 3% deficit limit. Deputy Prime Minister Matteo Salvini said this week that he would have “no problem breaking the deficit limit or seeing the public debt ratio rise above 140% of GDP.”

Note: June 5, the EC will publish an assessment of Italy’s public finances, which is likely to conclude that Italy needs to reduce its deficit.

Economic events

On the Economic Calendar, tomorrow Australian Parliamentary elections take place (May 17).

A panel of energy ministers from major oil producers, including Saudi Arabia and Russia, known as the JMMC, meets on May 19 to discuss the oil market and make recommendations before the 176th OPEC Meeting on June 25.

Market concerns

• New trade war fronts opening up US/EU, US/USMCA, US/MEXICO
• U.K/Brexit fallout
• US-China trade deal impact or react
• Trans-Atlantic trade tensions to intensify
• OPEC, Saudis, Venezuela, Libya & Trump
• Iran is threatening to close the Strait of Hormuz
• Venezuela/Russia/U.S tension
• Geo-political concerns in Iran, Russia, Ukraine & France
• India/Pakistan – tension remains high amongst two nuclear nations
• U.S ramps up trade talks with India and Turkey
• ‘Twitter Trump’

Next week: Bank Holiday Canada & AUD monetary policy minutes (May 20), U.K inflation hearings & NZD retail sales (May 21), U.K CPI, CAD retail sales & FOMC meeting minutes (May 22), Fr. & Gr. flash services & manufacturing PMI, Day 1 EUR parliamentary elections (May 23), GBP retail sales, Day 2 EUR parliamentary elections & U.S durable goods (May 24), Day 3 EUR parliamentary elections (May 25).

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