Recycling, White House style

Prepared by Jeff Halley, Senior Market Analyst

A quiet weekend

The weekend was blissfully quiet on the news front with even the Hong Kong protests passing without much incident. Hong Kong incidentally, will be the focus for other reasons this afternoon as it releases unemployment data at 16:30 Singapore time (SGT). It is unlikely the ongoing situation there will have fed through to worsening unemployment yet though.

The White House has provided perhaps the most exciting tit-bit of the weekend. Larry Kudlow, Director of the National Economic Council, suggested that it is giving thought to a proposal to recycle receipts collected from Chinese tariffs into income tax cuts. This sort of recycling won’t clear the oceans of plastic or reduce global warming, but it is an elegant solution to reducing the pain of tariffs on the American consumer of China and may give equity markets a small boost as we start the week.

Wall Street finished positively again on Friday as no news was good news. Equity markets drew a sigh of relief as U.S. bond yields rose and pushed up the U.S. dollar and dampened the negative yield curve rhetoric. Friday’s continuation of the two-day relief rally continues to look like the eye of the storm rather than the passing of the storm.

We have a light data week ahead of markets with the highlights being the FOMC and ECB minutes. The street is unlikely to gain new insights into either from the minutes, unfortunately. Fed Chairman Powell’s keynote address on Friday at the Federal Reserve’s annual Jackson Hole Symposium on Friday will probably disappoint bond market bulls as well. With the FOMC committee not unanimous when voting in the last rate cut, and with U.S. data outperforming, the chances of Mr Powell signalling a full-on move to an easing bias are remote.

Regionally this morning, New Zealand’s PPI output unexpectedly rose 0.50% in Q2, as did its Performance of Services Index. It will probably lead to some head-scratching over the RBNZ’s aggressive 50-point rate cut, but as a mortgage payer in New Zealand, I shall not complain.

Japan’s August Tankan fell to a much worse -4 (+5 exp), but its exports for July fell only -1.60%, less negative than expected. It seems to imply that the Japanese Yen’s rally is tempering the outlook for the business going forward, but that for now, Japan Inc is dodging the worst effects of its dispute with South Korea and the U.S.-China trade war.

Thailand’s Q2 GDP will be closely watched today at 1030 SGT. A weak number could see some shivers run though regional markets, implying as it would, that the U.S.-China trade dispute continues to spill into other Asian markets.

Currencies

The U.S. dollar was mildly stronger on Friday, supported by rising bond yields. Notably, the Euro sunk below 1.1100 against the greenback, growth concerns and political turmoil in Italy reinforcing the Euro-zone’s new title “The English Patient.”

With weekend talk of tax cuts in the U.S. pointing towards a stronger equity market, albeit temporarily, the greenback should continue its gentle ascent against both the G-7 and regional currencies in Asian trading.

Speaking of the G-7, its leaders meet in Biarritz, France on Wednesday. Traders can expect little to nothing to come from it with regards to currencies, other than the usual rhetoric about markets setting FX rates. Taxpayers will be less impressed when the splendid restaurant and security bills are settled.

Equities

Wall Street’s tentative comeback continued on Friday, the S&P rising 1.45%, the Nasdaq 1.70% and the Dow Jones rising 1.20%. All in all, the recovery is impressive, given the gloom and doom of the earlier part of the week. Bond yields rising as their panic buying subsided has definitely helped. I would argue that the recovery is a tentative one though, and we are one Tweet or headline away from normal service resuming. Traders should stay nimble.

Regional markets should enjoy a positive start to the week as U.S. shares get an early boost from tax cut talk from the White House.

Oil

Oil enjoyed a Lazarus like redemption on Friday as both crude contracts rallied tentatively. Brent crude rose 0.80 % to $58.70 a barrel, and WTI also rose 0.80% to $54.90 a barrel. OPEC made sure the rally hit a brick wall, unfortunately, downgrading its demand forecast for 2019 and highlighting “challenges” for 2020. In plain English translating as the world economy (and oil consumption) has slowed in 2019 and will continue to do so into 2020.

OPEC’s pronouncement likely ensures that oil struggles to maintain any meaningful rally today. Weekly U.S. inventory data will be closely watched now. Stubbornly high prints in recent times have been all but ignored by traders, but perhaps not this week.

Gold

Gold gave back some ground on Friday as the dollar rose and equities rallied, but not very much. Spot gold fell 0.65% to $1513.00 an ounce, still very comfortably above the $1500.00 region.

The price action on gold is still telling markets they have good reason to be nervous. With a meagre data calendar to start the week, the yellow metal will likely mark time at these levels. However, demand appears to be strong still on any dips towards the $1500.00 area.

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