Archives of “December 2019” month

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Gundlach: The US dollar should be falling (and it eventually will)

  
  Analysis
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Gundlach makes an interesting point

Gundlach makes an interesting point
Naked buying of dollar-demoninated debt by foreign buyers is propping up the dollar, according to Jeff Gundlach.
He argues that yield-starved investors in Japan and Europe are buying US bonds because they’re one of the few places with positive yields. Normally, the currency risk would be hedged but he notes that it’s impossible to hedge the currency risk, because that puts you back into negative rates. So they’re taking the positions unhedged.
Gundlach argues that’s the only thing that has prevented dollar weakness with the Fed cutting rates. However if/when the US dollar starts to weaken (or in corporate bonds) then there will be a rush to the exits and the dollar will plunge.
To be clear, he’s not saying that will happen any time soon, but that it will come eventually. This is a sort-of reversal of the pre-crisis trade where all the Japanese money was going into NZD.Here’s what the NZD/JPY trade looked like when it unwound in 2007 and 2008. There were single days with moves in excess of 10%.
NZDJPY

European shares move higher ahead of ECB and UK elections tomorrow

  
Analysis, Global Indices

Christine Lagarde’s debut press meeting/press conference

The European shares are closing higher ahead of the ECB meeting and UK election tomorrow.  The new ECB Pres. Christine Lagarde will be presiding over her 1st meeting and press conference.  So far, she has petitioned for more fiscal policy, but in her own words is still learning.
The provisional closes are showing:
  • German DAX, +0.61%
  • France’s CAC, +0.27%
  • UK’s FTSE 100, unchanged
  • Spain’s Ibex, +0.80%
  • Italy’s FTSE MIB, +0.14%

In the European debt market, benchmark yields are lower with the Spain’s Ibex down the most at -4.6 basis points. France’s 10 year yield move back below the 0.0% level at -0.006% (just below but still negative).

Christine Lagarde's debut press meeting/press conference_

China said to want 15 Dec tariffs cancelled as minimum pre-condition for continued negotiations

  
  Analysis

CNBC reporter, Eunice Yoon, tweets as citing Chinese experts who are following the trade talks well

The tweet thread reads:

“Chinese experts who follow #trade talks tell me 1) #China side would want Dec 15 tariffs canceled as minimum pre-condition for continued negotiations of phase one deal (if not, would be sign US not serious). 2) #China “extremely reluctant” to commit to massive concrete figures for US farm goods (if China agrees, it would be considered major concession) 3) still bottom basement level of trust Trump team won’t toss out any deal.”

I don’t think this is much of a surprise but markets are continued to be left hanging as we await Trump’s decision on the 15 December tariffs.
If you really want to harp on the semantics here, I’m not sure how the Chinese camp may interpret a delay in the tariffs as opposed to a cancellation. It may very well come down to that at the end of the day so just be mindful.
As for China’s reluctance to firmly commit to agricultural purchases, can’t say that we didn’t see this one coming now, no?
In any case, this continues to suggest that even with a delay in tariffs this week, any “Phase One” deal remains quite a distance away as both sides are still not moving on their respective key red lines.

FOMC December meeting preview: Watch the dots

  
  Analysis
  Tags

But don’t count on any big surprises by the Fed today

Fed

It’s the final FOMC meeting of the year but it could be the most lackluster one yet as the Fed looks set to reiterate a similar message to the October meeting.
Since then, we have come to know that the Fed has shifted its threshold for viewing inflationary pressures. As such, don’t look towards aggressive rate hikes being in the base case for next year considering where inflation is resting at the moment.
On the other hand, given the resilience of the US economy, rate cuts should also not be on the horizon but are probably seen as more of a defensive measure perhaps – just in case.
However, on the balance of things, that should point towards the Fed being more neutral going into next year and the dot plots should very much reveal that.
FOMC dots
The expectation going into the meeting is that the minor changes in the statement and economic projections should produce minimal changes in the currencies and rates markets, so there is the potential for surprises this time around.
That said, I would not be counting on that. If anything, the dot plots should reveal a continued split in Fed projections but the median for next year perhaps should rest at 1.625% – showing no move in the Fed funds rate.
The other part to watch for in the dot plots will be the longer-term rate, which was seen at 2.500% back in September. If there is a bit of a skew higher there, it could lead to mild dollar strength but I would not expect any significant repricing in Fed funds futures.
In short, the threshold for a significant reaction to the Fed today is rather high and it would require a major surprise by the Fed – which is unlikely. There may be a couple of changes to the dot plots (next year and longer-term) but that is also unlikely to have a major impact on the dollar and rates in the bigger picture.

Nikkei 225 closes lower by 0.08% at 23,391.86

  
Analysis, Global Indices

Another tepid day for Japanese stocks

Nikkei 11-12

This largely mirrors the mood in Wall St overnight, which failed to take heart in reports that Trump is planning a delay on China tariffs later this week.

However, other Asian equities have fared better on the news with the Hang Seng and Shanghai Composite up by 0.7% and 0.4% respectively.
The overall risk mood in markets remain more neutral and balanced for the time being with US futures little changed and Treasury yields a tad lower but nothing too significant. USD/JPY keeps around 108.75 as such, also little changed on the day.
Looking ahead, we still have the FOMC meeting to deal with so expect market participants to keep their focus on that alongside more trade headlines during the day.

China will do whatever it takes to boost economic growth into 2021 – here’s why

  
Analysis, Economy

Its a symbolic thing. 2021 is going to be the 100th anniversary of the Chinese Communist Party.

Here’s Stan Chart on what to expect from China in 2020 and into 2021:
  • government is unlikely to drop the target of doubling 2010 GDP by 2020
  • This requires minimum growth of 6.1-6.2% in 2019-20
  • The government has pledged counter-cyclical policies to offset the headwinds. We estimate that higher US tariffs will reduce China’s 2020 growth by 0.3ppt with the achievement of a ‘phase one’ trade deal and by 0.6ppt in a ‘worse-case’ scenario
  • The broadly defined budget deficit is likely to remain at around 6.5% of GDP
  • mix of fiscal stimulus shifting from tax cuts to spending
  • PBoC may keep credit growth slightly above nominal GDP growth, cutting the reserve requirement ratio (RRR) and de facto policy rates
  • “The switch to re-leveraging in 2019 from deleveraging in 2018 may turn out to be a key support for 2020 growth. In addition, we expect infrastructure investment to edge higher on fiscal stimulus; the industrial inventory cycle to bottom out; car sales to be less of a drag; and last but not least, a positive leap-year effect.”
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Despite the negative effects of the trade war China has plenty of levers to opull, and they will. Not all bad news ahead of China-proxy trade.
Its a symbolic thing. 2021 is going to be the 100th anniversary of the Chinese Communist Party. 

Asian Development Bank (ADB) cuts its growth forecast for China

  
Analysis, Economy

ADB has cut its GDP forecasts for developing Asia this year and the next

Citing a weaker outlook for China and India, and thus  indicated softer economic activity elsewhere in the region.
  • developing Asia forecast to 5.2% in 2019 and 2020, (from 5.4% and 5.5% previously)
China this year and the next lowered to 6.1% and 5.8%
  •  from 6.2% and 6.0% forecasts in September
  • Citing trade war impact on China and higher prices of pork cutting into consumer

UK election – Here is why GBP traders are freaking out about a possible hung parliament

  
Analysis, Politics
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The latest YouGov poll shows the projected majority for the Conserviative party shrinking

And also does not rule out a hung parliament (a hung parliament is within the margin of error).
Here is how the YouGov polling has evolved, run your trend spotting indicators over these ….
The latest YouGov poll shows the projected majority for the Conserviative party shrinking
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