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US-China trade war could become a currency war – Fitch

  
  Analysis
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I reckon it already has…

Dollar yuan

According to Fitch Ratings’ global head of sovereigns, James McCormack, the trade war between US and China could possibly turn into a currency war moving forward:

“I do not want to suggest that the trade war is going to become a currency war – but it could. There’s an increased amount of discussion on how the US could influence the value of the dollar.”

On trade discussions itself, McCormack argues that China may slow down negotiations as they aren’t in a hurry whereas Trump wants to get things done before the election next year.
As for my own thoughts, we already have the makings of a currency war but it’s just that we’re not seeing an explicit or full-fledged one just yet.
The Fed may be the one implementing exchange rate policy in the US but ultimately, any decision stems from the Treasury and Mnuchin is the one dictating that side of things. Yesterday, he said that there isn’t any change to the dollar policy for now.
However, the fact that we’re seeing so much talk about from the Trump administration about wanting a weaker dollar is in itself a shift in stance in my books. That cannot be a clearer signal that the dispute goes beyond trade issues.

Alcoa cuts aluminum demand forecast, citing lower demand

  
  Analysis
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Not a great sign for the global economy

From Alcoa:
“Global aluminum demand growth for 2019 is estimated to range between 1.25 percent and 2.25 percent, down from 2 percent to 3 percent in the previous quarter, driven by lower demand in both China and the world ex-China due to trade tensions and macroeconomic headwinds,” they said in the quarterly report.
At the same time, they continue to forecast that inventories continue to decline and are forecast to end the year at levels not seen since before 2008.

Barclays on the FOMC – 25bp cut in July, more to come by end of 2019

  
  Analysis
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Scanning through some of the late week info from via banks, this via Barclays, in brief:

  • Powell’s testimony was dovish, surprisingly so
  • Increases confidence on 25 bp cut to come this month
  • two more 25bp cuts to come by the end of the year
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No surprise from Barclays on the July forecast, this is consensus. A further 50bps to come by year end is a bit of an eyebrow raiser though.

Citi on the FOMC, 25 bp cut this month and another by year end

Citi see an increased downside risk for the US economy …. but acknowledge:
  • that view is clearly not shared by Chair Powell
  • July … a 25 basis point cut is likely to provoke two or more dissents, 25 basis points may be the compromise policy outcome
  • Following … one additional 25 basis point cut, most likely in September

Samsung estimates operating profit down by 56% in second quarter

  
  Analysis
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Samsung Electronics estimated its operating profit more than halved in the second quarter, amid growing concerns over US trade sanctions on Huawei and Japan’s export controls of high tech materials to South Korea. The poor earnings guidance comes as the semiconductor industry is buffeted by the slowing global economy, the US-China trade war and US export controls on Huawei. The US campaign against Huawei has increased chip inventories as the Chinese telecoms maker is one of the Korean tech sector’s biggest customers.  South Korean chipmakers face a gloomy outlook following Japan’s decision this week to impose tighter restrictions on exports of key chemicals used for chips and smartphones amid political disputes over wartime labour compensation.  Operating profit at the world’s largest maker of memory chips and smartphones was estimated at Won6.5tn ($5.6bn) for the April-June period, down 56.3 per cent from Won14.9tn a year earlier. Still, Samsung’s guidance was better than market estimates of Won6tn provided by Reuters. Sales were estimated to have fallen 4.2 per cent year on year to Won56tn. The company is set to announce detailed earnings later this month.  Chip prices have continued to fall since late last year, but shares of Samsung have gained nearly 20 per cent so far this year on expectations of a second-half recovery in the chip cycle. However, the downturn is expected to continue through the second half as external headwinds grow.

US nonfarm payroll data – scenarios for the Federal Reserve’s FOMC interest rate decision

  
  Analysis
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ABN AMRO look at the implications for the next Federal Open Market Committee interest rate decision (meeting is on 30-31 July). ABN AMRO set the stage for Friday’s data:
  • Markets will be particularly sensitive to incoming data as we approach (the FOMC)
  • The key question for markets remains whether the Fed will cut 25bp or 50bp, rather than whether they will cut at all
  • a 25bp cut is fully priced by OIS forwards
  • a 50bp cut is 2/3 priced
The bank expects +175K, which is above consensus (160K), citing
  • the May number was a very weak +75k (the Jan-April average was +195k). 
  • … likelihood of some payback for the May weakness
OK, for Fed implications (bolding mine):
  • June nonfarm payrolls will therefore attract even more attention than usual
  • A somewhat weak print (120-150k) would not have a significant market impact, but if we were to see another sub-100k reading, markets would likely take it to mean a higher likelihood of a 50bp rate cut, at least as a kneejerk reaction
  • For the Fed, we doubt such a figure would be enough by itself to lead to a 50bp cut, and so we suspect such a market reaction would not last (by the same turn, we doubt a strong print would derail cuts).
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Hmmm. I reckon if its a sub 100K ABN AMRO might be surprised at the intensity of the market reaction. It would heighten the 50bp expectation again and see a lower USD in a  thinly trading (post July 4 US holiday) market.

Six reasons why US stock markets have trounced the rest of the world

  
Analysis, US Market
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The lessons of equity markets don’t apply universally

It’s the US independence day holiday and this chart should give Americans more to cheer about than any other.
The lessons of equity markets don't apply universally
It shows equity returns since 1985 and the S&P 500 absolutely crushes every other major global index. The only one that’s even close is the MSCI World Index and that’s partly because it contains a heavy weighting in US equities.
Corporate America  truly is the champion of the world.

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What has Christine Lagarde said about ECB policies?

  
  Analysis
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Lagarde’s thoughts on ECB policies

Lagarde's thoughts on ECB policies
Bloomberg has a nice recap of all of Lagarde’s comments on ECB policies like QE and negative rates.
“Many of the right decisions have been taken. Most recently, initiatives by major central banks — the European Central Bank’s OMT bond-purchasing program, QE3 by the U.S. Federal Reserve, the Bank of Japan’s expanded Asset Purchase Program — are big policy signals in the right direction.” – Sept 24, 2012.
The entire collection is dovish. The risk is that those comments are part of her job at the IMF.
One thought that’s doing the rounds is that Lagarde’s real job at the ECB will be to push eurobonds forward and eventually the United States of Europe. That’s a compelling argument because closer ties is something she’s always pushed for and it would be part of the mandate implicitly coming from Macron and Merkel.
“Our goal should be clear: Restarting convergence and ensuring the fruits of economic growth are shared broadly across the EU. This will help restore faith in the European project.” – Feb 14, 2019.

Eurozone June final manufacturing PMI 47.6 vs 47.8 prelim

  
Analysis, Economy
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Latest data released by Markit – 1 July 2019

Slight downtick to the final release sees the overall euro area reading fall a little in June compared to the 47.7 print in May. That said, this is more or less within initial estimates so it’s not really giving much new information about the sluggish manufacturing sector in the region seen in Q2 2019.

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