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IMF issues annual report on China

Risks tilted to the downside amid trade uncertainty

The IMF is out with its annual report on China. They say:

  • risks are tilted to the downside amid trade uncertainty
  • China should maintain flexible yuan  if tariffs rise
  • China could intervene to support one in adverse scenario
  • China GDP growth could slowed to 4% by 2030
  • escalating trade tensions could warrant China stimulus
  • China augmented government debt to top 100% of GDP in 2024
  • The yuan is not significantly overvalued or undervalued. In line with fundamentals
  • IMF has been pressing China for more exchange-rate flexibility, less intervention in currency markets
  • China should open up more sectors to foreign competition to put its economy in best position to deal with trade pressures

Beijing pushes envelope with 7-yuan-to-dollar reference rate

 China’s central bank set its daily yuan reference rate at 7.0039 to the dollar Thursday, crossing the 7 line for the first time in roughly 11 years and signaling resolve even as the U.S. cries foul over the weakening currency.

Market participants speculate that Beijing may keep pushing the rate to around 7.2 to 7.3 so as to alleviate the impact of the next round of American tariffs.

But while a weaker yuan will help exporters impacted by the drawn-out trade war, the People’s Bank of China still must carefully balance these gains against the risks of runaway devaluation and capital flight.

The yuan can move only 2% in either direction from the daily reference rate on the mainland. So the rate, announced before trading starts each session, reflects the monetary authorities’ wishes.

The authorities want a gradual weakening of the yuan, said Ken Cheung, senior Asian foreign exchange strategist at Mizuho Bank.

The Trump administration just labeled China a currency manipulator Monday, after the yuan weakened past the psychological threshold of 7 in Shanghai. Setting reference rates past that line could trigger further pushback from the U.S. (more…)

Major US stock indices close with (go on, have a guess!) …. big declines

Ladies and gentlemen, as a special for today only, the four stock codes to watch are

  • U
  • G
  • L
  • and Y
Closing numbers for the big 3 are showing:
  • S&P index down 87.99 points, which is -3.00% at 2,844.06
  • NASDAQ index down 279.54 points or -3.49% at 7,724.53
  • Dow down 772.89 points or -2.92% at 25,712.12
Off lows but not a good day. All three with their biggest daily losses for this year.
The context of the moves today:
  • global growth weaker and weakeneing
  • global trade getting rocked by trade wars
  • The Federal Reserve recently cut and is likely to do so again (a bit of tail and dog, chicken and egg here …. shoose whichever you like)
  • Stock valuations are …. well … high. Some ludicrously so, but they have been for years …
  • what have I missed?

The Dog Days of August are Upon Us

The die is cast. To defend the uneven expansion and ward off disinflationary forces, monetary authorities will provide more accommodation.  The Federal Reserve delivered its first rate cut in more than a decade and stopped unwinding its balance sheet two months earlier than it previously indicated (worth $100 bln of additional buying of Treasuries and Agencies).  Following the end of the tariff truce, and after the July jobs report,  the market was certain the Fed would cut rates again in September, according to Bloomberg and CME calculations).
The ECB has signaled its intention to ease policy in September.  It is also thought to be considering several different tools, including a deeper negative deposit rate, renewed asset purchases, and perhaps, easier terms for the TLTRO that will be forthcoming at the start of Q4.
The BOJ has downgraded its growth forecasts and acknowledges that it will not meet its inflation target for at least the next two years.   It is unlikely to move until the after October when the impact of the sales tax increase can be assessed.
The US has lifted the debt ceiling and suspending spending caps.  US fiscal policy is less restrictive, and there is talk that the Trump Administration will support efforts to index capital gains.  UK government spending to prepare for a no-deal exit will increase, but it may prove insufficient to offset the private sector investment paralysis.  Germany, it would seem from the outside, has the need and resources to expand fiscal policy (and funding at negative yields), but it lacks the will.   On the other hand, Italy has the will but lacks the means.  Japan can provide a supplemental budget if the sales tax increase makes it necessary.

(more…)

Trump turned down idea from Mnuchin to warn the Chinese

Headline says: “Pres. announced tariffs after tense oval office meeting”

There is a headline saying that the president announced tariffs after a tense oval office meeting. According to the report, the president ruled out Treasury Secretary’s Mnuchin’s proposal to warn China of potential new tariffs.

It does not say how Lighthizer sided, but got to think he and Navarro were a thumbs up.  Larry Kudlow was likely a thumbs down.  If Wibur Ross was in the room, he would be a thumbs up too.

Trump’s new tariffs send Indices skidding lower.

Major indices end near session lows.  Give up big gains in the process

Pres. Trump surprised the stock market by announcing 10% tariffs on $300B of China good effective September 1. He is on the wires saying that the tariffs can be raised beyond 25%, and said that the 10% is for a short term period.  I guess the combination means, the 10% will go to 25% if there is no progress, not the other way around (that is how I read the it).
The news reversed strong gains.
At the highs, the:
  • Dow was up 1.16% or 311.32 points
  • S&P was up 1.11% or 33.21 points
  • Nasdaq was up 1.66% or 135.61 points
At the close the final numbers are showing:
  • Dow, down -1.05% or -280.85 points at 26583.42
  • S&P down -0.90% or -26.82 points at 2953.56
  • Nasdaq down -0.79% or -64.298 points at 8111.12

Surging household debt clouds Asia’s growth outlook

The rapid expansion of household debt in emerging Asian countries, particularly China, has become a risk to the global economy.

In Thailand and Malaysia, debt has ballooned due to booms in the auto and housing markets, and the growing repayment burden has dampened consumer sentiment. In China, household debt as a percentage of nominal GDP is now over 50%. Countries such as Thailand have begun curbing their consumption in response to rising debt levels.

The U.S. Federal Reserve is expected to cut interest rates at the end of this month. Emerging economies also have room for interest rate cuts, which would boost growth in the short run but could deepen the scars from indebtedness over the long term.

Somprawin Manprasert, chief economist at Bank of Ayudhya, pointed out that household debts have ballooned as a result of incentives for the purchase of cars and other items introduced by the Thai government in 2011. This is a structural factor that will weigh on future consumption, Somprawin said.

Thailand’s household debt ratio is close to 70%. That is higher than in Japan and other advanced economies, which have ratios of about 58%, and well above that of the eurozone. The main reason is auto loans. To support the car industry, the Thai government introduced tax incentives to encourage purchases, which took off in 2012. As a result of the higher debt load, personal consumption has been sluggish and inflation has been weak.

(more…)

CFTC Commitment of Traders: Positions are marginally changed

Forex futures positioning data among noncommercial traders for the week ending July 23, 2019

  • EUR short 39K vs 31K short last week. Shorts increased by 8K
  • GBP short 79K vs 76K short last week. Shorts increased by 3K
  • JPY short 9K vs 11K short last week. Short trimmed by 2K
  • CHF short 13k vs 12k short last week. Shorts increased by 1K
  • AUD short 48 k vs 53k short last week. Shorts trimmed by 5K
  • NZD short 12K vs 17K short last week. Shorts trimmed by 5K
  • CAD long 31K vs 21K long last week.  Longs increased by 10K
  • Prior week

Highlights:

  • GBP shorts remain as the largest position. The GBPUSD moved to new 27 month lows today rewarding those traders.
  • AUD shorts are the 2nd largest position and the AUD moved to new month lows today retracing the run higher from the June 10 low
  • The EUR shorts increased by 8K. The EURUSD moved modestly lower this week. The EUR short has been cut from over -100K short to 31K (the fall in short positions seems to have slowed over the last month.
  • Speculators remain long the CAD. It is the only major foreign-currency long position versus the US dollar

Forex futures positioning data among noncommercial traders for the week ending July 23, 2019

Disappointment from the ECB ahead would be euro supportive

The headline is the in a nutshell view from Macquarie following the European Central Bank overnight.

  • The banks notes expectations building for more from the ECB
  • But the ECB have a limited range of policy options available
  • The bank also faces political headwinds to further aggressive action
And thus eventual action could be disappointing to markets.
For the euro ahead:
  • market is pricing around 18bps of policy rate cuts over the next 12 months
  • Eurozone bond market rally is an indication market is also expecting the ECB to restart QE
And thus is if the ECB fail to deliver on either of these, euro rates would go higher supporting the euro
The headline is the in a nutshell view from Macquarie following the European Central Bank overnight.Secret message?

USD/JPY climbs to two-week high as yields rise

USD/JPY at the highs of the day

USD/JPY at the highs of the day
If you expect the Fed to follow the ECB, then USD/JPY longs are the place to be.
That’s the brewing signal in USD/JPY as it rises to a two-week high of 108.55. A Fed cut next week is almost a sure thing but a further cut is less certain and either way I don’t see the Fed pre-announcing anything.
Technically, USD/JPY is still in a tough spot but we now have at least one higher low over the past month. It will take a break above 109.00 to spark any kind of real rally but the conditions are there.