Markets gyrate as trade war bleeds into the currency market

TradeTheNews.com com Weekly Market Update: Markets gyrate as trade war bleeds into the currency market
Fri, 09 Aug 2019 16:14 PM EST

It was a wild week for markets with stocks plunging Monday after it appeared China allowed the Yuan to devalue above the key 7 mark to the US dollar. Interest rates lurched lower amidst intense safe haven flows fueled by a growing narrative the trade war had morphed into a potentially more destabilizing currency war. NYSE decliners led advancers by more than a 10:1 margin and the VIX surged 25%. Futures markets priced in at least another 25 bps cut in September from the Fed and started to price in two additional cuts before next spring. Also, the entire German yield curve entered into negative territory for the first time. After Monday’s closing bell the US Treasury formally designated China a currency manipulator, and China responded by confirming the suspension of purchases of US agriculture products.

Markets attempted to stabilize on Tuesday before several Central banks in Asia came out and surprised markets with more aggressive than expected rate cuts and dovish rhetoric. Wednesday’s outsized move lower in global interest rates was exacerbated by renewed worries of a full-blown currency war and an accompanying “race to the bottom” for central banks. President Trump did little to allay those fears throughout the week. On multiple occasions Trump continued to call the US Fed incompetent while demanding more aggressive rate cuts, even going a step further by overtly tying his view regarding the Fed to his belief the US dollar is overvalued. US stock indices briefly neared or tested Monday’s lows before a powerful reversal rally ensued Wednesday afternoon and carried over into Thursday. Treasury yields also saw sharp reversals from Wednesday morning lows and with that the curve steepened significantly.

Friday’s trade saw risk aversion flows resurface. The PBOC continued to allow the Yuan fix to further above 7 and the Administration confirmed the postponement on a decision about licenses for US companies to restart business with Huawei. Responding to reporters at the White House, President Trump indicated that though the September trade talks were still on it was not out of the question they could be called off. The US/China trade fight continued to take place against a backdrop of growing unrest in Hong Kong. Protests were planned for this weekend spreading to the international airport. Hong Kong’s Chief Executive Lam acknowledged the resulting downward economic pressure is serious and her administration is considering implementing emergency measures to boost the domestic economy. Separately, UK GDP had a negative print for the first time since 2013 and a growing Italian political crisis blossomed after Deputy PM Salvini withdrew his support for the current government, potentially paving the way for new elections this fall. Oil prices rebounded from stiff declines seen earlier helped by jawboning from oil producers. Gold prices consolidated above $1,500 for the first time since 2013 helped by modest weakness in the Greenback and shrinking costs to carry due to falling interest rates. The US 2-10 year yield spread finished the week below 10 bps. In a volatile week the S&P ended down 0.5%, the DJIA lost 0.8%, and the Nasdaq fell 0.6%.

In corporate news this week, Disney reported a larger than anticipated earnings miss, which the company blamed on its Fox acquisition and weak theme park revenue as crowds awaited the full opening of its new Star Wars expansion. Kraft Heinz results did little to quell investor uneasiness about its situation, and the CEO noted an ‘unacceptable’ level of decline. CVS beat and raised outlook as brand name medicine revenue rose. Zillow’s report disappointed the street as the company forecast Q3 losses in its new home-flipping division. Mastercard acquired the real-time payments division of Nets Group for €2.85B to boost its existing account-to-account capabilities. Broadcom confirmed it would acquire Symantec’s Enterprise Security Business for $10.7B in cash in a move to expand its reach beyond chip manufacturing. The FDA rebuked Novartis for withholding manipulated data from regulators involving its gene therapy Zolgensma, though the company responded by saying it had investigated the issue and neither patient safety nor treatment efficacy had been affected.


SUN 8/4
HSBA.UK Reports H1 $0.42 v $0.36 y/y, Pretax $12.4B v $10.7B y/y, Rev $29.37B v $27.29B y/y; confirms plans to cut more than 4K jobs and to buyback $1.0B shares
*(CN) CHINA PBOC SETS YUAN REFERENCE RATE: 6.9225 V 6.8996 PRIOR (weakest yuan fix since Dec 2018)
*(CN) China Offshore yuan -0.5% to 7.0107 (fresh record low); yuan weakens amid PBoC fix and recent trade threat by the US
(CN) China reportedly asked state-run purchasers to halt US agriculture imports

MON 8/5
*(DE) GERMANY JULY FINAL SERVICES PMI: 54.5 V 55.4E (confirms 73rd month of expansion)
*(EU) EURO ZONE JULY FINAL SERVICES PMI: 53.2 V 53.3E (confirms 73rd month of expansion)
*(UK) JULY SERVICES PMI: 51.4 V 50.3E (4th straight expansion)
*(US) JULY FINAL MARKIT MANUFACTURING PMI: 53.0 V 52.2E
*(US) JULY ISM NON-MANUFACTURING INDEX: 53.7 V 55.5E
*(CN) US TREASURY DEPT DESIGNATES CHINA AS CURRENCY MANIPULATOR
(CN) China Commerce Ministry (MOFCOM) confirms has suspended purchases of US agriculture products; have not ruled out putting tariffs on US agri products imported after Aug 3rd, new 10% tariffs on Chinese goods violates G20 agreement

TUES 8/6
*(AU) RESERVE BANK OF AUSTRALIA (RBA) LEAVES CASH RATE TARGET UNCHANGED AT 1.00%; AS EXPECTED
*(US) JUN JOLTS JOB OPENINGS: 7.348M V 7.326ME
*(NZ) NEW ZEALAND CENTRAL BANK (RBNZ) CUTS OFFICIAL CASH RATE (OCR) BY 50BPS TO 1.00%; MORE THAN EXPECTED
DIS Reports Q3 $1.35 v $1.76e, Rev $20.3B v $21.7Be

WEDS 8/7
*(IN) INDIA CENTRAL BANK (RBI) CUTS REPURCHASE RATE BY 35BPS TO 5.40%; MORE-THAN-EXPECTED
*(TH) THAILAND CENTRAL BANK (BOT) CUTS BENCHMARK INTEREST RATE BY 25BPS TO 1.50%; NOT EXPECTED
*(DE) GERMANY SELLS €2.646B VS. €4.0B INDICATED IN 0.0% OCT 2024 BOBL; AVG YIELD: -0.79% (record low) V -0.66% PRIOR; BID-TO-COVER: 1.18X (technically uncovered) V 1.51X PRIOR
*(US) JUN CONSUMER CREDIT: $14.6B V $16.1BE
(JP) Japan Investors Net Buying of Foreign Bonds: ¥286.2B v -¥161.5B prior week; Foreign Net Buying of Japan Stocks: -¥339.9B v +¥36.7B prior week
CVS Reports Q2 $1.89 v $1.70e, Rev $63.4B v $62.6Be
Z Reports Q2 -$0.14 v -$0.15e, Rev $599.6M v $586Me

THURS 8/8
941.HK Reports H1 (CNY) Net 56.1B v 65.6B y/y; EBITDA 151.1B v 145.9B y/y; Rev 389.4B v 391.8B y/y
TKA.DE Reports Q3 Net -€94M v -€90Me, adj EBIT €226M v €227Me, Rev €10.8B v €10.6Be; considers selling units
DTE.DE Reports Q2 adj Net €1.33B v €1.24B y/y, adj EBITDA (adj for leases) €7.26B v €5.93B y/y, Rev €19.7B v €18.4B y/y
KHC Reports Q2 $0.78 adj v $0.75e, Rev $6.41B v $6.64Be
(US) Atlanta Fed maintains Q3 GDP growth at 1.9%
*(US) TREASURY $19B 30-YEAR BOND AUCTION DRAWS 2.335%; BID TO COVER 2.24 V 2.20 PRIOR AND 2.20 AVERAGE OVER LAST 4 AUCTIONS
*(JP) JAPAN Q2 PRELIMINARY GDP Q/Q: 0.4% V 0.1%E; GDP ANNUALIZED Q/Q: 1.8% V 0.5%E (3rd straight quarter of expansion)

FRI 8/9
*(US) JULY PPI FINAL DEMAND M/M: 0.2% V 0.2%E; Y/Y: 1.7% V 1.7%E
(US) Pres Trump: things are going 'very well with China'; not ready to make a deal; Possible next month's trade talks with China could be cancelled; I would not devalue the dollar