Daily Market Notes Tickmill UK

Tickmill-News · April 11, 2019, 8:53pm

Lagging” ADP calculation could underestimate actual jobs growth

Non-farm Payrolls probably rebounded in March, making up for a murky February reading. Back in February the reading hit a 17-month low, with only 20K jobs added. Usually the start of spring supports activity in construction while manufacturing PMIs signaled about continuing revival in production sector.

The pace of construction spending accelerated in first two months of 2019 – by 2.5% in January and by 1.0% in February. The positive NFP report should shift the balance of arguments in favor of a transitory slowdown in the economy, which the Fed still has faith in. This will certainly underpin hopes that the US Central Bank won’t step into the ECB shoes as US policymakers attempt to maintain neutral tone of the comments. In doing so, the Fed would basically be acknowledging that the ECB’s early tightening was a mistake.

However, the US jobs market is unlikely to repeat the feat of last year. Coming at the height of fiscal stimulus, while firms face increasingly strained labor shortages and tightened credit conditions that constrain capital spending.

The rise in jobs is expected at 180K in March, while unemployment probably nudged higher, to 3.8%. These number are the median estimate of experts polled by Reuters. Some attention should be paid to the revised February reading, which should additionally smooth concerns over the slack in the labor market.

It is likely that the economy has moved to a lower gear because of the damping effect of the tax reform, which apparently could not ensure much desired “self-sustained” growth. The decline in trade due to the rivalry of Beijing and Washington for technological leadership, as well as a slowdown in foreign demand, stoked concerns that longest streak of economic expansion may be soon brought to the close.

In the first quarter it is expected that the economy will grow by 1.4% – 2.1% in annual terms. The fourth quarter GDP was revised from 2.6% to 2.2% due to a sharp decline in retail sales, which is one of the main components of consumption. In turn accounting for almost 70% of the aggregate demand.

The ADP report released on Thursday, estimated job growth in March at 129K, somewhat limiting optimism about today’s report. On the other hand, the ADP calculation model includes data from past months, as well as information about jobs coming not directly from companies. So, the February slowdown could have affected the March indicator. Econometric studies show that the official data was lower than the ADP when temperatures in the first two months were below seasonal norms. However, with improved weather, the Ministry of Labour often exceeded their estimate the ADP reading. It is difficult to accept the assumption that the ADP data for March caught a real weakness of the labor market, especially in light of more than encouraging figures on the initial jobless claims for March

The chart shows that in February, the increase in jobs (by 20K) was also accompanied by the persistent rise of jobless claims data, beyond initial estimates. Unemployment claims were in a downward trend in March, helping markets to price in positive reading of the NFP.

Tickmill-News · April 11, 2019, 8:59pm

Side effects of negative rates as a primary short-term concern for the ECB

After just one month, the ECB made a seemingly significant retreat in credit tightening policy, calling off the rate hike and announcing the extension of the TLTRO program. With fresh signals of a slowdown in the economy and a jittery bond market, is there a requirement of new decisive actions from the Central Bank?

The ECB meeting on Wednesday is expected to become a kind of information bridge, with which the ECB will prepare the markets for new easing measures or measures combatting the side effects of the soft policy, to be announced at subsequent meetings. The composition of the policymakers voting on policy decisions is expected to be incomplete, as some of them will attend the spring IMF summit in Washington.

It’s difficult to believe that the economic and market challenges faced by the Central Bank are of a transient nature. As China gradually discovers excess production capacities due to lower global and domestic demand, in turn undermining medium-term Eurozone’s export outlook. Market rates (expressed through the yield of German government bonds) collapsed to the lowest level for two and a half years, resembling behavior seen in 2016, when recession fears were high. The ECB, even with a “dovish” wait-and-see attitude, potentially risks being overly optimistic and losing sustainable growth trajectory again.

Accordingly, with the need to keep interest rates low for a longer time, some analysts believe that the ECB should focus on side effects of the policy, primarily profits of the banking system. Comments on TLTRO and rates tiering from the ECB, could serve as confirmation of such intentions. In addition to the added value of the measures to reduce banking costs from negative interest rate policy, the ECB seems to conclude that the “symptomatic treatment” is the smartest step they forward. In other words, no major changes in monetary policy are expected in the near future.

Recent statements by policymakers, as well as the last meeting’s minutes concerning the introduction of rates tiering on excess reserves, suggest that Draghi may divulge more information this Wednesday. If the head of the ECB confirms that cashback for banks is on its way into the policy decision, it could have a negative effect on the euro. Since it will mean extending the era of low interest rates for an even longer period.

However, not all officials see the need for supporting the banks. The head of Danish Central Bank, Klaas Knot, commented that he has not yet got the evidence that negative rates harm lending in the real economy. ECB Vice President, Guindos, recommended banks work on their lending policies to figure out solutions for the shrinking interest margin.

As for TLTRO, the market will be interested in the size of interest rate and allowed use of funds. The minutes of the March meeting did not provide the necessary details about this step, except those that have been common knowledge since the last meeting: loans have a two-year maturity and they will be issued on quarterly basis from September 2019 to March 2021. The updates about TLTRO could cause a lively reaction in the shares of the banking sector with the impact on the common currency limited, as bank support is already known information.

Positive information that could allow the ECB to take a more pronounced neutral stance are: an increase in manufacturing activity in China this March, as well as a spring revival in the services sector in the Eurozone (accounting for almost 70% of GDP). The seasonal boost in consumer spending, associated with Easter, may have a deferred effect on inflation this year, as the celebration is scheduled for April 21 (compared to April 1 in 2018). This fact should also be taken into account when digesting the latest Eurozone inflation reading, according to which consumer prices, excluding volatile goods, rose by only 1% in annual terms.

Risk Warning: Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.

Tickmill-News · April 15, 2019, 8:31pm

ECB acclimatizes to decision-making in perpetual gloom

Whichever perspective the ECB chooses to evaluate the EU economy with, the resulting estimates lie in the range of “negative” to “neutral”, virtually ruling out a bullish surprise at today’s meeting.

Trump opened a new front in the trade war, this time attacking Europe for its unfair Airbus subsidies.
The Italian government had to say goodbye to hopes for economic growth this year as shown by government forecasts.
The British Parliament is stuck in growing dissent, leaving the Brexit denouement as uncertain as it was after the referendum in 2016.
In addition, the IMF once again cut global growth forecasts on Tuesday, which as a result increases the risks of external demand for export-dependent EU economies.
Like last time, the ECB is likely to characterize the risks as skewed to the downside. It will no longer work as though it’s giving a fresh wake-up call. Instead mentioning the reasons that will provide more information about the dynamic assessment of some ongoing processes in the economy, as well as abroad. This may shed some light on what the ECB thinks about changes in corporate expectations, or the trend for decline in trade with its main partners, i.e. China and the United States. A welcomed communication from the ECB would be the evaluation of the tariff threat from the US (for example, “external risks increased”), as the regulator can’t implement policy decisions while isolating foreign trade.

Shifts in policy are not expected at today’s meeting, as officials are mulling over the program for offering new loans to the banking sector (TLTRO) and are seeking ways to protect the profit of the banking sector. Nevertheless, warnings about the risks to growth and inflation may take on gloomier tone. The economy is facing increasing difficulties and complacency would be an unreasonably bold step. In order to prepare the markets for possible easing measures, the communication policy must also be built correctly, especially in light of the clear bearish bias of both TLTRO and compensation to banks on their interest on for excess reserves.

Although US tariffs still remain a distant threat, their emergence should definitely reflect on corporate sentiment, which could potentially delay economic recovery. The Eurozone is one of the weak points in the global economy, in part due to Italy, which is in recession and Germany unsuccessfully trying to reinvigorate activity in the manufacturing sector:

Source: Bloomberg

The IMF cut its forecast for global economic growth from 3.5% to 3.3%, as shown in updated data released on Tuesday. A decline in the first half of the year is expected to change to a pickup in the second.

The head of the ECB, Draghi, will need to somehow respond to growing rumors about the intention of the Central Bank to support profits of the banking sector. The measure could work as a “progressive taxation” of excess reserves, which commercial banks park in the ECB. Negative rates force commercial banks to pay the ECB for the reserves. Reimbursement of these costs could help banks, in the situation of shrinking net interest income, which creates an incentive for excessive risk taking

Source: Bloomberg

Draghi may refrain from commenting, in the light of statements by Klaas Knot, the head of the Danish Central Bank, who urged his colleagues to abandon the discussion of this measure due to difficulties in its implementation.

The disorderly withdrawal of Britain from the European Union remains one of the main threats to economic growth, weighing heavily on corporate and consumer sentiments. This is understood by all 27 countries of the bloc, however, there is still no consensus on the mechanics of the exit. Today the leaders of European Union will meet again to discuss possible solutions, which should satisfy both sides, as well as UK political forces.

Risk Warning: Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.

Tickmill-News · April 15, 2019, 8:43pm

No trace of “trade truce” in Chinese exports data

The growth of Chinese exports in March offset decline in the first two months thanks to a combination of political, seasonal and economic factors. However, this recipe was useless to support imports, which is led by a prolonged decline in domestic consumption due to a fall in consumer confidence in China.

Exports in RMB increased by 21.3% YoY against 6.3%, effectively putting an end to anxiety after consistent decline by 1.4% and 16.6% in the first two months. The share of exports in China’s GDP has been steadily declining from a peak of 36.05% in 2006 to 19.75% in 2019. However, as can be seen, the composition of GDP remains highly vulnerable to fluctuations in foreign demand. For comparison, in the United States, the share of exports is about 12% of GDP.

The rebound of exports into positive territory reinforces the conviction that the slowdown in the first two months was a fall in trade after the “tariff rush” in 3Q and 4Q of 2018, the Lunar New Year celebration, as well as the gradual effect of the Central Bank and the government’s measures to maintain economic activity and their postponed impact behavioral benchmarks such as corporate confidence. The Chinese Central Bank urged that economic indicators be viewed not as separate readings, but in a trend, in order to get a correct idea of the causes of individual episodes of a short-term recession. As you can see, such a call was not unreasonable, although it was difficult not to succumb to the temptation to add disastrous exports on an already existing series of negative readings from China and rest of the world.

It is important to note that the progress in trade negotiations has stimulated exports from a completely non-obvious side – the strengthening of trade relations with the second largest trading partner – the EU. This can be perceived as a compensatory effect of US pressure on its main trading partners, who had no choice but to unite. During the period January-March 2019, imports from the United States fell by 28.3% in China, while exports fell by 3.7%, despite the fact that in December Trump and Xi concluded “non-aggression pact” for three months and for those three months the trade teams were busy talking up the expectations, declaring “fruitful “and “constructive” talks progress. It is difficult to consider such a decline in trade the result of a truce. However, in trade with the EU over the same period, China exported 14.4% more than during the same period last year, while imports grew by 7.3%:

The yield on 10-year Chinese government bonds rose on a positive report to 3.32%, the highest level for this year. Bond futures declined for the first time in three days. All this suggests that traders are pricing in increase in risk appetite and the effect of monetary easing measures.

Given the export price inflation, which probably remained at elevated levels after a 6.2% increase in February, real export growth in March could turn out to be more moderate. In addition, the rebound after the Lunar New Year will have to go into stabilization, so the effect of data on market expectations will be very limited.

Tickmill-News · April 21, 2019, 10:31pm

What the new Brexit delay means for UK manufacturers?

Capital spending and exports, the engines that drive the growth of British economy, entered lower gear due to weakening foreign demand and dragging uncertainty of Brexit. In these conditions, the economy begins to rely more and more on the main driver – consumption, which in turn depends on wage growth and consumer optimism – the channels through which shocks of aggregate demand enter the economy.

The fifth largest economy in the world expanded by only 1.4% in 2018, which was the worst performance in 6 years and data for the first quarter of 2019 show that the trend for slowdown will stay in place. “A sense of urgency” left British politicians with a Brexit postponement until the end of October, which will likely resume tedious process of “dragging the rope” between politicians. Lack of clarity about the access to EU single market in future drags on capital spending of UK firms.

Consumer spending grew last year at the lowest rate since 2012. Part of the slump came from Pound devaluation after the referendum, which boost price growth and put pressure on wages, hitting purchasing power of households’ incomes in Britain.

As inflation was suppressed and wages rose, the negative gap between these two variables favoured consumption thus boosting consumer confidence which supported household spending. Consumer spending and the government purchases made the biggest contribution to the growth of aggregate demand in 2018, while the capital expenditures and net exports slowed the rise

Normally, when expansion relies on household consumption, with muted action form other growth factors, it’s easy for the economy to lose momentum or to see how it changes sign: consumers are the last in turn to get and adjust to market signals, the only question is how soon this will happen. According to the head of the Bank of England Mark Carney, if the burden of expanding the economy lies on the shoulders of the consumer, we should start to “watch the clock.”

British firms have postponed plans to expand production since the announcement of the referendum in 2016. Now a negative outlook on investments is confirmed with a significant increase in inventories, as the companies are unlikely to expand without selling off the surplus. On the other hand, it can be preparations for a favourable Brexit outcome, in which companies will have access to a single market and will be able to support good level of sales. However, British firms will have to reduce production if Brexit drags on, in this case, a short-term surge in production activity observed now should be perceived as a “lull before a thunderstorm.”

The Bank of England for some time insisted on the need for a gradual increase in interest rates along with the emergence of certainty about leaving the UK from the EU. However, the fresh postponement is likely to force the Central Bank to repeat the mantra about patience again, especially in light of the deteriorating PMI from IHS / Markit, which to some extent well predicted monetary decisions

This, in turn, means negative Pound outlook as a result of BoE monetary decisions since the odds of its consistent disappointment become higher.

Tickmill-News · April 21, 2019, 10:35pm

Chinese Economy’s “Good News” May Be Bad News for Stocks

The source of genuine fundamental improvements in the Chinese economy can only come from the manufacturing sector… At least this is the opinion of Chinese investors who bought stocks and ditched fixed-income securities during the last episode of rising manufacturing PMI.

Let me remind you that on March 29, the markets were updated with the closely-tracked China manufacturing PMI, which unexpectedly jumped into positive territory (above 50 points), markedly outstripping the estimate. In one of my previous articles, we explored that the magnitude of the PMI rebound is of less importance than the variation of rise, depending on the size of firms. The greatest increase in activity was observed in small enterprises most vulnerable to demand shocks and credit conditions:

This is a very promising shift in terms of the outlook for corporate optimism as its more volatile and sensitive to economic changes in small firms.

It’s also important that two key sub-indexes shifted to recovery: production volumes and new orders (a leading indicator).

The government linked the positive changes in production with the success of the targeted credit measures for enterprises that bolstered consumption and investment. Well, the episode of liquidity injection into the economy, to the tune of 4.6 trillion Yuan in January is not quite a targeted measure. However, in February the PBOC tried to move monetary aggregates back to normal, but yet again returned to expansion in March

Given the size and position of the Chinese economy in the world, it’s easy to understand what’s now driving the global appetite for risky assets. Reliance stems from the PBOC’s assistance, with its sheer scale obviously supporting domestic production data.

Data released on Wednesday indicated that the impulse in PMI developed in broad macroeconomic variables. Industrial production and retail sales exceeded expectations, while the government’s target variable – GDP, rose by 6.4% in the first quarter, compared with a forecast of 6.3%. At first sight, the forecast looks good, however it’s possible that the “impatient” PBOC is just waiting for the first signs of improvement in order to tighten control of the monetary supply.

Further to this, the first signs of a U-turn in monetary policy are already in full view. For example:

The widely expected decline in RRR in April was not realized.
The PBOC did not conduct open market operations for 18 days in a row.
The new medium-term lending facility decreased in size. As a result, overnight repo rates soared to a maximum of 4 years, indicating growing liquidity deficit.
It’s clear that, with the transition of the People’s Bank of China to a more offensive stance, the stock market will again be under pressure. Additionally, if the growth of Chinese economy again turns out to be not “self-sustained”, then new economic shocks overlapping the tightening policy may hit the asset prices much more painfully.

Tickmill-News · May 6, 2019, 11:19am

US Retail sales join Chinese data to hint about early stage of global recovery

US retail sales unexpectedly recovered in March at the fastest rate in a year and a half, offsetting a gloomy February with the fall by 1.7%. As the March data shows, the structure of aggregate consumption saw exceedingly favourable shift, namely, consumers spent more on car purchases. This rebound could point to the improvement in household expectations regarding the size and stability of future income, but still with only one observation such a conjecture remains a shallow speculation. Although car sales tend to be volatile by nature and thus considered unreliable, the positive monthly change in March comes right in time to support the assumption about rebound of economic activity in the second quarter.

However, in January, car sales pulled consumption down, apparently due to seasonal exhaustion after New Year’s spending.

Broad retail sales indicator rose by 1.6% in March compared with February. Core sales also rose adding 1%.

From the interesting details of retail sales report, it can be noted that all four of the largest items of consumer spending posted an increase compared with the same month last year and February:

Cars and spare parts – + 3.8%
Food and drinks – + 1.0%
Restaurants – + 0.8%
Online purchases – +1.2% and +11.6% compared with March 2018.

Positive data further attracted buyers to the dollar, after the US currency went into the lead against the main opponents during the London session on Thursday

Unemployment in the US is likely to continue to test historical lows in April, as shown by unemployment benefits data. The number of initial claims for benefits has dropped to its lowest level in 50 years (192K) and it is completely unclear how this fails to translate into the consumer inflation.

Large downward risks to the American economy, hovered in the air, are fading from view. Given that the data from China indicated fast recovery, the trading theme of the next week should be “the search for yield”.

Tickmill-News · May 6, 2019, 11:26am

South Korea: World Growth Must Wait!

One of the brightest stars in terms of global growth unexpectedly faded, with South Korean GDP falling by 0.3% in Q1. Posting its worst performance in almost a decade

The economy grew by 1.0% in Q4, 2018 alongside an expected a rebound of 0.3% in the subsequent quarter. Hopes were dashed however due to weak foreign demand for South Korean exports and diminishing domestic consumption. Retail sales declined sharply in February due to the early celebration of the Lunar New Year. Apart from the seasonal factor however, there was also a structural weakening when compared to the average value for January-February with the same period last year.

When assessing the implications for the global economy, it should be noted that the country exported fewer semiconductor elements, refined petroleum products and passenger cars. Exports declined in February and fell short of forecasts in March, indicating a continuing trend towards weakening external demand during these two months. Sources of weak foreign demand arose from the largest trading partners, such as China, USA, Hong Kong and Japan, which is all well documented in their domestic data. Channels of transmission foreign demand slack into domestic consumption were capacity utilization, which contracted in March, deterring from expansion on business investments, as well as an increase in the ratio of inventories-to-shipments of the exporters.

Source: Korean Development Institute

Industrial production in February fell by 1.4% MoM, the service sector showed zero growth. In the medium-term trend, assessing the change in indicators in annual terms, the situation also looks alarming. Waning momentum in manufacturing and mining arose became especially distinct in early 2019 while the services sector has been stagnating for a long time.

Shares of companies producing semiconductor elements, amid the decline in exports, raise doubts about the rationality of valuation, as the price is rising while EPS falls

The South Korean government has pledged to increase fiscal momentum with an additional package of spending of $5.9 billion, in addition to the record budget set for 2019. According to their calculations, this will lead to additional GDP growth of 0.1% and creation of 73,000 jobs. With the failure of the first quarter, the government’s targets for 2.6% to 2.7% GDP growth are beginning to look excessively ambitious, unless, of course, a miracle occurs in export activity.

The country, with a high share of economic and implicit political power belonging to industrial conglomerates called Chaebol, ranks 11th in terms of the size of the economy and has been growing at one of the highest rates after the Great Depression.

Tickmill-News · May 6, 2019, 11:30am

Fight fire with fire: Chinese banks issue more loans to combat effects of bad debts

After a crushing blow inflicted by Google (shares fell by 6% on the earnings report) Nasdaq futures suffered from additional pressure after Chinese PMI report release, which showed that manufacturing activity in April failed to develop the March impulse.

The rebound in March set the stage for expectations that Chinese economy will enter the second quarter with the claim on recovery after dismal winter, but April data were a big disappointment. Both productive and services sector have torn the groundwork of March, broad activity indices decreased from 50.5 to 50.1 and from 54.8 to 54.3, respectively. The estimate of production activity from Caixin, which adds more weigh to small enterprises in the index formula, also decreased from 50.8 to 50.2 points, contrary to the forecast of 50.9 points.

The decline embraced all components of the index what brought additional damage to hawkish beliefs on the markets. The leading index of new orders declined slightly, remaining in the expansion zone. However, the index of new export orders fell below 50 points, indicating a cooling in external demand.

The output component fell along with the urban unemployment component. In March, the unemployment rate navigated to the 74-month low, before the labor market cooled in April. The inventory index returned to negative territory, the goods delivery time index strengthened, indicating an acceleration of capital turnover for producers.

The pressure in prices of manufactured goods and other costs declined showed corresponding index, which of course means a less favorable outlook for consumer inflation. The balance of incentives for tightening vs. additional credit easing for the Chinese government should remain at the same level, or perhaps slightly shift in favor of counter-cyclicality (more easing).

A wait-and-see attitude may not be completely comfortable to the government when taking into account curious fact that the weak economy in 1Q, the massive infusion of liquidity (4.6 trillion yuan in January) coincided with increased ratio of bad loans to the highest level almost for three years

At the same time, despite the slowdown in the economy, which is usually accompanied by the reduction of attractive borrowers and the growth of defaults, Chinese banks, in unison with the Central Bank, almost doubled the issuance of loans in the first quarter compared to Q4 2018

A brilliant example of what a low level of independence in the decisions have large Chinese banks. Fight fire with fire!

The lagging of China’s banking sector shares from the ShComp broad index (19% vs. 23% YTD) may just be a concern about the increase of bad loan provisions, which, of course, will have a negative impact on EPS.

According to a survey by China Orient Asset Management (one of four state-owned companies managing bad debts), 45% of the 202 surveyed managers of Chinese banks believe that bad loans will update the record in 2019.

The implications for the rest of the world are the implicit boost to risk appetite due to the fact that the Chinese economy should remain afloat, because quickly stopping support for banks, drowning in bad credit, can be hardly included in the government plans.

Tickmill-News · July 1, 2019, 9:31pm

More than simply a trade truce

The signs of softening stance of the White House in talks with China before the two leaders met at the G-20 summit (Trump’s phone call to Xi, reports about “extended ” meeting), to the general surprise, were not empty speculations, but a forerunner to extending the truce. The results of the meeting between Trump and Xi set a new vector of cooperation between the two states, as Trump accepted some Chinese demands, such as extending pause in tariff escalation and easing of pressure on Huawei. Markets welcomed this decision by increasing the demand for risky assets, the dollar strengthened, the yield on 10-year notes rose, and SPX futures began trading with a positive gap at around 2975 points.

And if the tariff truce was within the range of expected scenarios, then the removal of some restrictions on Huawei prompted China to return to the negotiating table, which considered attacks on the Chinese telecom giant as forcing to negotiate with a “gun pointed to its head”. China, in exchange for easing sanctions on Huawei agreed to increase purchases of agricultural products in unspecified amount. Its manufacturers in the United States suffer huge losses, hit by the millstones of the tariff war.

The chance of a rate cut by 50 bp in July keeps declining, according to futures trading with interest rate as an underlying asset, but the market remains confident that the Fed will lower the rate in July by at least 25 bp.

Asian stock markets got the biggest relief from the Trump-Xi decision. The Japanese Nikkei jumped by 2.1%, the Chinese CSI 300 by 2.6%, as the pause in the exchange of tariffs will allow firms to expand the horizon of production planning, which should add confidence to Chinese firms in decisions to boost hiring and capital investments.

The official index of manufacturing activity in China fell to 49.4 points in June, remaining in the contraction territory for the third month, the data showed on Monday. The activity index of China’s factories, calculated by Caixin, dropped to 49.4 points, the worst since January of this year. Manufacturing PMI includes several sub-indices, such as output, new orders, input and output prices, delivery time of raw materials by suppliers, inventories, employment, etc. Despite the decline in the component of new orders (from 49.8 to 49.6 points), and hiring (from 47.0 to 46.9 points) the positive part of the report was a rebound in activity of small enterprises from 47.8 to 48.3 points.

Recall that small enterprises in China endured greatest pain from the tariff war since the combination of slowdown in growth and credit crunch led to credit tightening especially to this type of firms. Banks are willing to lend to large enterprises, seeking to maintain “healthy” assets on the balance sheet because of increasing probability of default by corporate borrowers. By this, they effectively block the channel of cheap liquidity opened by the Central Bank, intended for small firms.

It is not known whether the Chinese authorities will keep pause before new stimulus measures (favoured by the outcome of the Osaka meeting), but with the deterioration of the manufacturing sector, the likelihood of expanding support measures is increasing, which should support risk appetite not only in the Chinese stock market, but also abroad in the form of lower demand for “safe havens”.

European data increased pressure on the euro. Activity indices in production in Italy, France and Germany continued to fall. Unemployment in Germany fell by 1K, the unemployment rate in the Eurozone fell more strongly than expectations to 7.5%. EURUSD is heading to 1.13 level, losing almost half of percent today.

Tickmill-News · July 16, 2019, 7:26pm

Saudi Arabia Under Pressure as the “Oil Market Goes Green”

Oil prices renewed their decline, maintaining the bearish tone set on Monday. US producers are gradually resuming oil production in the Gulf of Mexico after Hurricane Barry, in what serves as the basis for downbeat expectations for API and EIA inventory updates this week.

The rebound of Chinese economy in June, particularly in industrial production and retail sales, left a light imprint of buying activity in oil prices on Monday. However, it failed to gain a foothold, as the forecast for global economic growth (and therefore oil consumption) remains flimsy. This is further evidenced by the dovish stance of the ECB and Fed, ready to combat recession, while American oil producers are ramping up production, maintaining concerns about the glut.

On January 1, 2020, the International Maritime Organization will enforce new standards for ship fuel, designed to significantly reduce emissions of harmful gases into the atmosphere. This will be one of the biggest shifts in the oil market, as ships burn about 3 million barrels of high sulfur oil every day. These new standards will obviously create an excess of “dirty” fuels on the market and increased demand for standards-compliant fuels.

The allowable sulphur content is planned to be reduced from the current 3.5% to 0.5%. The average sulfur concentration now stands at 2.7% with a very low percentage of ships currently sticking to the new emission norms. The profits of refineries that focus on refining dirty oil will be under pressure, and this is especially true for companies in Saudi Arabia. Below is the matrix of oil grades in two ways – by density and sulfur content:

Also, for ships that are not going to switch to clean fuel, it is possible to use special installations that reduce the content of harmful substances in emissions.

The market is also under pressure due to discouraging reports from the EIA, which sees no end in sight to the potential for growth in US oil production. According to the latest forecasts, production in seven major fields will grow by 49K in August to a record 8.55 million barrels per day. The total production in the United States now exceeds 12 million barrels and is expected to rise further.

On Monday, the volume of suspended capacity in the Gulf of Mexico was 1.3 M barrels per day. On a selected day from Sunday to Monday, producers restored production to 80K barrels per day however, the recovery rate is expected to increase. Capacity utilization on some platforms reaches only 31%. Workers of more than 280 drilling platforms were evacuated but they are expected to return to their jobs in a few days after the storm leaves the region.

Risk Warning: Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.

Tickmill-News · July 23, 2019, 12:47am

US and Vietnam: from “Best Friends” to Trade Rivals?

Next possible leg of the trade war may affect countries that have emerged victorious at the expense of first victims. This assumption is explained by the fact that losing the accumulated trade and economic advantage is more expensive for any economy than simply missing it out – and Trump understands this perfectly well. Already very attractive for the US president is the ability to knock out concessions from China’s small neighbour, Vietnam, which is seen as one of the main beneficiaries of the transformation of the supply chains in the trade between the US and China

Trump just needs to make a threat, but can Vietnam avoid this or a new trade front with an East Asian country is only a matter of time?

First, it is worth remembering that in May, the US Treasury Department included Vietnam in the list of potential currency manipulators, which gives Trump a formal pretext for imposing tariffs on Vietnamese goods if the fact of deliberate devaluation is proved. This threat has already led to the introduction of 400% of the tariffs on steel imports from Vietnam, which was produced in South Korea or Taiwan. Thus, the role of the country as an “unwitting accomplice” is being blocked, also serving as a warning that the connivance of the authorities will be punished specifically with tariffs on Vietnamese goods.

And there is a reason for this. For example, there are allegations that Chinese goods are “rebranding” in Vietnam and exported to the United States under the guise of Vietnamese goods. The rise of exports from China to Vietnam and from Vietnam to the United States indicates that there may be a phenomenon that US officials call “transshipment”

As can be seen, China’s exports of key goods to the United States have shrunk along the “short route” and have grown along the “long route” through Vietnam.

If the United States introduces 25% tariffs on imports from Vietnam, considering that the severity of misconduct is commensurate with Chinese, then according to some estimates, this could lead to a reduction in export volumes by 25% and a loss of 1% of GDP. The United States continues to be Vietnam’s main trading partner, and vice versa, the share of US exports to Vietnam, especially in terms of agricultural products, has risen sharply

Last month, Trump stunned the Vietnamese authorities with statements that Vietnam was “the worst abuser in the trade of everybody” and “fairness in trade with Vietnam may even be less than with China.” Back in 2016, after entering the presidency, Trump made similar complaints, but the contract for Boeing purchases of several billion dollars and the trend to strengthen alliances with China’s neighbours, in the opinion of the Vietnamese authorities, have become a reliable dam protecting the country from criticism of the POTUS. But it was not there. Trump expressed discontent with the explosive growth of Vietnam’s trade surplus with the United States, which in the first five months of this year reached $21.6 billion, almost doubling compared to the same period last year.

Several sources claim that Vietnam made several promises to Washington related to trade, and Trump’s recent criticism can only accelerate their implementation. For example, the development of a law on the creation of three free economic zones, which, according to fears of local firms, could go under the control of China, was suspended indefinitely, demonstrating to Washington that the trend of rapprochement with a neighbour was interrupted. Nevertheless, Vietnam is also working on a “spare airfield”, having entered into the Trans-Pacific Agreement (from which the United States left) and signed a free trade agreement with the European Union. Together they can mitigate damage from possible US sanctions.

Dynamics of transshipment operations, where Vietnam serves as a gasket between China’s exporters and US importers. The lack of repression and conniving routes – loopholes is likely to provoke a new wave of criticism from Trump.
Vietnam surplus with the United States. The main item of US exports to Vietnam is agricultural products (4 billion dollars in 2018). If purchases will grow at a faster pace, it can be assumed that countries have agreed on something.
Cooperation in the military sphere. In terms of concrete numbers, this should be increased purchases of American weapons and equipment. This should be a more reliable signal of preference for cooperation with the United States to balancing between the interests of superpowers (i.e. US and China and probably Russia).

Tickmill-News · July 29, 2019, 8:25pm

Market discounts retail sales data focusing on the Fed comments as July meeting looms

Greenback posted surprisingly muted response to strong US retail sales on Tuesday, despite of actual figures printing almost twice higher than the estimates. Some traders went on vacation, the rest opted to focus on the Fed’s comments, so the mix of lowered trading volumes and weakened importance of the “hard data” only helped Dollar to sustain gains slightly above 97 level during the trading session on Wednesday.

Retail sales in the control group grew by 0.7%, more than twice as high as expectations (0.3%), retail sales metrics including/not including goods with volatile prices indicated a steady rise of consumer spending in June. Car sales for the second month in a row make a positive contribution to sales, probably due to a seasonal increase in summer trips.

Powell, speaking in Paris, attempted to refine his subtle guidance to July meeting, keeping market focus on the risks of decline in inflation expectations and their “deanchoring”, fall in market-based compensation for inflation, which require more policy accommodation. At the same time, the Fed opts to discount traditional fundamental data, showing its concern the expectations. Powell’s comments boosted the odds of 50 bp rate cut to 31%.

At the same time, Powell managed to convince the market that the Fed will be able to support inflation. Market-based metrics of inflation expectations have turned into growth from the end of June:

It can be seen from the chart that the main risks are currently perceived to stem from US bilateral trade relations as the inflation expectations tumbled exactly after the announcement of new tariffs on China goods in May. This was also repeatedly stated by Powell. On the other hand, the decline inflation expectations in May could be a market foresight of the new round of credit easing in response to exacerbation of tariff tensions, in which case the Fed turns out to be led, reacting to short-term market whim, instead of spotting genuine trend in the economy.

However, for the late phase of expansion, which the US economy is supposedly in, the “hard” data tends to lag (since crises start with a sharp change in expectations in response to a shock), therefore, the Fed needs to “diversify” the sources of information in order to stick to the proclaimed “data dependency” policy in early 2019.

In my opinion, the rate cut by 50 bp is difficult to consider a commensurate “precautionary measure” in response to economic changes, where retail sales and the labour market are growing at a fairly steady pace. A strong stimulus signal from the ECB next week will reduce the risks of a further “slowdown in growth abroad” (one of the reasons for the Fed’s concerns, along with the trade war), and US GDP data on Friday may contain a positive surprise as shown by NFP and retail sales. All this may limit dollar sales.

Tickmill-News · July 29, 2019, 8:30pm

Policy Bias in China: Fighting with Credit Leverage or Adding more Stimulus?

A key gauge of the debt burden in Chinese economy exceeded 300% of GDP, the Institute of International Finance reported. Beijing was forced to maintain the trajectory of undesirable debt growth, increasing monetary and fiscal support in response to shocks in foreign trade, weakening foreign demand and activity in production and services sectors. Big tax cuts and following decline in state revenues has led to the need to ease restrictions on the issue of special purpose bonds by municipal governments in order to keep a stable pace of investment in infrastructure projects. This fueled growth of the national debt to 50.5% of GDP in 1Q 2018
Chinese government increased quotas on the issuance of special purpose bonds by 59% compared with 2018. But in May local governments filled the quota by only 40%, issuing debt at quite an even pace. Recall that such bonds are paid off with the project revenues, and not from the taxes collected. Raising funds for unprofitable projects and higher risk credit on such bonds imply that local governments are risking facing with increase in borrowing costs in case they make an investment mistake.

The liabilities of the three main types of economic agents – the state, firms and households amounted to 303% of GDP in the first quarter of 2019, compared with 297% in the same period last year. The IIF report also showed that the debt burden grew at an accelerated pace in many countries after the trade tensions escalated.

While the authorities’ efforts to combat financing through informal channels (i.e., shadow banking) led to decline in much-inflated corporate debt in the non-financial sector from 158.3% to 155.6%, borrowing in other sectors has increased. Changes in the size liabilities can uncover more underlying processes if divided in four broad components: government debt, household debt, the financial sector, and the non-financial sector. By comparing changes of debt in each sector with the same period last year and the values for given period with safe standards globally, we can try to make a qualitative conclusion about the policy bias: towards fighting leverage or increasing stimulus.

Below is a diagram showing the debt-to-GDP ratio by sector for the first quarter of 2019, as well as a change from the same period last year

The most rapidly growing debt was household debt (from 49.7% to 54%), and debt in the non-financial sector, which is the “main customer” of shadow money markets, slightly decreased from 158.3% to 155.6%. Three of four sectors (except non-financial one) are having quite safe levels of debt when comparing it with world average. Despite conflicting rumors about the course of fiscal and monetary intervention, Chinese authorities, as can be seen, managed to combine prudently stimulus measures with restrictions on shadow financing (reducing debt burden in the riskiest sector and increase it in those where it is reasonable).

At the same time, the value of China’s total debt in absolute terms exceeded $40 trillion dollars, which is almost 15% of the global debt.

Tickmill-News · July 29, 2019, 8:34pm

Fed Williams’ “Brilliant Failure” in Communication Sparked jolt on the Markets

After it became clear that the Fed is going to cut rates in July, market expectations had a room to develop only towards the most bearish outcome (50 bp cut), pressuring dollar and pushing safe heavens and bonds higher. Yet another run-of-the-mill John Williams speech on Thursday became a sheer surprise, aiding bearish rumors to thrive with the following “recipe” to combat next recession:

“First, take swift action when faced with adverse economic conditions”

“Second, keep interest rates lower for longer.”

And third, adapt monetary policy strategies to succeed in the context of low r-star and the ZLB.”

(it is not entirely clear what Williams meant by adapting).

The first two statements were enough to promptly change the market consensus to the rate cut by 50 bp. However, the Fed representative later issued a statement a la “it was a joke” as the unwelcome jump in market expectations prematurely limited the room for maneuver. There are still two weeks before the FOMC meeting, taking into account the incoming data, the unpredictable Trump, the ECB decision and other events, eventually only 25 bp cut can be justified, which will disappoint markets and cause volatility. These are completely unnecessary policy costs for the Fed and Williams in this regard was too much outspoken and unusually plain in his statements.

Williams sounded so ominous that the odds for 50 bp rate cut jumped from 30 to 70%! The Fed spokesman “ran to the first reporter he could find” to report a communication failure, stating that “Williams recapped 20 years of academic research in his speech. It was not about his views in monetary policy and upcoming decisions” Well, if this is so, then Williams simply has an “outstanding ability” to pick time and topic for speech. Or… was it intended open mouth operation?

As a result, the chances of two outcomes of the July meeting became equal, but the imprint on the foreign exchange market and safe assets remained. Gold reached a five-year high, trading on Friday at around $1,445 per troy ounce, the yield on 10-year US T-notes was down to 2.026%. The reaction of the dollar was less pronounced, a small amplitude of the fall says that there is no place to run. Oil is rising due to exacerbating tensions in the Strait of Hormuz and expectations of the Fed’s easing policy, but one should keep abreast of US negotiations with Iran, the news about which appeared recently. Therefore, the rally in oil prices may be fragile, as it is now due solely to temporary factors. The cryptocurrency market also rose, following the rally in fixed income markets of developed economies, but Congress’s reluctance to share monetary power with the Facebook cryptocurrency project suggests that the legal status of decentralized cryptocurrencies as a fundamental growth driver can be forgotten for the near term.

Tickmill-News · July 29, 2019, 8:37pm

IEA’s Birol: Oil consumption forecast can be revised to the downside in the coming months

The International Energy Agency (IEA) cut forecast for oil consumption in 2019 due to flattening growth of the global economy and persisting risks from trade standoff between US and China, said Fatih Birol, the head of organization.

The agency expects consumption to fall to 1.1 million barrels per day and may deliver even gloomier revision of the projections if the global economy, and especially China, shows further weakening, Birol said.

The IEA was much more upbeat last year predicting an increase in demand by 1.5 million b/d in 2019 but updated projections contained much more pessimistic figures weighed largely by global trade risks.

«China is experiencing the slowest economic growth for the past three decades, as well as some developed economies … if the global economy figures are even worse than we expect, then in the coming months we can even revise our figures again,” said Birol in Reuters interview.

According to Birol, the demand for oil were adversely affected by the trade war between United States and China at a time when the markets have been drowning in oil due rising shale oil production in the United States.

It is expected that in 2019, US oil production will increase by 1.8 million barrels per day – less than 2.2 million barrels per day in 2018, Birol said, but “these volumes will go to the market, where demand growth is decreasing “.

According to him, the IEA is concerned about rising tensions in the Middle East, especially around the Strait of Hormuz, an extremely important shipping route connecting the Gulf oil producers with markets in Asia, Europe, North America and other countries.

Tickmill-News · July 29, 2019, 8:41pm