Capital Markets: "Trump's "Call from China" helps Markets Recover"

From Marc to Market:

Overview: The anticipated growth implications of the heightened tensions between the world's two largest economies is dominating activity at the start of the new week. These considerations that drove the 2.6% drop in the S&P 500 before the weekend is carrying over into today's activity. The dollar was driven below JPY105 support, while global equities and emerging markets slumped. Gold was lifted to a six-year high to flirt with $1555 area. However, it is remarkable how quickly China appeared to respond to the market disruption, and President Trump claimed that China called, wanting to resume trade talks, which had already been reported to have re-started earlier this month. The US negotiating team was to go to China next month before last week's tariff increases. Equities trimmed losses, and the dollar recovered broadly, including against the yen. Most Asia Pacific markets fell 1%, though India, open late closed higher. European bourses, excluding London, which is on holiday were marginally lower, with the Dow Jones Stoxx 600 was off by about 0.25% in late morning turnover. US shares were trading firmer, pointing to around a 0.75% higher opening. Bond yields tumbled in Asia but are a little firmer in Europe. The US 10-year yield fell a little through 1.45%, a new three-year low before stabilizing. After beginning the Asian session on its back foot, the dollar has steadily recovered and is now firmer against nearly all the major and emerging market currencies.

Asia Pacific
The PBOC continued to resist the full pressure on the yuan, reinforcing the sense that if the yuan were to truly float, it would sink. The reference rate was set at CNY7.0570 while the market's model's suggested it ought to have been near CNY7.0628. In its money market operations, the PBOC also drained a small amount of liquidity. The offshore yuan (CNH) fell, with the dollar rising to CNH7.1926 before backing off.

The dollar is firm against the Hong Kong dollar, but below the cap of HKD7.85. The demonstrations in Hong Kong intensified, and China stepped up its warnings. Hong Kong reported a July trade deficit that was smaller than expected (HKD32.2 bln vs. HKD42.8 bln in June). The drop in exports moderated to -5.7% year-over-year from -9.0% in June. Imports were weaker, falling 8.7% year-over-year after a 7.5% decline in the 12-month through June. Singapore offered an upside surprise. Industrial output rose 3.6% in July. Economists surveyed by Bloomberg expected a 1.6% decline. The favorable news was blunted by the downward revision to the June series that took the 1.2% gain initially reported and cut it to a 0.3% decline.

Amid the US-China's tit-for-tat tariff action, the US and Japan appear near a trade agreement. The broad outlines have been known for months. US farmers are at a disadvantage since a Trans-Pacific Partnership and a free-trade agreement with the EU. It is less clear what the US will concede. Auto duties will not change, but Lighthizer suggested some levies on industrial goods may be reduced. Abe may think he is securing goodwill from the mercurial American president. Yet one cannot help but be skeptical. As the framework agreement was announced, there already was the basis for disagreement. Trump, as he is wont to do, may have oversold Japan's agriculture purchases, saying for example that there will be "very, very large orders for corn" shortly. Abe said that Japan's private sector will look at US agriculture products and that there was still work to be done. A deal is hoped to be reached by the UN General Assembly session in the second half of September.

The dollar initially gapped lower against the yen and fell to JPY104.45, a new three-year low before rebounding smartly. It is flirting with JPY106 late in the European morning. Recall the pre-weekend high was near JPY106.75. The intraday technicals are stretched ahead of the start of the North American session. The Australian dollar was sold through $0.6700 to approach the low set earlier this month ($0.6675). It has also recovered to return to little changed levels. It has not closed above its 20-day moving average since late July. It is found near $0.6780 today, which is a couple ticks above the pre-weekend high.

Europe
Journalists are getting much mileage from BOE Carney's call for a new global reserve asset to replace the dollar. He rejected the idea of replacing the dollar with another national currency, recognizing the contradiction economists like Triffin noted more than 50 years ago. He called for some digital currency. If it sounds familiar, it is because it is. This is a modern reiteration of Keynes' bancor he proposed at Bretton Woods. Like then, it will have many advocates. Yet, how to get from here to there is not clear or obvious, and even Carney recognized that it is nowhere close to materializing. Ultimately, the US may lack the power and/or will to impose a new world order, such as Bretton Woods II, but it is strong enough to block the imposition of one on it....

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