Tuesday, July 30, 2019

Capital Markets: "Sterling Pounded"

From Marc to Market:
Overview: The prospect of a no-deal Brexit continues to pound sterling lower. A little more than two months ago, it was testing $1.32. Two weeks ago it was around $1.25. Today it traded near $1.2120 before stabilizing. On the other hand, the 10-year Gilt yield is below 65 bp, a new multiyear low, while the international-laden FTSE 100 is holding its own in the face of heavier equity prices in Europe. The major equity markets in the Asia Pacific region rose except for Taiwan, which some linked to the anticipation of Apple's earnings later today. Led by financials, utilities, and industrials, the Dow Jones Stoxx 600 is off around 0.5% near midday. US shares are little changed. Benchmark 10-year yields are edging lower today, though the yields in the periphery of Europe are a little firmer. The US dollar is narrowly mixed. While Brexit is a drag on sterling, disappointing Swedish GDP figures (-0.1% vs. expectations of +0.3%) have weighed on the krona. The Turkish lira continues to recover and is leading the emerging market currencies higher. The dollar has fallen below TRY5.60 and is at its lowest level in nearly four months. The next important chart area is seen closer to TRY5.40.

Asia Pacific
Japan reported disappointing industrial output figures and an unexpected decline in unemployment before the BOJ met
and left policy unchanged. Industrial production slumped 3.6% in June, which was twice what the median forecast anticipated in the Bloomberg survey and the third-largest decline since the natural disasters in 2011. The year-over-year contraction deepened to 4.1% from 2.1% in May. On the other hand, the unemployment rate edged down to 2.3% (from 2.4%), and the job-to-applicant ratio slipped.

The BOJ was unimpressed. It shaved its GDP forecast for the fiscal year to 0.7% from 0.8%. The government had cut its forecast in recent days as well. It stands at 0.9% now down from 1.3%. The BOJ has all but given up on its inflation target, now forecasting CPI to be at 1.6% at the end of FY21. The BOJ acknowledged that risks to growth and inflation remain on the downside. The window of opportunity for the BOJ to take new measures is seen later this year after the sales tax hike (from 8% to 10%). Although the BOJ does not target the yen, the strengthening of the yen would likely be seen as a risk to both inflation and growth.

Australia's building approval slump deepened in June and although the central bank is not expected to cut rates next week (August 6), after reducing them at the previous two meetings, a rate cut in Sept-Oct is anticipated. Economists had been looking for a small uptick as building approvals were to stabilize after dropping a sharp 13.1% in March and 3.2% in April. Instead, May's 0.7% gain was more than halved to 0.3%, and June dropped 1.2%. Tomorrow, Australia reports Q2 CPI figures. The small increase that is expected (1.5% year-over-year from 1.3%) will not stand in the way of expectations for lower rates.

US Trade Representative Lighthizer stepped up the pressure on Vietnam.
He warned that Vietnam to reduce its bilateral surplus with the US, which is growing in part as companies move production and/or shipping out of China. Lighthizer wants Vietnam to open its markets more to US goods and services. Much of the Trump Administration's regional trade efforts appear to be still playing catch-up after pulling out of the Trans-Pacific Partnership. Vietnam, like signatories, has reduced trade barriers, but US companies do not benefit...

Yesterday Mr Chandler also led with the pound:
Prospects of a No-Deal Brexit Weigh on Sterling