Capital Markets: "End of Tariff Truce Trumps Jobs"

From Marc to Market:

Overview: The market was finding its sea legs after being hit with wave and counter-wave following the FOMC decision, and more importantly, Powell's attempt to give insight into the Fed's thinking. Trump's tweet than signaled an end to the tariff truce with a 10% levy on the $300 bln of imports from China that have not been subject to action previously. Investors understood this to mean a greater slowdown and pushed yields and equities sharply lower. The Asia Pacific and European markets have responded in kind. Japanese and Hong Kong markets were off around 2% to lead the region lower. The Dow Jones Stoxx 600 in Europe fell by about 2% in the morning turnover. US 10-year yields fell to three-year lows yesterday and off another further five basis points to 1.84%. Core European bond yields are off three-four basis points, which puts the 10-year German Bund yield at nearly minus 50 bp. Other core bond yields are also setting new record lows. The US dollar is mixed, with the dollar-bloc and Scandis weaker, while the yen and Swiss franc lead the gainers. Gold is seeing yesterday's surge retrace a bit, while WTI for September delivery is firmer after a nearly 8% drop yesterday. Copper is off 2% and is seen as another expression of concerns about global growth.


Asia Pacific
Chinese officials threatened some unspecified retaliation for ending the tariff truce. Apparently, Trump rejected advice to notify China before tweeting the tariff increase, while his economic and trade advisers were still within in the Oval Office, according to reports. The Chinese yuan sold off in both its on and offshore variants in response to the end of the tariff truce. The PBOC did not have to sell the yuan, the market did it for them. Economists estimate that the new tariffs will shave something on the magnitude of 0.4%-0.5% off China's GDP. The PBOC seemed to try to moderate the decline, but the dollar still rose and brought the important 7.0 level back into view. The interest rate differentials put the nine- and 12-month forward rares above CNH7.0. The dollar's 12-month forward rate is also above CNY7.0.

Japan made good on its threat to remove South Korea from its privileged export list as of August 24. This will exacerbate the challenge to a broad swath of South Korean industry, which will need licenses for their exports to Japan. South Korea has a similar list and is threatening to remove Japan toward the end of the month. The US plea to a "standstill" arrangement appears to have fallen on deaf ears. The timing is particularly poor as both economies appear challenged by the slowdown in China, disruption of US-Chinese trade, and North Korea's third missile test this week.

Consistent with a string of better than expected economic news this week, Australia reported a 0.4% rise in June retail sales after a 0.1% gain in May. Earlier this week, Australia reported firmer than expected Q2 CPI (0.6% quarter-over-quarter and 1.6% year-over-year) and July manufacturing PMI. The Reserve Bank of Australia meets next week and after cutting rates in June and July is expected to pause before cutting rates again later this year. The Reserve Bank of New Zealand meets next week as well, and it is expected to deliver another 25 bp rate cut.

The dollar first broke above important resistance at JPY109 yesterday before reversing low and dropping to about JPY107.25. This bearish large outside down day saw follow-through buying that pushed the greenback to nearly JPY106.80 in the Europea morning. This essentially matches the low from June, which was the lowest the dollar has been since the flash crash in January that saw it briefly dip below JPY105. As is often the case, old support now becomes resistance, and the JPY107-JPY107.25 may be challenging to surmount with nearly $1.6 bln in options struck in the range that expire today. The Australian dollar's losing streak is threatening to extend into the 11th consecutive session today, and during this streak, it has consistently taken out the previous day's low. It saw nearly $0.6785 today and had begun the streak nearly three cents highs. It is at its lowest level since the flash crash that Bloomberg reports was near $0.6740. The dollar rose to CNY6.95 and almost CNH6.98. Note that President Trump's reference to the unrest in Hong Kong as being a riot, which is Beijing's language, may be seen as a signal of US recognition that it is an internal issue for which some Chinese officials have accused the US of fomenting.

Europe
The Tories working majority in the House of Commons was halved to a single seat as the Lib Dems won the byelection in Wales. The Tory candidate was the incumbent but had been recalled for being convicted of falsifying expense claims. It the was the first test of the new Prime Minister, but given the flawed candidacy, it might not have been an accurate indication. The Conservative vote was split with the Farage's Brexit Party, and if this had not been the case, the Tories would have held on to the seat. The dismal showing for Labour, which came in fourth, maybe one of the saving graces for both the Tories and may help explain the broader resurgence of the Lib-Dems.

There is some rare good news to report on US-Europe trade. Later today, the US is likely to announce a "beef deal" that will boost its exports to the EU. This is an example of managed trade. In broad details, the US share of Europe's quota on imports of hormone-free beef was made possible by concessions from Australia, Argentina, and Uruguay to take smaller shares earlier this year. Reports suggest that over time, US farmers can secure 80% (or 35k metric tons) of Europe's quota, but may begin with half as much. The fact that the US wants to "celebrate" this agreement is sending a different signal from the confrontational approach seen recently in reaction to France's proposed digital tax.

S&P reviews Turkey's credit rating today....

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