07-Feb-2020

1) Asia Open: The China tariff cut was the eureka moment
2) Dollar gains ahead of U.S. jobs data on improved risk appetite and rising U.S. yields
3) The RBA gives and takes

1) Asia Open: The China tariff cut was the eureka moment

It was another good day for global equities, which saw the S&P500 up 0.2% to notch a fresh record high. European stocks again saw similar gains. US 10-year treasury yields slipped 1bp to 1.64%. The eureka moment came on the back of China’s pledged tariff cuts, which has captured the imagination of analysts and bullish investors alike. And with indications that the coronavirus outbreak is plateauing outside of China, it too provided an open invitation to strap on risk as investors appear increasingly prepared to shrug off concerns about the viruses enduring impact on growth.

Provided the US reciprocates the Chinese tariff cut with one of its own, the trade calm will be viewed in a very trade-friendly light and well beyond the immediate fiscal benefits. The sweetener is a fantastic pacesetter for Phase 2 of the trade negotiations. Still, the frontrunning commitment is also very reassuring after the legacy of delays to Phase One while also eases some coronavirus growth concerns.

Beyond the usual pre NFP moves which typically sees traders jockeying for a position amid their regular Friday housekeeping duties

While the outbreak appears to be stabilizing outside Hubei Province, but the situation in Wuhan and Hubei may still be challenging, and the disruption to China’s economy will likely continue in the short term. This may give cause for pause or at minimum investors coming up for air as the street feels a wee bit long after aggressively front running both the reflation and Wuhan transitory trade this week.

And the possible equity market correction is supporting the gold market diversification hedge this morning.

With the thought that global central banks are more than willing to cover the markets back, the extent to which investors look through” weak China data in the coming weeks will help determine whether this week’s risk rally has the legs to run.

Remember, its an election year, and a timely roll back in a chunk of US tariffs could trigger a move in the S&P500 to 3500 all but assuring a Trump victory.

Gold suffered quite a capitulation this week, yet demand endures.

• The gold seasonality effect is ebbing.
• The Wuhan shock and awe fear are receding.
• US exceptionalism inflows are punching both SPX and USD tickets higher.
• US 10-year yields have begun to move off their post-coronavirus lows, and less easing is being priced in, yet gold endures.

Why is gold so strong? Wednesday’s strong ADP payroll result has put the USD back atop the king of the hill, and the US currency looks firm. Equities have been surging, with new highs hit in the US and European markets, and bond yields have been nudging higher. All this implies lower gold prices. Not to mention weak EM physical demand, where the bulk of the world’s gold bullion is purchased. Yet gold still remains firm.

2) Dollar gains ahead of U.S. jobs data on improved risk appetite and rising U.S. yields

The greenback continued its recent ascent and gained across the board on Thursday as China reduced its tariffs on some U.S. imports by halve to help boost global economy from coronavirus outbreak together with rising U.S. Treasury yields and stocks boosted risk appetite.

Reuters reported China said on Thursday it will halve tariffs on some goods imported from the United States starting from 1:01 p.m. local time (0501 GMT) on Feb. 14 and reiterated it hopes it can work with Washington to eventually scrap all tariffs in bilateral trade.    China’s finance ministry said in a statement that tariffs on some goods will be cut to 5% from 10% previously, while tariffs on some goods will be lowered to 2.5% from 5% previously.    China hopes it and the United States can abide by the trade deal they agreed to and implement it well in order to boost market confidence, push bilateral trade development and aid global economic growth, the ministry added.

In other news, Reuters reported Dallas Federal Reserve Bank President Robert Kaplan said on Thursday that he expects “solid” economic growth this year, as easing trade tensions have lessened downward pressure on global growth, manufacturing and business investment.     Kaplan worried last year that trade uncertainty would weigh on consumer spending more than it turned out to have done, he told a University of Texas at Austin’s McCombs School of Business group. But with the U.S. inking an initial trade deal with China, “we think we are going to have a solid year of growth in 2020” of about 2.25%, he said, though he added his outlook would be firmer were it not for the “wildcard” of the new coronavirus in China and the situation at Boeing, he said.

Versus the Japanese yen, although dollar gained from 109.73 in Australia to a 2-week high at 109.98 in Asia after China said it will halve tariffs on imported goods from the United States, price retreated to 109.79 in Europe on profit-taking but later climbed to session highs of 109.99 in New York again on rising U.S. Treasury yields and U.S. stocks.

The single currency moved narrowly in Asia following this week’s decline and despite a brief recovery to 1.1013 in European morning, the pair later tumbled to a near 4-month low at 1.0965 in New York on usd’s strength before recovering.

Reuters reported German industrial orders unexpectedly plunged in December on weaker demand from other euro zone countries, data showed on Thursday, suggesting that a manufacturing slump will continue to hamper overall growth in Europe’s largest economy.    Contracts for ‘Made in Germany’ goods fell by 2.1% from the previous month, the Statistics Office said. That was the biggest drop since February and compared with the Reuters consensus forecast for a 0.6% rise.     The reading for November was revised up to a drop of 0.8% from a previously reported fall of 1.3%.

The British pound met renewed selling at 1.3002 in Australia and fell to 1.2972 in Asia. Despite rebounding to 1.2998, cable then dropped to 1.2949, then to a 5-week low at 1.2921 in New York on continued market concerns over trade deal talks between Britain and the European Union as well as usd’s strength.

Reuters reported Britain is seeking far-reaching reductions in tariffs in a trade deal with the United States, trade minister Liz Truss said on Thursday, setting out the broad aims of her post-Brexit push to secure new free trade agreements.     “The FTA (Free Trade Agreement) will secure comprehensive, far-reaching and mutually beneficial tariff reductions – taking into account sensitive UK products – which will increase access to the U.S. market for UK businesses, and lower prices and increase choice for UK consumers,” Truss said in a written statement to parliament.

3) The RBA gives and takes

The RBA giveth the RBA taketh after Governor Lowe says a lower AUD would be helpful, which comes on the heels of Governor Lowe earlier in the week sounding like he’s at the helm of a central bank that was is in no hurry to cut rates. In one of the quicker RBA flip flops, maybe he is in a rush after all as a reality check sets in regarding adverse domestic knock-on effects from the recent coronavirus triggered commodity rout.

Gold moved to $1569 given the moderately  dovish  nod in the statement  was factoring in China coronavirus risk, and AUD capitulated to.6720 and could slide further with USDCNH moving higher

For Asia FX, the question is, what beats hollow: only a modestly higher fix for USDCNY, or acute equity market weakness? Who knows little makes sense in the market these days as CNH, KRW, and TWD are on moderately underperforming so far, they should be weaker. I think things will get worse before better with Feb 21 The Korea 20-day trade data circled on my calendar.

I am catching up on the Fed wire from overnight. Fed Vice Chair for Supervision Quarles struck a cautiously optimistic tone in remarks on Thursday –: “I remain optimistic about the outlook, but I am also highly aware that some notable risks still threaten growth, both overseas and at home. The remarks are very much in line with recent Chair Powell’s recently-espoused views, which is USD-neutral and mildly bullish for Gold.

On the broader scheme of things, tonight’s NFP report shouldn’t matter, but it always matters in warped market logic kind of way.  And downside surprises matter a lot more than upside surprises especially if the print is a downside outlier.

The higher ADP was written off due to seasonally warm weather then so will a +200 K NFP. Whereas a number towards +150 K will be viewed as a Goldilocks number, either way, there will be no material impact on risk.

I’m in the monthly FX market pool at  +179 as I see no signal from the ADP number. The modest signal of potential strength is offset by the tick lower in the Services ISM employment index and the persistent bounce in continuing claims.