Market News | Amana Capital
Special Story: Markets Tremble on Growing Fears over Trade War Between Two World's Biggest Economies
The US revealed plans to impose tariffs on Chinese imports under Section 301 trade action. On the other hand, to counter U.S. tariffs, China announced plans for tariffs on US pork, steel pipes, fruit and wine imports. In the short run, fears of escalation into a serious trade war may extend bearish price action.
President Donald Trump is now expected to instruct the U.S. Trade Office to impose higher tariffs on Chinese goods, initially an amount of USD50 billion in Chinese exports, which he is very well likely to raise to USD60 billion. The assigned department would publish a signed memorandum of the targeted list, many of which will include those China has deliberately tried to acquire via forceful means from U.S. companies.
In lieu of this, the Treasury Department will be allotted 60-days’ time period for the proposal of actions beyond CFIUS and the, they will then, head against China’s forceful actions’ dispute settlement. Trump hopes to witness other countries in the litigation process, targeted at rectifying their attitude
On the other hand, China has not remained silent on the US’ allegation against them and the country’s WTO envoy has said that they will challenge the U.S. against the ignorance of rules containing new tariff announcements. China further claimed that the US’ latest steel and aluminum tariffs are inconsistent with WTO’s legal benchmark for national security.
While China expects unilateralism to not last for long, it shall also respond to allegations of currency manipulation by any. But the truth is, the country is a little weak on the tariff front, with claims of compulsive means for trade requirements, along with weaker protection for intellectual capital. However, in whichever of this articulates, it would have a minimal impact on both the countries as investors have already started to be defensive.
Following all this, the safe-haven yen surged to a 16-month high vs the greenback early Friday as investors braced for safer assets like gold and the Japanese yen on worries of a trade war. The U.S. dollar fell to as low as 104.635 yen the lowest level since November 2016, as the Japanese currency moved up. Meanwhile, the dollar index, which measures the strength of the greenback against a basket of six major currencies last traded at 89.62 on the New York Stock Exchange as of 12:00GMT, recovering from a one-month low of 89.396 reached on Thursday.
Special Story: PBoC Bides Its Time on Rates, but Macroprudential Tightening Is On
The People’s Bank of China (PBoC) adopted a 5 basis points hike in its open-market operations (OMO) rate on March 22, following the Federal Reserve’s footprints to deliver a 25 bps rate hike, in line with market anticipations. Such is the first decision by the PBoC under its newly appointed Governor Yi Gang. The central bank said that the move is aimed at reducing the gap between OMO rates and the market interest rates and shaping the reasonable interest rate expectations, besides, stabilizing the macro debt ratio.
The hike matched the response to the previous Fed rate increase, in December, but was less small than the 10 bps rate rises in January and March last year. The PBoC's appetite for rate hikes clearly is waning. But the question is whether reticence to hike is generated by concerns over the strength of the RMB or by an unwillingness to tighten the screws further on domestic leverage. Chinese monetary policy could go two ways from here.
Policymakers could go soft on systemic tightening through interest rates. The latest move barely was a hike at all and likely will be offset by open market operations and RRR cuts, with policymakers highlighting targeted reductions at the National Party Congress. The PBoC offered the gap between money market rates and its policy rate as a reason for yesterday's mini-hike. But it noted that the gap had closed recently.
On the face of it, this could be taken as an indication that the PBoC will be able just to continue with 5bp hikes immediately after each Fed moves, offset with looser liquidity provision through open market operations and RRR cuts. Our view, though, is that the risk to Chinese policy rates is to the upside. Market focus will soon return to Fed surprises, as more hikes are priced in. The fourth dot for this year did not emerge at this week's Fed meeting, but we expect it to appear in June. This would give Chinese policymakers room to come good on the tough rhetoric on rates at the National Party Congress.
Former PBoC Governor Zhou Xiaochuan stated that mortgage rates are not yet high, while Guo Shuqing—then head of the banking regulator and now head of the merged banking and insurance regulators—said that the household debt ratio was too high and should be lowered. Moreover, the gap between policy and money market rates is set to widen again. Capital outflows are set to pick up, partly as a result of trepidation over the centralization of power around President Xi Jinping, but also because of the narrowing interest rate differential.
The PBoC will be happy to see a lower currency, but it will always lean against outflows to a certain degree. This will tighten domestic liquidity conditions and push up money market rates. The PBoC can hold down interbank rates to an extent, through open market operations. But it doesn't have complete control over interbank rates, which sometimes breach the ceiling of the rate corridor.
While the risks to hikes are to the upside, the bar is not set very high, at 5bp. Though the PBoC's statement emphasized that the rate hike would play some role in curtailing shadow and conventional credit growth, the authorities clearly are relying rather more on macro-prudential policy than on rates. In the past, we would have dismissed this as doomed to fail. But the new regulatory architecture is more joined up, reducing regulatory arbitrage. What's more, the heads of new bodies will be eager to flex the muscles of the revamped system.
Meanwhile, we foresee that the PBoC might raise the OMO rates by a total 15bps for the rest of this year, somewhere around the time of the US Fed rate hikes.
The United States’ new home sales for the month of February came in at 618K, lower than the market expectations of 623K in the Reuters survey, down from the reading of 593K, revised higher to 622K in the month of January.
A higher than expected reading should be taken as positive for the United States dollar, while a weaker than expected reading should be taken as bearish for the currency. Meanwhile, as of 05:05GMT, GBP/USD traded 0.30 percent higher at 1.2339.
This is just a quick post, the story is being edited and updated…
Next week, in the United States, 3rd release of Q4 GDP, core-PCE prices and Conference Board Consumer Confidence data will be key releases. Also, several FOMC voters will be speaking next week, including Quarles, Dudley, Mester, and Bostic, which will be closely watched.
United States: Q4 GDP (3rd release) is likely to be revised up to 2.8% from 2.5%. Inventory investment should account for most of the upward revision. The market expects core PCE prices to rise 0.2% m/m in February. A print in line with our expectations would cause the y/y reading to barely round up to 1.6% from 1.5%. We expect Conference Board Consumer Confidence to increase slightly in March to 131.0 versus 130.8 in February. Several FOMC voters will be speaking next week, including Quarles, Dudley, Mester, and Bostic.
Eurozone: Market expects M3 money supply to grow 4.8% y/y in February and show continued credit growth to households and corporates. Economic confidence is likely to fall to 113.0 in March from 114.1 in February, in line with the rollover in other soft indicators. German HICP inflation is likely to rise sharply to 1.7% y/y in March from 1.2% y/y in February due to base effects related to the timing of Easter. Retail sales should increase 0.3% m/m in February and we expect consumer confidence to decrease slightly to 10.7 in April.
United Kingdom: Economists forecast mortgage approvals to fall to 67.0K in February and the final estimate of Q4 GDP to be unrevised at 0.4% q/q.
Central Banks: There are no central bank meetings in developed markets next week. In emerging markets, we expect the central bank of South Africa to cut the main policy rate by 25 basis points to 6.50%, in line with consensus expectations. The central banks of Hungary and Thailand should be on hold next week, as expected. The consensus expects the central bank of Czech Republic to keep the main policy rate unchanged.
Cryptocurrency Daily Update: Bitcoin, Ethereum, Ripple, Bitcoin Cash and Litecoin
- Crypto prices continue downfall after IRS imposes capital gains tax, Japan’s FSA warns Binance on illegal operations
- All major cryptocurrencies suffer following subdued demand
- Ethereum, Ripple, Bitcoin Cash and Litecoin trade nearly 3-5% lower
BTC/USD (Bitcoin): Bitcoin prices remained on the downside during European session Friday, taking cues from reports that the Internal Revenue Service (IRS) has declared that any items purchased using a digital currency would be liable to capital gains tax, in addition to the purchase of other digital currencies as well. Also, Japan’s Financial Services Agency (FSA) has plans to issue a warning against Binance for carrying out operations in the country without the license to do so. At 10:50GMT, it was trading 3.42% lower at $8,483.50 on the Bitstamp exchange.
Technical Analysis Overview: Bitcoin prices are trading near to the immediate support level at 8,312.16 and is eyeing the next support at 8,115.92 and 7,793.00 beyond that. However, if the market turns bullish, then R1 could be seen at 8,771.32 and the next resistance level at 9,187.52 (trend-defining level).
ETH/USD (Ethereum): The world’s second-largest cryptocurrency in terms of market cap, Ethereum, followed the footsteps of its wider peer, slumping on the IRS’ declaration of capital gains tax coupled with Japan’s warning to Binance for operating in the country without a license. At 10:55GMT, it was trading 5.15% lower at $519.74.
Technical Analysis Overview: Ethereum is also on a downward movement, trading close to the immediate support level at 509.94; the immediate resistance level is seen at 543.15 and beyond that, the trend-defining level of 591.58 will act as the next resistance level. However, if market sentiment remains bearish, the next support is eyed at 452.08.
XRP/USD (Ripple): The third most popular cryptocurrency, Ripple followed Bitcoin, slumping along with its counterparts, as investors braced for the negative sentiment in the market, after Japan’s FSA has issued a warning to Binance against its illegal operations in the country. At 11:10GMT, it was trading 4.47% lower at $0.62524.
Technical Analysis Overview: Similar to Bitcoin, Ripple is also falling, with eyes on the immediate support at 0.62387 and 0.58266 beyond that. If the trend reverses, the immediate resistance could be seen at 0.72556 (trend-defining level). If the immediate resistance level is breached, 0.75128 would act as the next resistance and 0.79269 after that.
BCH/USD (Bitcoin Cash): The bitcoin cash also went with the flow, suffering along with its counterparts, following a downside movement in all its peers, tracking lacklustre demand as investors remain worried on Japan’s FSA’s warning to Binance to discontinue operations without a license. At 11:10GMT, it was trading nearly 3% lower at $983.83.
Technical Analysis Overview: Bitcoin Cash is now trading the immediate support level at 952.17 and the immediate resistance at 1,019.16. The next support levels are possibly seen at 910.12 and 843.63 respectively if market movement remains bearish. However, if upside momentum re-arrives, the next resistance level is seen at 1,083.22 (trend-defining level).
LTC/USD (Litecoin): Flowing with the current, Litecoin, the fifth best digital currency, by market cap, also fell as investors turned bearish on the IRS imposing a capital gains tax on digital currency purchases and Japan issuing a warning to Binance on its illegal and unapproved operations in the country. At 11:15GMT, it was trading 3.40% lower at $159.81.
Technical Analysis Overview: Litecoin is trading below its trend-defining level at 176.37, down nearly 4% and is moving closer to its immediate support at 155.74. If investors turn further bearish, the next support could be targeted at 151.30, followed by 137.32. However, in an unprecedented bullish movement, the possible resistance levels are seen at 165.39 and the trend-defining level beyond that.
The Nikkei manufacturing PMI dipped to a still strong 53.2 in March, from 54.1 in February. Demand likely will falter in coming months as CPI inflation has eroded domestic households' purchasing power. In addition, exports face near-term headwinds due to Chinese demand coming back online after production curbs in Q4.
But developed market demand should remain strong overall this year. If the yen appreciates past 100 to the dollar, then Japanese firms will start to feel the pinch. But for now, the yen remains at competitive levels on a relative unit labour cost basis, and appreciation bias should wane around the middle of the year. The focus for now remains on the beginnings of BoJ normalisation, or at least on their not falling too far behind the global hiking cycle. Previously, markets appeared to believe, somewhat unreasonably, that the BoJ would just rigidly stick to its targets as they were set in September 2016.
But global markets look dramatically different now and the ongoing Fed hiking cycle will continue the divergence between Japan and the rest of the world. A fourth Fed rate hike still has to be priced into markets for this year. This will give the BoJ room to hike its 10-year yield target by 20bp in June, validating the strength of the yen, but without sending it into unacceptable appreciation.