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Mood optimistic despite softer yuan

Mood optimistic despite softer yuan

European and US stock markets saw major volatility last week as trade tensions between the US and China caused the bulk of the turmoil. 

The People’s Bank of China fixed the yuan above the 7 mark against the US dollar in a bid to cushion the blow of the tariffs on imports. It hasn’t been a major devaluation, and traders got used to the idea that a fixing above the 7 mark, could become the new normal.

Overnight, stocks in China traded a little higher after the Chinese central bank set the yuan fixing at 7.0211, which was a slight devaluation on Friday’s rate, but it was stronger than the 7.0331 that traders were expecting. Trading in Asia was subdued as markets in Japan, India and Singapore were closed for public holidays.  

Goldman Sachs lowered its fourth-quarter growth forecast for the US to 1.8% from 2%, and the bank no longer expects a trade deal between the US and China before the US presidential election in 2020. The Wall Street titan cited the trade spat as the reason for the less optimistic outlook.   

On Friday, President Trump set US-China relations back even further by claiming that he ‘won’t do business with Huawei’ and he suggested that the planned trade meeting for September, might not take place. Previously, the US promised to loosen the restrictions on the Chinese tech giant, and he appears to have done a U-turn. Technology, national security and intellectual property rights are an important component of the trade negotiations, so this is likely to hold up the prospect of a deal.

Political uncertainty erupted in Italy at the back end of last week as tensions between the Lega Party, and the Five Star Movement came to a head. Matteo Salvini, of the Lega Party filed a vote of no confidence in Giuseppe Conte, the Prime Minister. It would appear that the coalition has come to an end and that the nation is heading for a general election. The news put pressure on Italian government bond yields, and Italian banks felt the pain too, given the massive level of exposure they have to the debt market.       

In the second-quarter, the UK economy grew by 0.2% on a quarter-on quarter basis, and it was the first negative quarter since 2012. The update wasn’t a major shock seeing as the services sector, manufacturing industry, and construction business haven’t been in great shape, and some of the consumer spending updates were disappointing. The news drove the pound down versus the US dollar and the euro.     

Gold reached a fresh six year high last week, and it exceeded the psychologically important $1,500 mark. The sharp sell-offs in stocks helped the metal push higher, and the largely softer US dollar was a factor too. Core US PPI dropped to 2.1% from 2.3%, and if prices are cooling at the factory level, it might mean softer inflation in the medium-term. The update added weight to the argument that the Fed should cut rates later this year, and that weighed on the US dollar.      

Oil bounced on Friday on the back of talk that OPEC will look to cut production even further in a bid to offset the recent declines in the energy market – which suffered greatly last week on account of trade tensions and rising US oil and gasoline stockpiles. The major oil producers like Saudi Arabia would like to put a floor under the oil market, but getting other producers onside has been tricky in the past. The Baker Hughes report on Friday evening showed the number of active rigs dropped by 6 to 764, and it was the sixth week in a row the number of active rigs dropped as some of the smaller oil companies are curtailing spending on new drilling.  

It would appear the cooling of the world economy has taken its toll on Canada, as the latest jobs data showed the unemployment rate edged up to 5.7% from 5.5%. The employment change showed a drop of 24,200, and that was largely split between full-time and part-time jobs. In light of the Fed’s rate cute last month, global trade tensions, and weaker oil prices in recent months, the Bank of Canada might move towards a more dovish position. Last week we saw a number of central banks cut their rates, and the BoC might pivot in a similar direction.  

EUR/USD – remains in the wider down trend of 2019, and if the bearish moves continues it might target the 1.1000 area. A rally might encounter resistance at the 1.1300 region – the 200-day moving average.

GBP/USD – has been driving lower since mid-March, and if the bearish move continues it might target the 1.2000 region. The 1.2200 area might act as resistance.

EUR/GBP – has rallied for over two months, and if it holds above 0.9200, it might bring 0.9410 into play. A move to the downside might put 0.9089 on the radar.

USD/JPY – has been in a down trend since late April, and if the bearish move continues it might target the 104.63 region. Resistance might be found at the 50-day moving average at 107.90.



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