· The dollar edged lower for a second consecutive day on Wednesday on growing expectations of a U.S. rate cut next week while high-yielding currencies suffered due to ongoing trade tensions.
Against a basket of its rivals, the dollar edged 0.1 percent lower to 96.64 and just above a 2-1/2 month low of 96.46 hit last week.
· “The prospect of an unending trade dispute between the world’s two largest economies is a nightmare scenario and, despite their respective government officials’ comments, both the US and China are seeing a steady deceleration in their domestic growth,” said Konstantinos Anthis, Dubai-based head of research at ADSS.
· Those concerns have also undermined appetite for risky currencies with the Australian dollar weakening 0.3% versus the Swiss franc and the perceived safe-haven Japanese yen rising 0.2% against the dollar.
· A Fed watch tool by CME assigns a 18% probability of a U.S. rate cut next week and a 68% probability of a cut in July.
· Rising rate cut bets have also been helped by easing inflation pressures with underlying price pressures remaining muted. Core CPI inflation is expected to print at 1.9% in May compared to 2% in April.
“We do not expect today’s CPI report to challenge the Fed’s view that inflation is currently ‘subdued’,” MUFG strategists said in a daily note.
· The euro was broadly steady at $1.1360 and in close reach of a three-month peak of $1.1348 scaled on Friday.
· EUR/USD is consolidating above 1.13 ahead of Draghi’s speech and key US data releases. The gains in the spot, however, will likely be short-lived, if the US reports a better-than-expected consumer price inflation for May at 12:30 GMT today.
The shared currency confirmed a technical breakout with a rise to 1.1348 on Friday. So far, however, a bullish follow-through has remained elusive with the upside capped near 1.1340.
· A phrase often used by American market commentators over the years is “don’t kill the goose that lays the golden eggs” and while no one has slaughtered global markets yet, feathers have been sharply plucked.
If our bird is the markets, then the trade war is the latest cause of stress and not everyone believes the Federal Reserve can prescribe an antidote this time.
Hans Redeker, Global Head of FX Strategy at Morgan Stanley said the market was wrong to buy stocks last week after Federal Reserve Chair Jerome Powell hinted at a response to any fallout from trade. Redeker said investors need to watch the warning signs.
One red flag, waving for weeks, is the inverted yield curve. Redeker said many people are simply putting it down to the U.S. repatriating money but ignoring its knock-on effect. Redeker said people should question how U.S. banks might act in future if they suffer limited profitability thanks to low interest rates.
· The European Central Bank is ready to cut interest rates and embark on a fresh round of bond purchases this autumn, a move that that ECB hopes will fend off fears of economic uncertainty and a global economic slowdown.
The bank’s president, Mario Draghi, made clear that all measures available to the ECB will be used as the export-driven European economy is experiencing a severe slowdown due to the German economy – the fourth-largest in the world – posting dismal figures in recent months, a brewing conflict between Brussels and Italy over the latter’s budgetary policy, and the threat of a disorderly Brexit.
Draghi explicitly referred to the ECB’s intention to go beyond the €2.6 trillion bond-buying programme that ended in December 2018 as a way to boost business confidence, He also mentioned, however, the need for government action in the form of fiscal expansion for more financially stable members of the Eurozone.
The ECB does not expect deflation or recession in 2019, but Draghi made clear that interest rates are likely to be cut.
· The European Central Bank is willing to cut interest rates and resume bond purchases if necessary, two policy makers signaled on Tuesday.
Bank of Finland Governor Olli Rehn and his Slovakian counterpart Peter Kazimir both gave press conferences at which they said the ECB is ready to combat any further slowdown that threatens to prevent them restoring price stability. Market-based inflation expectations for the euro zone tumbled to record lows last week, despite the central bank extending its pledge to keep rates at record lows.
“The Governing Council is determined to act and stands ready to adjust all of its instruments, as appropriate,” Rehn, who is a contender to succeed ECB President Mario Draghi in November, said in Helsinki. He also said the institution’s economic analysis at its policy meeting last week showed the external risks to the euro area won’t fade in the near term.
· Mr Draghi has transformed the ECB from a descendant of the old Bundesbank into a modern central bank, and from a central bank thinking for a small open economy to one appropriate to a diverse and continental-scale economy. The crucial question then is whether his successor will possess the intellect, flexibility and courage needed to respond to whatever happens. Some of what might happen could indeed be perilous: the world is highly unstable; eurozone inflation is very low; and monetary policy is close to its normal limits. Even today’s slowdown demands action. A worse slowdown might demand heroic action. The next president might have to pull new rabbits out of the hat.
It is doubtful whether any of the candidates meet these high standards. The riskiest by far would be Jens Weidmann, Bundesbank president. Mr Weidmann has opposed many of Mr Draghi’s innovations, including resort to QE. He even testified against OMT before the German constitutional court. The ECB council might be able to force him to do the right thing, in a crisis. But that would be a mad way to run the central bank.
Yet there is an alternative possibility. The one thing that could reconcile Germans to how the ECB must behave is recognition of that reality by a German president. He would have to tell his compatriots some home truths. Most obviously, that inflation has been lower under the ECB than under the Bundesbank. Then he would have to point out that a world of low inflation and generally very low interest rates is not one in which their savings have much economic value.
Finally, such a German president should add that the German private sector has a surplus of savings over investment comparable in scale to that of Japan. It is possible for Germany to have full employment and a budget surplus because Germany has been running a huge current account surplus. That would have been far more difficult if Germany had not been inside the eurozone: a floating Deutsche Mark would surely have appreciated hugely, Germany would now be in deflation, much more of its export-oriented production would have moved out and its monetary policy might be like Japan’s.
· With under three weeks to go before proposed talks between the Chinese and U.S. leaders, expectations for progress toward ending the trade war are low and sources say there has been little preparation for a meeting even as the health of the world economy is at stake.
President Donald Trump says he wants to meet with President Xi Jinping at the June 28-29 G20 summit in Osaka, Japan and will decide on whether to extend tariffs to almost all Chinese imports after that.
Though neither side has confirmed that a meeting will take place, investors worldwide who have seen over a trillion dollars wiped from global markets in the past month by the trade fight will be closely watching any interaction between the two men.
Sources familiar with the matter, including officials and diplomats in Washington and Beijing, say there has been a lack of preparatory work for the meeting, due largely to the increasing acrimony. The trade negotiating teams have not met since talks ended in stalemate on May 10.
· China’s lending to other countries, often shrouded in secrecy, is thought to be higher than the amounts that are officially tracked, resulting in much “hidden debt.” That growing debt problem could spark a worse-than-expected slowdown, among other problems, experts warn.
The lack of transparency would also affect investors who are considering bonds issued by those countries, or organizations such as the International Monetary Fund (IMF) which are helping those countries with their debts, according to Carmen Reinhart, a professor at the Kennedy School of Government at Harvard University.
“In short, debt transparency is essential for economic development. So when debts are ‘hidden,’ that’s a problem for everyone — not just the World Bank or the IMF. It’s especially a problem for the citizens of countries whose hidden debt is suddenly discovered, since uncertainty can lead to higher funding costs or, in the worst case, cut them off from funding,” the World Bank statement said.
· Tensions were high in Hong Kong on Wednesday with large crowds of protesters gathering around the local legislature as lawmakers postponed debate on proposed legal changes condemned by hundreds of thousands in the city. Police, meanwhile, threatened to use force against the demonstrators.
The protests, which kicked off over the weekend, were aimed at stopping a government plan to allow extraditions to mainland China. The heart of the issue, demonstrators say, is the city’s ceding its autonomy to Beijing.
· Chinese tech giant Huawei has scrapped the launch of new laptop as a result of being effectively barred from doing business with American suppliers.
It’s the first product launch the company has cancelled as a result of being put on a blacklist restricting its access to U.S. technology.
Richard Yu, CEO of Huawei’s consumer division, told CNBC that the firm had formally planned to launch a new product in its Matebook series without giving a date, but it had been indefinitely put on hold.
· The U.S. will maintain its oil production — or even ramp it up higher — despite low energy prices and slowing economic growth, Deputy Energy Secretary Dan Brouillette said Wednesday.
Shale producers in the U.S. will continue to produce a record 12 million barrels a day throughout next year, he said, citing projections from the Energy Information Administration. They may even go up to as high as 13 million barrels, he added.
“U.S. production numbers are going to continue for quite some time,” Brouillette told CNBC.
· Oil prices fell more than 1% on Wednesday, weighed down by a weaker oil demand outlook and a rise in U.S. crude inventories despite growing expectations of ongoing OPEC-led supply cuts.
Brent crude futures, the international benchmark for oil prices, were down 87 cents, or 1.4%, at $61.42 a barrel by 0231 GMT.
U.S. West Texas Intermediate (WTI) crude futures were down 85 cents, or 1.6%, at $52.41 per barrel.
Reference: Reuters, CNBC, FX Street, Financial Time, Bloomberg