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On 06 August 2019 - US rebounds as China currency worry eases; Europe, Asia off

Anne D Picker

Anne D Picker - Econoday

Risk sentiment recovers as China limits yuan decline.

US markets

US stocks bounced back Tuesday after the biggest drop of the year Monday, as the People’s Bank of China signaled its desire to limit the decline in the yuan, though worries remained over the US-China trade war. 

The PBOC set its daily currency fixing below the key 7 level at 6.9683 per dollar, and announced sales of yuan debt securities as a way to tighten liquidity and bolster the currency. The central bank assured markets the yuan would not continue to drop, and that it would maintain currency market liquidity.  Previously, risk assets dropped as the US-China trade war appeared to enter a new, dangerous phase on Monday, with the yuan falling through 7, and China cutting imports of US agricultural goods.

The Dow industrials rose 1.2 percent, the S&P 500 rose 1.3 percent, and the NASDAQ was up 1.4 percent. 

Technology, communications services, and consumer discretionary sectors were the leaders as US shares recovered. Materials, especially chemicals, and energy shares lagged.

Among companies reporting, Novartis dropped 2.7 percent on news the Food and Drug Administration accused the pharma firm of manipulating its product testing. Becton Dickinson, a medical technology firm, rose 2.5 percent after beating on earnings and revenues. Pharma Zoetis rose 7.6 percent on strong sales of medicines for pets.

In economic news, St. Louis Fed President James Bullard, a noted dove on the Fed’s policy-making Federal Open Market Committee, downplayed a suggestion that the Fed might be ready to cut rates again to offset the impact of the trade war. “You are not in recession mode here,” he said, noting that the Fed cut rates recently and that is already helping the economy. In data, moderation in labor demand remained the theme of the US JOLTS report, as job openings edged 0.5 percent lower to 7.348 million in June from May's 7.384 million. Hires also eased, down 1.0 percent to 5.702 million from 5.760 million. Openings still remain far above hires, by 1.646 million, but openings are starting to show some wear and are down 0.6 percent from June last year.

These data reflect observations at 4:00 PM US ET:  Dated Brent spot crude was off 72 cents to US$59.09 while gold rose US$8.60 to US$1,485.10. The US dollar was little changed against most major currencies. The yield on the US Treasury 30-year bond yield fell 2 basis points to 2.24 percent while the yield on the 10-year note was unchanged 1.72 percent. 

European markets

European equities slipped Tuesday as markets continued to focus on the US-China trade dispute, but the selling pressure eased from Asian hours. The Europe-wide STOXX 600 fell 0.5 percent, the German DAX was off 0.8 percent, the French CAC eased 0.1 percent, and the UK FTSE 100 fell 0.7 percent.  

The risk-off tone most evident in the Asian morning faded after the People’s Bank of China signaled it wanted to limit weakness in its currency, the yuan. The PBOC fixed the yuan at a higher than expected 6.9683, and took steps to reduce market liquidity, which tends to drive the yuan higher. On Monday, risk assets were hit hard after the PBOC allowed the yuan to fall below 7 per dollar, and explicitly named the US trade stance in explaining the move.

On Tuesday, cyclical stocks, and shares with heavy exposure to Chinese trade, including basic resources, chemicals, oil and gas, insurance, technology, and banks, led the decliners within the Euro Stoxx 600. Outperformers included utilities, media, and personal and household goods.

Among notable companies exceeding expectations on quarterly results, Deutsche Post was up 2.3 percent, GEA Group, a German food company, gained 6 percent, and Meggitt, a UK engineering company, rose 2.9 percent. Norwegian Air fell 4.6 percent and Wacker Neuson, a German construction equipment company, fell 7.3 percent after negative earnings surprises.

In economic news, German manufacturing orders rebounded surprisingly strongly in June. Following a slightly smaller revised 2.0 percent monthly fall in May, new business was up fully 2.5 percent, its strongest performance since August 2017. Annual growth improved sharply from minus 8.5 percent to minus 3.7 percent.

Asia Pacific Markets

Asian markets extended losses Tuesday, following the lead set by Wall Street Monday, with the escalation in US-China trade tensions again the main focus of investor attention. Chinese authorities set the midpoint for the yuan at 6.9683 per dollar, slightly stronger than the key 7.00 level after Monday’s decision by the US Treasury to designate China as a currency manipulator. Further declines in commodity prices and concerns about the impact of the weaker Chinese currency weighed heavily on Australia’s All Ordinaries index, down 2.5 percent on the day, while the Shanghai Composite index closed 1.6 percent lower. The Nikkei and Topix indices dropped 0.7 percent and 0.4 percent respectively, while Hong Kong’s Hang Seng index fell 0.7 percent on the day.

The Reserve Bank of Australia policy meeting was the main highlight of the regional data calendar Tuesday. Officials left the main policy rate unchanged at a record-low of 1.00 percent, in line with the consensus forecast after cuts of 25 basis point rates at each of the previous two meetings. Although they still expect growth to pick up “gradually,” officials are now slightly more cautious about the inflation outlook, judging that it is “likely to take longer than earlier expected” for inflation to increase back into their target range of 2.0 percent to 3.0 percent. This suggests that that further rate cuts will be considered if incoming labor market data indicate that spare capacity in the economy remains relatively high.

Data published earlier Tuesday showed an increase in Australia’s trade surplus from a revised A$6.173 billion in May to a new record A$8.036 billion in June, well above the consensus forecast for a surplus of A$6.0 billion. Exports grew at a somewhat slower pace on the month, but this was outweighed by a sharp drop in imports. Japanese household spending data showed a fall in year-on-year growth from 4.0 percent in May to 2.7 percent in June, largely driven by weaker spending unhorsing and utilities, while New Zealand labor market data showed strong rebound in employment growth in the three months to June and a fall in the unemployment rate to 3.9 percent, its lowest level since 2008.

Looking forward

On Wednesday in Asia/Pacific, monetary policy announcements are due from the Reserve Bank of India and the Reserve Bank of New Zealand. From Europe, data reports on French merchandise trade, German industrial production, and UK Halifax housing price index are due. In North America, the Canadian Ivey purchasing managers report is scheduled. Chicago Fed President Charles Evans, a noted dove and FOMC voter, is scheduled to speak.

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