26th August 2019 

·        A plethora of US-China comments thus far has resulted in choppy risk sentiment, overall Trump has been constructive though China remains negative

·        US President Trump stated that the sides held talks over the weekend though, China denied all knowledge of this and Trump added that anything is possible in the context of delaying planned tariffs

·        European bourses are firmer and both WTI and Brent remain supported on the more positive comments from US President trump thus far, DXY is stronger and fixed lacks clear direction thus far

·        Looking ahead, highlights include US Durable Goods and UK Summer Bank Holiday

US-CHINA TRADE

* Weekend

US President Trump announced to raise tariffs on China on Friday by another 5ppts in which the tariffs on USD 250bln of goods from China will be increased to 30% from 25% on October 1st, while the planned 10% tariffs on the remaining USD 300bln of goods from China which are due from September 1st will be taxed at 15%. (Twitter)

US President Trump suggested that he has the absolute right to order US companies out of China under the 1977 International Emergency Economic Powers Act but added we'll see how it goes. (Newswires/ABC)

China Vice Premier Liu He said China is willing to resolves trade dispute with US through calm negotiations and resolutely opposes escalation of trade war which is not beneficial for both sides. (Newswires)

China Global Times Editor stated that China is seriously making preparations for a scenario in which China-US trade relations further deteriorate..(Twitter)

* Monday

US President Trump says China called US trade negotiators last night and want to return to the negotiation table, adding that Chinese President Xi is a great leader. There will be a further statement on China. We will start to negotiate shortly, believes we will make a deal; China does not want to lose its supply chains.

US President Trump, when asked if he could delay planned tariffs on China, says anything is possible, adds that we are in a much better position now than at any time in trade negotiations. (Newswires)

China's Foreign Ministry say they resolutely oppose the US's new tariffs, and China will take further steps to protect their interests if the US enacts new tariffs; Not aware of a US-China weekend phone call. (Newswires)

China Global Times Editor says top Chinese and US negotiators have not held talks in the past few days, but the two sides have been keeping contact at a technical level; adds China has not changed position, will not cave to US pressure. (Newswires)

ASIA-PAC

Asian equity markets tracked last Friday’s hefty losses on Wall Street and the continued weakness in US index futures at the reopen due to the escalation in the US-China trade war. ASX 200 (-1.2%) was led lower by underperformance in energy after the recent slump in oil and as the tech sector suffered the brunt of the latest trade aggressions, although gold miners bucked the trend after the precious metal surged on a safe-haven bid. Nikkei 225 (-2.2%) was heavily pressured with losses for exporters exacerbated by detrimental currency flows, while Hang Seng (-1.9%) and Shanghai Comp. (-1.2%) slumped amid the trade concerns. Furthermore, Hong Kong was the worst performer amid further unrest as police were said to have beaten protesters and fired tear gas at an anti-surveillance rally over the weekend. Conversely, some of the losses were later pared after China’s Vice Premier Liu He stated that China is willing to resolve the dispute through calm negotiation and resolutely opposes escalation of the trade war, while India markets were intially underpinned after the Finance Minister recently announced several measures to support the economy including a withdrawal of capital gains tax enhanced surcharge and a INR 700bln bank recapitalization but then gradually deteriorated alongside the broad risk averse tone. Finally, 10yr JGBs were underpinned by a safe-haven bid and which coincided with upside in USTs as the US 10yr yield drop to a fresh 3-year low, with the BoJ also present in the market for 10yr+ and inflation indexed bonds. 

PBoC skipped open market operations but announced CNY 150bln of medium-term lending facility operations at 3.3% vs. Prev. 3.3%. (Newswires)

PBoC set CNY mid-point at 7.0570 vs. Exp. 7.0528 (Prev. 7.0572)

Hong Kong riot police were said to have beaten protesters and fired tear gas at an anti-surveillance rally over the weekend, while the police were also said to have used a water cannon for the first time ever and an office reportedly fired a warning shot. (Newswires)

US and Japan reached a framework for a trade agreement in which auto tariffs will remain unchanged and US will delay decision on Japan auto tariffs. Furthermore, reports added that Japan will reduce tariffs on US beef and pork, while Japan is said to have agreed to import an additional 2.5mln tonnes of feed corn from the US and the sides aim to sign a deal by September. (Newswires/Nikkei)

US

Fed’s Mester (Non-voter, Hawk) said she is undecided for September FOMC meeting but added that the Fed may need to cut rates to avoid restraining the economy if the economic outlook deteriorates, while she also stated that Chinese counter tariffs are just a continuation of the trade uncertainty that has been with us for some time and reiterated that the Fed should be data dependent. (Newswires)

GEOPOLITICS

EU diplomat stated that no agreement or progress was made towards persuading US President Trump to reissue oil sanction waivers at the G7, while there were separate reports Britain will be sending another warship to the Persian Gulf to support safe passage of shipping. (Newswires)

North Korea conducted another missile test over the weekend. (Newswires)

Iranian Revolutionary Guard said Iran tested a new missile. (Newswires)

China Defence Ministry urged the US to stop arms sales to Taiwan and cut its military ties with the country. (Newswires)

Russian President Putin has ordered Russia's military to prepare measures in response to US missile tests and wants the military to take exhaustive measures to prepare for a reciprocal response, according to Russia's Kremlin. (Newswires)

UK/EU

UK PM Johnson at the G7 Summit said the prospect of a Brexit deal is ‘improving’ but that the situation still remains ‘touch and go’, adding that Britain would not be obliged to pay the GBP 39bln divorce bill in the event of a no-deal. However, UK Government lawyers have reportedly drawn up a range of scenarios for no-deal; including one where Britain is legally obliged to pay the GBP 39bln. (Times/Sky/Telegraph)

US President Trump said that without the EU acting as an ‘anchor’ a ‘very big trade deal’ could be secured within around one year following Brexit. Although, PM Johnson cautioned that it could take longer. (Times)

UK Chancellor Javid is reportedly mulling an emergency budget if a no-deal Brexit seems imminent in late October. (Times)

EU Chief Brexit Negotiator Barnier stated we are ready to analyse UK proposals that are realistic, operational & compatible with our principles but added the WA is the best possible deal. (Newswires)

Sources say that if a "real" solution to the Irish backstop can be found, reopening negotiations on the WA would not be a problem, says the Express's Barnes. (Twitter)

European Council President Tusk said the bloc will respond in kind if the is imposes tariffs on France regarding its digital taxation plan, while he suggested there could be a risk to whole world if US President Trump imposes tariffs for political reasons. (Newswires)

EU plans to simplify Eurozone budget rules and may soften debt reduction targets. (FT)

ECB’s Weidmann (Hawk) stated that any review of the ECB’s policy should take place under new the new ECB President Lagarde, who is due to take office on November 1st. (Frankfurter Allgemeine Sonntagszeitung)

Italy’s 5-Star and PD parties are reportedly struggling to find a deal on a new government ahead of the Tuesday deadline. (Newswires)

French and US Finance Officials have agreed on a draft proposal on France's digital tax, which will be submitted to heads of state later on Monday, according to sources close to negotiations. US President Trump says US and France are getting close to a compromise on the digital issue .(Newswires)

German IFO Business Climate Index 94.3 vs. Exp. 95.1 (Rev. 95.8); current conditions 97.3 vs. Exp. 98.8 (Rev. 99.6); expectations 91.3 vs. Exp. 91.5 (Rev. 92.1) (Newswires)

EQUITIES

European equities are higher across the board [Eurostoxx 50 +0.6%] after US President Trump adopted a constructive tone regarding talks with China, whilst upside in the region was exacerbated after the US President stated the US and Germany have reached agreements on a number of subjects including trade, whilst also noting that US and France are getting close to a compromise on the digital tax issue. However, bourses came off highs after China Global Times editor noted that US and Chinese negotiators did not hold a phone call. Nonetheless, stocks are still supported by hopes of potential tariffs delays on China. Sectors are mixed with no clear winner/laggard. In terms of individual movers, UBS (-1.4%) shares fell after source reports that the bank reportedly explored an alliance with Deutsche Bank (+0.3%). Meanwhile, EssilorLuxoticca (+1.2%) shares spiked higher amid reports that ThirdPoint LLC have acquired a stake in the Co. Note, the FTSE is closed due to UK Summer Bank Holiday today.

Tesla (TSLA) - Co. are reportedly to raise prices on August 30th in China, which is earlier than planned. And are also said to be considering increasing prices in December for China if tariffs on US produced cars are implemented., according to sources. (Newswires)

FX

JPY/CHF/XAU - The major safe-havens have retreated from lofty overnight peaks amidst comments from US President Trump at the G7 about conversations between Chinese and US officials following Friday’s reciprocal ramp up of tariffs that could bring the 2 sides back to the negotiating table. Even though China’s Foreign Ministry is unaware of any such calls, the markets are waiting for a statement from Trump with risk aversion receding in the run up. Hence, Usd/Jpy, Usd/Chf and Xau/Usd are extending their retracement to circa 106.00, 0.9785 and 1525/oz from just shy of 104.50, 0.9710 and 1555 respectively at one stage, to the benefit of the DXY that is rebounding towards 98.000 vs 97.618 at the low.

GBP/NZD/EUR/CAD - All on the defensive as the Greenback broadly recovers as noted above, but with Sterling also losing more of its Brexit positivity after UK PM Johnson cautioned that while prospects of reaching a deal have improved it remains a close call. Cable is back down around 1.2235 compared to 1.2285 at best, which coincided with a Fib retracement and resistance level ahead of 1.2300 as well, while Nzd/Usd remains toppy on approaches to 0.6400 and is still underperforming vs the AUD as the cross rebounds to 1.0600 and Aussie derives more traction from the latest Trump tweets within a 0.6765-0.6690 range. Note also, the Kiwi was not helped by NZ trade data showing a deficit as imports eclipsed exports in July. Elsewhere, the Euro is slipping back towards 1.1100 from 1.1165 with additional pressure, albeit incremental, coming via a dire German Ifo survey and the institute clarifying that the declines in business sentiment, current conditions and expectations did not take into account latest trade war escalations, though this is hardly surprising given the timing of the August poll. Last but not least, the Loonie is still pivoting 1.3300 and not gleaning any independent impetus from Canadian data, but US durable goods may impact as the series of often erratic.

EM - Some calm after the overnight risk-off storm, and especially for the Turkish Lira that suffered losses in keeping with a flash crash when Japanese margin accounts are said to have liquidated unprofitable long Try/Yen positions. Usd/Try is back down near 5.8200 compared to almost 6.3000 during Asian trade, but Usd/Cny remains relatively bid above 7.1500 irrespective of more conciliatory remarks from Trump who is not ruling out another roll-back of Chinese tariffs, and reports of big Chinese banks selling Dollars vs the Yuan.

FIXED

The risk roller-coaster continues to hurtle along and the latest twist of the white knuckle ride has seen US Treasuries lead other core bonds on an incline after Hu Xijin of the Global Times chimes with China’s Foreign Ministry in denying knowledge of any phone conversations between top officials from Washington and Beijing over the weekend. UST futures are back above parity and the curve a bit flatter, while Bunds are off 178.22 lows (-32 ticks on the day) but still some distance from best levels (179.21) in UK-light trading conditions due to the late August bank holiday. Ahead, US durable goods that is often volatile and off-consensus plus more regional activity surveys for August, but US-China headlines, tweets and reports remain at the fore.

COMMODITIES

WTI and Brent futures are marginally in positive territory as the benchmarks ride on the current “risk on” wave in the markets after US President Trump took a constructive stance regarding US-Sino trade dialogue, ahead of an announcement on China later today; however recent comments from China’s Global Times Editor have paired back much of this positivity. WTI futures have just climbed above the 54.50/bbl level whilst its Brent counterpart eyes 60/bbl to the upside. In terms of geopolitics, Iranian Foreign minister Zarif unexpectedly attended side-line discussions at the G7 summit. It is unclear if the brief meeting between Macron and Zarif yielded any significant progress as US President Trump has since declined to comment on whether oil sanctions would be waived to have Iran return to the negotiating table; though they are going to discuss ballistic missiles and the duration of any subsequent agreement with Iran. Participants will today be eyeing trade developments as a catalyst, with US President Trump set to make an announcement later today, although no specific time was mentioned. In terms of US President Trump's scheduling for the day, aside from the scheduled G7 pressers, he is to hold a press conference with French President Macron at 14:30BST. Elsewhere, gold prices have retreated after printing fresh 6-year highs on the back of trade developments, which saw the precious metal soar above 1550/oz early Asia-Pac trade. Meanwhile, copper prices saw a firm rebound after briefly breaching 2.5/lb to the downside. Finally, Dalian iron ore prices saw renewed downside amid President Trump’s announcement on Friday that tariffs on China (current and impending) will be raised by 5ppts.