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Dollar and Equities Sink as Trade Pessimism Rises

Pessimism regarding a Phase One trade deal has intensified; further muddying the waters are recent US Congressional actions

FOMC minutes contained no surprises; regional Fed manufacturing surveys for November continue

South Africa is expected to cut rates by 25 bp to 6.25%

Korea reported trade data for the first twenty days of November; Indonesia kept rates steady at 5.0%, as expected

The dollar is mostly weaker against the majors in very narrow ranges as markets await fresh drivers. Kiwi and Nokkie are outperforming, while the yen and Loonie are underperforming. EM currencies are mixed.  ZAR and MXN are outperforming, while KRW and MYR are underperforming. MSCI Asia Pacific was down 0.7% on the day, with the Nikkei falling 0.5%. MSCI EM is down 0.8% so far today, with the Shanghai Composite falling 0.3%. Euro Stoxx 600 is down 0.5% near midday, while US futures are pointing to a lower open. 10-year UST yields are up 1 bp at 1.76%, while the 3-month to 10-year spread has risen 2 bp to +20 bp. Commodity prices are mostly lower, with Brent oil down 0.4%, copper down 1.0%, and gold down 0.2%.

The dollar is coming under some modest pressure, though most major currencies remain within their recent well-worn ranges. DXY is down modestly after rising two straight days, with markets searching for fresh drivers. The euro remains capped near $1.11, as is sterling near $1.30.  Even USD/JPY, which usually reacts the most to renewed trade tensions, remain smack in the middle of recent ranges. More action is being seen in the equity markets, with most markets sinking under the weigh of renewed trade tensions.

Pessimism regarding a Phase One trade deal has intensified on reports that people close to the White House warned that it may be pushed back into 2020. Elsewhere, President Trump criticized China for not “stepping up” whilst visiting an Apple facility in Texas. Press reports that his senior advisors are counseling him to lower his expectations. China is reportedly pressing for greater tariff rollbacks, while the US doesn’t want to grant them without greater China concessions on structural reforms.  As we have seen in the past, the final stages of trade talks are the most difficult and dangerous.

Further muddying the waters are recent US Congressional actions. The unanimously approved Senate bill on Hong Kong was approved Wednesday by the House 417-1. These are veto-proof margins in both chambers, which we believe leaves President Trump with little choice but to sign it into law.  The House also passed another Senate bill banning the export of crowd-control items to Hong Kong police. Tensions are likely to rise, but the question is whether it will spill over into trade negotiations. Our view is that it that the impact will be seen more in rhetoric than in action. In other words, both sides will try to weaponize the human rights topic in the current brinkmanship stage of the negotiations, but Phase One should ultimate be signed in a few (bumpy) weeks. Indeed, Vice Premier Liu He said he remained “cautiously optimistic” on a deal.

We have seen a modest pickup in cross-asset measures of implied volatility over the last few sessions as trade tensions rose, but nothing too dramatic. Most of the impact so far has been on the equity side with a pickup in the US (VIX) and European (V2X) markets. Still, both measures are still trading close to lows for the year. The US Treasury volatility index (MOVE) has also seen a modest increase, but it’s still trading well below the highs seen in August. Lastly, there has been little pick up in the FX space, either for EM or DM.


FOMC minutes contained no surprises.  Most Fed official saw rates as “well-calibrated” after the October cut and considered rates would remain appropriate unless there was a “material change” in the outlook.  A couple of officials that voted for the cut saw it as a “close call.”  We hesitate to call these minutes hawkish, but the tone suggests a somewhat high bar for renewed easing.  The risk of a cut in the December meeting has been effectively priced out and there is only a 20% chance of a cut implied for Q1 2020 according to WIRP.  It looks as if we are entering into a prolonged period of stasis by major central banks.  That said, if we had to pick, we see more downside risks to the global economic outlook than upside and so rates are more likely to fall than to rise.  A lot really depends on the prospects for a Phase One trade deal.  Mester and Kashkari both speak today.

Regional Fed manufacturing surveys for November continue.  Philly Fed comes out today (6.0 expected), followed by Kansas City Fed Friday (-2 expected).  Last week, the Empire survey came in at 2.9 vs. 6.0 expected.  Today also sees weekly initial jobless claims (218k expected) for the BLS survey week containing the 12th of each month, as well as October leading index (-0.2% m/m expected) and existing home sales (2.0% m/m expected).


The South African Reserve Bank (SARB) is expected to cut rates 25 bp to 6.25%. Most analysts are calling for rates to remain steady, though implied rates in futures markets have been moving closer to our view. We think there are plenty of economic reasons to justify a cut, including a growth slowdown, structural challenges in the energy sector, and contained inflation readings as seen by yesterday’s lower than expected CPI data. But beyond that, we think this is an optimal window for a surprise move given a relatively stable market outlook. Markets are likely to become a lot more edgy in a couple of months as the crucial Moody’s credit downgrade may finally happen.


Korea reported trade data for the first twenty days of November.  Exports contracted -9.6% y/y and imports by -11.2% y/y.  Along with Taiwan export orders reported yesterday at -3.5% y/y, the early trade data show some modest improvements in November for the entire region in terms of activity and growth.  However, it is still way too early to sound the all clear.

Bank Indonesia kept rates steady at 5.0%, as expected.  However, the bank did cut reserve requirements by 50 bp.  A third of the analysts polled by Bloomberg looked for a 25 bp cut to 4.75%, but Bank Indonesia played it more cautiously.  CPI rose 3.13% y/y in October, the lowest since April and below the bottom of the 3-5% target range.  Next policy meeting is December 19 and we believe easing will continue given signs that the economy is slowing.

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About Win Thin
Win Thin
Win Thin is a senior currency strategist with over fifteen years of investment experience. He has a broad international background with a special interest in developing markets. Prior to joining BBH in June 2007, he founded Mandalay Advisors, an independent research firm that provided sovereign emerging market analysis to institutional investors. He received an MA from Georgetown University in 1985 and a B.A. from Brandeis University 1983. Feel free to contact the Zurich office of BBH
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