LCG: Dow hits record high, US dollar weakens as US-China trade deficit jumps

July 4, 2019

Asian equities traded mostly in the green, after the Dow Jones (+0.67%) hit a record high in New York. The S&P500 (+0.77%) and Nasdaq’s Composite (+0.75%) closed on a positive note before the July 4 break. Chinese stocks continued feeling the pinch of the tensions in Hong Kong.

The US dollar weakened against all its G10 counterparts and the 10-year treasury yield slipped below the 2.95% mark after the ADP report showed that the US economy added 102K private jobs in June, less than 140K expected by analysts. The weak ADP figure whispers that Friday’s nonfarm payrolls could also disappoint and keep the Federal Reserve (Fed) doves in charge of the market. 

Meanwhile, the US trade deficit rose to $55.5 billion in May versus $54 billion penciled in, and the previous month’s figure was revised up to $51.2 billion from $50.8 billion. Yet the worst in all this is that the US’ deficit versus China jumped to $30.1 billion from $26.9 billion despite White House’s efforts to restore a ‘fairer’ trade relationship between the two countries. The devaluation in yuan has certainly played a role in favour of China. And the latest trade figures will probably not help releasing the US’ anger as the trade talks resume. 

The US and Chinese officials will be talking on the phone next week, according to the latest news, but the chances for a significant progress are low. Hence, the trade war story should continue being one of the major talking points in the second half of the year. 

But today, the US markets will take a break to celebrate the Independence Day and to enjoy the fireworks.

Stock investors benefit from cheap pound

In the UK, the composite PMI unexpectedly slipped below 50 in June, pointing at a contraction for the first time since the Brexit referendum. Cable eased to 1.2557 as soft data strengthened the case for a more accommodative monetary policy from the Bank of England (BoE) in the coming quarters. The UK economy will certainly need BoE’s help to survive a possibly messy divorce with the EU, on top of the negative repercussions of the US-China tensions. As such, the BoE doves continue gaining field. Though it is too early to call for a rate cut in the foreseeable future, the probability of a 25-basis-point action before the end of this year doubled to 45% since the beginning of this week.

British stocks advanced on cheaper pound. The FTSE 100 rose to 7621p, the highest since August 2018. Energy stocks (-0.95%) lagged, as Brent crude eased to $62 a barrel.

The FTSE is expected to open flat. Investors will likely chase dip-buying opportunities in downside corrections, as the soft British pound and the prospects of a cheaper liquidity remain mouth-watering in the actual context of the global equities rally.

Euro under pressure of all-time low yields

The euro remains under the pressure of historically low sovereign bond yields. The 10-year Bund yield approaches the European Central Bank’s (ECB) deposit rate of -0.40%, as the expectation of a 10-basis-point cut in September are gradually factored in the bond prices.

Still, with the rush into the US treasuries, the US – EZ yield spread fell to the narrowest since April 2018. This is because the Fed, which has been normalizing the interest rates since 2015, has a greater maneuver margin on the dovish side compared to the ECB.

Henceforward, the euro should find some support against the US dollar. Buyers could come to rescue near the 100-day moving average (1.1260).

Due today, the Euro area retail sales may have improved 0.3% m-o-m in May, versus -0.4% printed a month earlier. Encouraging data could give a hand to euro buyers before the US comes back in focus with Friday’s payroll report.

Swiss prices may have deflated in June

Swiss consumer prices may have eased 0.1% m-o-m in June, as the franc rose to a two-year high against the euro.

Although, the escalating tensions between the EU and Switzerland over the Swiss equities’ trading ban cooled off the franc appetite, the euro-swissy trades a touch above the 1.10 mark, far below the Swiss National Bank’s (SNB) ideal 1.20 handle.

Pricing on the three-month euro-swiss franc futures, on the other hand, suggests that the market is convinced that a further SNB policy action could be needed, especially if the European Central Bank attempts to lower its rates by the end of this year.