Stocks slide as trade worries return; BoJ alters guidance

Summary:

• Sentiment takes a hit no trade concerns

• China doubts long-term deal with Trump possible

• European and US stocks slide in response

• Euro area inflation drops near 3-year low

• BoJ alters forward guidance 

There was a broad risk-off move seen in the markets this morning after the latest comments from Beijing suggested that investors may be getting a little bit ahead of themselves in assuming a smooth de-escalation in trade tensions between the world’s two largest economies. The market’s sensitivity to this kind of news was revealed yesterday, when a smaller but similar move occurred following reports that the APEC summit in Chile where the US and China were expected to sign “phase one” of their trade deal was cancelled. Traders and headline-scanning algos rushed to sell stocks on it before the realisation that the cancellation was solely due to civil unrest in the country at present and not because of a breakdown in US-Sino negotiations saw the moves reversed. 

“Phase one” is still set to be signed next month but the latest remarks suggest it could be presumptuous to believe that this will lead to phases two, three and possibly more in short order. Reports indicate that China has doubts about reaching a comprehensive long-term trade deal with the US, and has taken aim at president Trump for these, citing his impulsive nature and the risk that he could pull out of the terms in the coming weeks. 

US PresdientTrump took to social media to respond to the latest developments on the trade front with an upbeat message with a manner that could be described as upbeat and it’s worthwhile noting that while the main indices are trading lower on the day the selling has been fairly measured for now. In Europe the German Dax is trading lower by around 0.4% on the cash close while the US500 is down by 0.75% at the time of writing.  

A print of 0.7% in year-on-year terms for the Eurozone CPI flash estimate is the lowest in almost 3 years, but an unexpected 0.1% rise in the equivalent core measure to 1.1% sends a mixed message on price pressures in the bloc. Having said that, whichever way you look at it inflation, according to these metrics, continues to run well below the 2% target and therefore justifies the resumption of asset purchases by the ECB which are due to occur once more next month. The EURUSD has gained every day this week with price this morning moving back near the 12 week high of 1.1180. The lagging line has just moved out of the D1 cloud and the trend could be turning higher. 1.1075 seen as possible support.

Several hours after the Federal Reserve delivered the third rate cut in a row and after Powell communicated a pause in this cycle, the Bank of Japan chose to leave monetary policy settings unchanged, matching market observers’ expectations. Nevertheless, we were offered two important points of note. The first one is a shift in forward guidance and now the BoJ “expects short- and long-term interest rates to remain at current or lower levels as long as it is necessary to pay attention to the possibility of losing price momentum.” In its previous statement the Asian central bank signalled rates would stay at current levels at least around spring 2020. This change is to suggest the BoJ has still a lot of measures at hand, even if it does not have them. The second point is another cut of economic projections (the table below), a move widely expected given the Bank’s inability to reach the inflation target. As a consequence, the BoJ still does not expect that its price objective is attainable over the projection horizon.