Asian stocks rebound, Turkish lira slides on US threat

Summary:

• Asian equities bounce back on hopes related to a Trump-Xi meeting in Japan later this month
• Weak Japanese trade data, better NZ CA for Q1 - FX stays calm ahead of the Fed
• Turkish lira moves back as Trump administration threatens to impose new sanctions

Markets cheer

Mario Draghi made investors’ day on Tuesday as he explicitly admitted that the ECB could both cut rates further and resume its asset purchase programme if economic growth did not rebound. Such comments were read by market participants as a hint the ECB will have to do something soon because the economic outlook does not seem to improve. On top of that, we have a lot of outside risks to this outlook predominantly from the trade front as well as Brexit. Upbeat sentiment seen in Europe yesterday was also present in the United States and today in Asia. The Hang Seng is rising 2.3% a while before the close whereas the Shanghai Composite (CHNComp) is moving up 1.4% and the Japanese NIKKEI (JAP225) is climbing 1.8%. Let us also recall that Mario Draghi and his speech was not the sole reason for a widespread rebound in equity markets globally.

The second one came from Donald Trump who confirmed a meeting with Xi Jinping in Japan later this month. Earlier it was uncertain whether both meet during a G20 meeting in June. However, all of that looks like a game as Trump’s notion changes from day to day, for example he said overnight that the US would have a great deal with China or no deal at all. Moreover, one may be almost certain an exchange rate between the US and the Eurozone will be a pivotal element in current frictions between the two countries. Trump blamed Draghi for talking the euro down against the US dollar which could be an excuse to threaten the euro area tariffs on cars and parts. What’s more, Trump has pressured Jerome Powell recently to cut rates immediately in order to help the economy by weakening the greenback. However, this does not look as easy as it seems. Keep in mind that market participants have already priced in a rate cut in the US by September, hence weakening the US dollar could not be an easy task. It appears that the Fed could be able to do so only if it presents dovish forward guidance - let’s be true the Fed does not have too many reasons to change the course of the current policy stance.

The Hang Seng (CHNComp) jumped at the opening and broke above the key resistance in the form of 10580 points. Source: xStation5

Major currencies stay calm

Although sentiment across equity markets looks rosy, market participants are much less confident in case currencies. During Asian trading we have not had a clear direction there with slight appreciation of the Japanese yen. In terms of macroeconomic data we were offered first quarter current account from New Zealand showing a deficit of 3.6% of GDP, a slight improvement compared to a deficit of 3.8% of GDP in the final three months of 2018. In addition to that we got a release on foreign trade from Japan for May bringing a 7.8% YoY decline in exports and a 1.5% YoY decline in imports. The detailed numbers showed exports to the US rose 3.3% YoY while exports to China dwindled 9.7% YoY. Looking beyond major currencies one needs to focus on the Turkish lira being 0.8% down against the US dollar this morning. Its weakness came after Bloomberg comments regarding possible new US sanctions on Turkey on the back of a purchase of Russian missile defense system by Turkey.

The USDTRY shot up on the news that Turkey could face new sanctions from the US. The move has abated to some extent but the TRY remains under pressure anyway. Source: xStation5

In the other news:

• Jeremy Corbyn said it would back an option of 2nd Brexit referendum

• Donald Trump asked White House lawyers for options on removing Jerome Powell

• As many as 97 Chinese state-owned industrial conglomerates have been instructed to boost profits by 9% this year so as to stabilise the economy