Wall Street dives, PBoC injects upbeat sentiment into markets

Summary:

• US indices saw heavy declines on Monday on the back of a trade war escalation
• US officially labels China a currency manipulator suggesting it undertakes steps to eliminate an unfair competitive advantage
• PBoC sets the yuan reference point higher stronger than expected signalling it aims to stabilise its currency
• RBA stays on hold, a very strong jobs report from New Zealand

Currency manipulator

Monday’s trading on Wall Street brought remarkable declines on the back of still sour sentiment regarding the latest trade war escalation with China. The NASDAQ was hit the most losing as much as 3.5%, the SP500 plunged 3% and the Dow Jones lost 2.9%. At the same time, increased demand was seen across safe haven assets including US Treasuries, the Japanese yen and the Swiss franc and it even strengthened after the US Treasury Department officially labelled China a currency manipulator. On top of that, it added that the US would engage with the IMF to eliminate an unfair competitive advantage made by Chinese actions which, in the eyes of Washington, were a violation of China’s G20 commitments to refrain from competitive devaluation. These comments came just several hours after Chinese central bank chief, Yi Gang, declared that this nation would not use the yuan as a tool to deal with trade disputes saying “I am fully confident that the yuan will remain a strong currency in spite of recent fluctuations amid external uncertainties”. With deteriorating sentiment and simmering tensions over the US-Sino trade spat, the US 10Y bond yield fell to below 1.68% overnight before it rebounded toward 1.76% on a broader improvement in market sentiment.

The NASDAQ plummeted on Monday and stopped falling a bit above its crucial trend line. Source: xStation5

Cautious approach

The improvement in sentiment came after the People’s Bank of China set the onshore yuan reference rate stronger than expected by local analysts (6.9683 vs. 6.9225 on Friday) in spite of the fact that the USDCNY was trading well above 7.00 on Monday. It signals that Beijing does not want to devalue its currency at the same pace as market forces would suggest, a positive sign which has caused a turnaround in market sentiment in the second half of the Asian session. On top of that, the PBoC announced the planned sale of yuan-denominated bonds in Hong Kong in a move to support the offshore yuan. As a result, the USDCNH reversed from above 7.14 to below 7.08 in late trading hours. This move also helped other markets recover with US bond yields rebounding, the Japanese yen tumbling 0.7% and the Aussie dollar climbing more than 0.4%. Moreover, SP500 futures are also pointing to a green opening trading 0.3% higher at the time of preparing this commentary. 

The above-mentioned spread suggests the PBoC has so far refrained from currency devaluation at the pace suggested by market forces. Source: Bloomberg, XTB Research

RBA on hold, labour market in NZ thrives

As far as topics other than the US-China trade war are concerned, we were offered two important points overnight. First, the labour market report for the second quarter from New Zealand came far above expectations, casting a long shadow on a rate cut by the RBNZ being already baked in (the bank meets on Wednesday). The jobless rate fell to 3.9% from 4.2% (an uptick to 4.3% had been forecast) while the labour force participation rate remained unchanged at 70.4%. Moreover, employment grew 0.8% QoQ, compared to the consensus calling for a 0.3% QoQ increase and wage growth in the private sector jumped to 0.8% from 0.3% in quarterly terms (both including and excluding bonuses). The NZ dollar jumped immediately in response to the release but i has given back a lot of its gains since then. 

Finally, the Reserve Bank of Australia kept interest rates today as broadly expected and just negligibly adjusted its statement. It reiterated that rates to remain low for an extended period of time and they would ease monetary policy further if needed to support sustainable economic growth. It also noted that the Aussie dollar was at its lowest level in recent times suggesting the central bank could stay calm when the Aussie begins appreciating. Overall, the statement was muted impact on the Aussie dollar which has been more affected by a market sentiment improvement caused by the PBoC’s actions. 

The AUDUSD is trying to bounce off its lows on the back of an improvement in risk sentiment. Source: xStation5

In the other news:

• Australian trade surplus for June was 8.036 billion AUD, the consensus had indicated at a 6 billion AUD surplus

• Household spending in Japan grew 2.7% YoY in June, nominal labour cash earnings rose 0.4% YoY while wage growth was negative of 0.5% in real terms

• German factory orders rose 2.5% MoM in June, the previous reading was revised up from -2.2% to -2% MoM