Euro-Area Finance Chiefs Brace for Fresh Fight Over Budget

(Bloomberg) — Euro-area finance ministers will debate the final key elements of a small budget for their currency bloc, as the region seeks to cap two years of difficult negotiations over a tool that falls far short of the original sweeping vision of French President Emmanuel Macron.

The discussion on the budget, whose broad outlines were already agreed in June, will seek to bring to a conclusion difficult talks that pitted the fiscal restraint of the EU’s hawkish North against the South’s calls for spending to stimulate the economy. But entrenched differences over aspects of how this pot of money will be financed may mean an accord remains elusive.

The agreed budget would create a pot of about 20 billion euros ($ 22 billion) to facilitate investments and reforms and help give a boost to poorer nations, rather than help support economies in a downturn, as was initially intended. These funds, which would be part of the EU’s broader budget and distributed over seven years, will be used to help countries see through investments and reforms and help poorer nations catch up.

Proponents argue that the pared-down budget could still be a foot in the door that could evolve into something more powerful in times of crisis. Skeptics of the plan say it’s a toothless tool that could nonetheless help incentivize laggards to reform.

Stumbling Blocks

A key issue ministers will debate is whether the instrument can be financed entirely from the EU’s broader budget, paid in by all the bloc’s 28 governments, or whether it could be topped up by other funding sources in the future.

Countries led by France have been pushing for a deal that would allow funds to be added through further contributions. The Dutch and other fiscal hawks have pushed for it to be funded exclusively from the EU’s budget, a restriction that would limit its total size.

A compromise could include a so-called “enabling clause”, which would pave the way for countries that wish to top up the budget to do so in the future. But the Dutch have insisted that this would only be on a voluntary basis, a red flag for other members.

The other main issue to be discussed involves the details of the so-called co-financing rate, which determines how much money governments will receive from this budget for a project and how much they have to put up themselves. This contribution could vary depending on the member’s economic situation, being reduced during a downturn.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.

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The key to trading fresh sentiment

Sentiment, like food, is best traded fresh.

Sentiment, like food, is best traded fresh.

Firstly, what is sentiment?

Sentiment is, quite simply, the present mood of the market. The market, like people, has different moods depending on what has just happened. As traders we are always wanting to know what the current sentiment is. Now, trading sentiment is a basic market skill as we try to make sure we are always trading in line with market sentiment (Unless of course we are fading market sentiment, which is a valid pursuit, but the subject of a different article). So, what are the keys to trading fresh sentiment? In this article I will briefly present the case that the two key concepts to trading fresh sentiment are as follows:

  • Picking which sentiment change to focus on and;
  • Trading that sentiment while it is still fresh

Picking which sentiment to focus on

The very best time to trade sentiment is when we notice the sentiment change. Sentiment can change on a number of different issues. It could be a surprise data point, a political development or some other unexpected event that causes a currency to move. The point is, we have our opportunity from changing sentiment.

Not all sentiment is equal

One of the challenges of trading sentiment is that every day there is a plethora of different data points and comments that flow across feeds. Not all of those data points move the market, so the first thing to realise is that sentiment varies in importance. Now, this is obvious in that a central bank interest rate decision holds far more sway over a currency than a retail sales release. However, aside from the stark and self-evident differences, it is important to recognise which sentiment is going to be important ahead of the event. Let’s take a worked example with the CPI data released on Wednesday for Canada.

Canadian CPI this week

The Canadian CPI data release was my key focus for this week as it was widely known, prior to the CPI release, that the Bank of Canada was in a unique position amongst its central bank peers. See here for the full rundown on the BoC I wrote last week where I commented:

“The Bank of Canada remains the only major central bank to not turn explicitly dovish. However, in an increasingly bearish central bank world the pressure is increasing on the Bank of Canada to follow suit”

This means that the market was just waiting for a reason to sell CAD as the expectations were that the BoC will follow their central bank peers. They just need a data reason to nudge them that direction. Also, we know that the BoC are not reluctant in cutting interest rates and surprising the markets, as they did here in 2015.

So, that sets the expectations for the potential of a strong CAD sell off if the CPI print was a negative read. That would be the ammunition to fuel increased expectations of a coming BoC dovish tilt, the sentiment change. This would have resulted in a strong sell off for CAD. In the event, the release was a positive uptick in inflation, so the chances of a September rate cut from the BoC faded into the background. The trade was not there. Move on to the next opportunity.

The key takeaway

The key point is that the market moving event, with the most force behind it,would have been the negative CPI print. In this way, we could be poised and ready to take an immediate CAD short out of the event. It would have been a high conviction trade.So, you need the following elements for a decent sentiment trade:

  • A clear bias going into the event
  • A data release or event that clearly confirms or contradicts that bias. In other words it is clear that the market will respond in a certain way.

Now let’s move onto the next principle, trading sentiment while it is still fresh.

Trade the sentiment while it is still fresh

Let’s say, for the sake of argument, that you took a similar trade like the one outlined above that actually played out. Now, you missed trading out of the event because you were away from your desk, at sleep or at work etc. There is often a second chance to enter a trade on that sentiment in the next 24-48 hours. Now, you don’t want to just chase the price selling or buying at market. So, in these scenarios wait for a retracement to a key level. Then trade back down to those prior lows. Below is an example of a trade I took this the week on the AUD/NZD pair that illustrates this.

AUDNZD: An example of trading sentiment while still fresh

I have been core long on AUDNZD since August 07 and remain so at the time of writing. You can read my reasons for that in the previous links, but the bottom line for the AUDNZD longs was the growing diverging outlook between the RBA and the RBNZ. The RBA minutes out on Tuesday this week further confirmed that divergence and the market chances of a rate cut from the RBA went down to ~12% from ~50% the previous week. So, having missed the release of the minutes overnight I set orders to buy on stop around the 50% Fib level and took profits at the prior’s high. Check out the details below. My entry is the small blue arrow and exit the small red arrow. My order was filled about 12+ hours after the minutes, but I got it while it was still fresh.

Sentiment shifts

So, there you have it. Sentiment is a dish best served fresh.  I like the look of the NZD business confidence data out next week with the RBNZ making it their focus. A weak print will confirm that bearish bias for the NZD and I favour, at time of writing, AUDNZD longs on a weak print.

 Yesterday provided another excellent opportunity for a fresh sentiment trade to take AUDJPY shorts. With risk clearly off as China retaliated against US tariffs the JPY stood to gain in safe haven flows. The AUD stood to lose due to its close relationship to CHina’s economy.  An AUDJPY  short made obvious sense and it was reasonable to expect sellers. Here was the post I made to HYCM’s telegram channel just before the large AUDJPY drop (where I work as the Chief Currency Analyst). 

AUDJPY

So, trading fresh sentiment is a good source of profitable trades and I am pleased that I closed out Friday with such a clear example. Not to mention that it was very nice to come back to 70/80+ points on a AUDJPY trade, and I know forexlive readers will all appreciate that warm glow;-). 

What sentiment trades are you looking at for the coming week? Please post in the comments section below and help reinforce this concept.

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Trump announces fresh tariffs on Chinese products, ramping up rates by 5%

Trump makes the announcement via Twitter

On October 1, Chinia is going to be hit by fresh tariffs.

Here’s the announcement, which was clearly timed to hit moments after the FX close:

For many years China (and many other countries) has been taking advantage of the United States on Trade, Intellectual Property Theft, and much more. Our Country has been losing HUNDREDS OF BILLIONS OF DOLLARS a year to China, with no end in sight Sadly, past Administrations have allowed China to get so far ahead of Fair and Balanced Trade that it has become a great burden to the American Taxpayer. As President, I can no longer allow this to happen! In the spirit of achieving Fair Trade, we must Balance this very unfair Trading Relationship. China should not have put new Tariffs on 75 BILLION DOLLARS of United States product (politically motivated!). Starting on October 1st, the 250 BILLION DOLLARS of goods and products from China, currently being taxed at 25%, will be taxed at 30% Additionally, the remaining 300 BILLION DOLLARS of goods and products from China, that was being taxed from September 1st at 10%, will now be taxed at 15%. Thank you for your attention to this matter!

One thing that’s a bit unclear is the Dec 15 tariffs. I’m guessing those are still exempted until then.

All told, this isn’t that bad. It could have been worse. He’s ramping up tariffs by 5%. It’s not some kind of apocalyptic announcement but it certainly continues the trend of escalation. 

trade war

 

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What Analysts Are Saying About Trump’s Fresh China Tariff Threat

(Bloomberg) — China’s yuan is likely to test the 7 per dollar level sooner than previously expected after Donald Trump’s abrupt decision to escalate the trade war, which could also prompt more easing by Beijing to support the economy, analysts say. The threat will weigh on stocks too, presenting buying opportunities if the benchmark falls below a key level, they said.

The yuan fell as much as 0.76% to 6.9394 per dollar Friday morning, its weakest since November, while the dropped 2% to 2,851.44, the lowest in nearly two months. Technology stocks were among the hardest hit. The yield on 10-year Chinese government bonds slid 4 basis points, the most in a month, to 3.11%.

Chinese Stocks Slide With Yuan as Trump Shatters Market Calm

Here’s a roundup of views from analysts:

“Expectations that the yuan will remain stable are shattered,” said Zhou Hao, a senior emerging market economist at Commerzbank AG (DE:) in Singapore. “Once the era of low volatility has ended, many traders will have to stop loss. Investors will test the PBOC’s resolve to defend 7 today or in the coming days.”

“The risk of the yuan breaking 7 has risen visibly” and could happen any time, said Christy Tan, head of markets strategy at National Australia Bank Ltd. in Singapore. The central bank won’t allow disorderly movements in the currency.

Beijing may be tempted to allow further depreciation to support growth, said Ken Cheung, a senior Asian FX strategist at Mizuho Bank Ltd. The Politburo’s emphasis on stability means China is likely to keep a smooth pace of depreciation, and given concerns over capital outflow risk, “we do not expect the to breach the 7 handle immediately.”

RATES

The odds have built for more Fed rate cuts, while China’s economic growth will likely drop below 6% next year, said Koon How Heng, head of markets strategy at United Overseas Bank Ltd. “I’m not so worried about Chinese outflows, but this may well intensify the relocation of manufacturing capital away from southern China into various ASEAN countries like Vietnam, Thailand, Malaysia and Indonesia,” he said.

The escalation in trade tension adds downside risk to growth, which is generally bond supportive, said Frances Cheung, head of Asia macro strategy at Westpac Banking Corp. “More importantly, China is likely to focus on supporting domestic growth and the market may expect more liquidity and credit support,” she said. “The yield differential remains favorable for China government bonds.”

The new tariffs impact the growth outlook much more, because many high-tech consumer goods are included, said Zhaopeng Xing, a markets economist at ANZ Bank China, adding that the yield on China’s 10-year government bond could fall another 10-15 basis points to 3.0%.

STOCKS

Most people were expecting some compromise in the latest round of trade talks, said Banny Lam, head of research at Ceb International Inv Corp. Selling pressure could be more intense as it is Friday and investors are uncertain about what may happen over the weekend. “China should be really tough in response to the U.S. moves,” he said.

There’s a higher likelihood that China will use fiscal tools over the weekend to bolster confidence, said Wang Zhihong, managing director at Whiterock Asset Management Co. “We will increase our short position on industrial commodities,” he said.

It could be an opportunity to buy if the Shanghai Composite falls below 2,700, especially consumer and infrastructure-related stocks, said Kenny Wen, strategist at Everbright Sun Hung Kai Co. “The Chinese government may boost infrastructure spending and tax cuts to boost domestic consumption to offset the tariff impact.”

Sun Jianbo, president of China Vision Capital Management in Beijing, said he’s waiting to bottom fish consumer electronics stocks after the tariff news. “The trade war is going to last for a while, so our internal consensus has always been buying stocks after the tensions ratchet up and selling after it cools down a bit. Things can’t go too extreme on either side.”

“There’s no need to get over-pessimistic as the U.S. can’t afford to lose the China market and the trades will go on even after more tariffs,” Sun said. “Stocks in the consumer electronics supply chain will drop for sure, but as long as their earnings growth potential remains intact, we would start buying after the correction.”

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Market gauge of long-term euro area inflation expectations continue to hit fresh record lows

The ECB’s worst fear is starting to be realised

EUR 5Y inflation swap forward
ForexLive

The key gauge of long-term Eurozone inflation expectations has fallen to a fresh record low of just 1.19% and has been on a downwards spiral since breaking the 2016 low since the ECB meeting and Draghi last week.

On Monday, Bloomberg reported that the ECB is beginning to get a little worried about the prospects of inflation expectations deanchoring. Right now, we could be at the tip of where it all breaks down for the ECB.

The peculiar thing about the recent sharp fall in inflation expectations over the past week is how the euro has been resilient. While that may owe to positioning and flows moving out of the dollar, it’s hard to see the single currency hang on for too long especially if a further fall risks forcing the ECB to introduce stimulus measures sooner rather than later in order to restore confidence back in markets.

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Yen soars, Aussie tumbles as fresh growth worries trigger FX 'flash crash'

© Reuters. FILE PHOTO: Illustration photo of a Japan Yen note © Reuters. FILE PHOTO: Illustration photo of a Japan Yen note

By Vatsal Srivastava

SINGAPORE (Reuters) – The yen surged on Thursday through key technical levels as heightened worries about the global economy pushed investors to safe haven-assets in moves exacerbated by thin holiday volumes.

Charging the risk averse mood was Apple Inc’s (O:) move on Wednesday to cut its sales forecast for its latest quarter, on slowing iPhone sales in China. That followed a series of surveys that showed factory activity weakening across much of Europe and Asia in December.

Market participants fled to the safety of the highly liquid Japanese yen which rose 1 percent versus the dollar on Thursday. In early Asian trade, the dollar tumbled to an intra-day low of 104.96 yen, its lowest since March 2018.=>

The spike in risk aversion triggered massive stop-loss flows from investors who had held short positions on the yen for months. A lack of liquidity, with Japan still on holiday after the New Year, added to the sharp surge.

Market participants described the move as a "flash crash" in major currencies against the yen, driven primarily by technical, not fundamental, factors.

Longer-term, however, analysts see other reasons for the yen to rise.

"The yen is undervalued and can strengthen both if the dollar weakens across the board, but also if our broadly positive view that the global economy will stabilize at potential growth this year proves to be wrong, the Fed pauses and/or we get a risk-off market correction-as we saw at the end of 2018," said Athanasios Vamvakidis, FX strategist at Bank of America Merrill Lynch (NYSE:).

The Australian dollar , often considered a gauge of global risk appetite, fell to its lowest level since 2009 in early Asian trade to an intra-day low of $ 0.6776. The dollar last traded at $ 0.6931, down 0.74 percent. Weaker-than-expected data out of China, Australia’s largest trade partner has taken the shine off the Aussie dollar in recent weeks.=>

Against the yen, the Aussie dollar () fell 1.8 percent to 74.67.

China’s economy remains of major concern for markets after a measure of its manufacturing activity shrank for the first time in 19 months in December, hit by the Chinese-U.S. trade war, with the weakness spilling over to other Asian economies.

The () was at 96.77, relatively unchanged from its previous close.

However, analysts expect the dollar to come under pressure in coming months with diminishing prospects for U.S. central bank rate hikes in 2019, which has driven Treasury yields lower.

The yield on U.S. 10-year treasuries () fell to 2.63 percent, the lowest in nearly a year on Wednesday.

Federal Reserve chairman Jerome Powell speaks in Atlanta on Jan. 4. Any acknowledgement that growth risks are building and financial conditions tightening is likely to be read by traders as a dovish policy signal.

Elsewhere, sterling fell 0.7 percent to $ 1.2516 on Thursday.=>

The euro () was down marginally at $ 1.1340. On Wednesday, the single currency fell 1 percent after data showed manufacturing activity contracted in Spain, France, Italy, and Germany.

(Graphic: World FX rates in 2018 – http://tmsnrt.rs/2egbfVh)

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There are fresh signs of an 'inventory cliff' coming

Are inventories piling up?

I’m more optimistic than most for 2019. I don’t think there’s any recession or major global slowdown coming but I recognize that markets are sending that signal and while I’m willing to be a bit stubborn, I’m not willing to be blind.

One major worry for me is inventories.

Here’s how the thinking goes: Tariffs and the threat of tariffs led to major inventory building in 2018. That skewed economic growth higher last year but at some point, companies will be drawing down on those inventories and it will be payback time.

So when the WSJ reports about companies “so  inundated with inventory that some are renting truck trailers to use for storage space,” I get worried.

The story is largely anecdotal but notes that one company launched a mobile inventory business just this year. They also note that high inventories are typical at year end.

There is some hard data:

“Across the U.S., warehouse vacancy currently stands at 4.3%, according to real-estate firm CBRE Inc., the lowest the real-estate firm has recorded since it started tracking the figure in 1980,” the report says.

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Former Malaysian PM Najib, 1MDB ex-CEO face fresh corruption charges

© Reuters. FILE PHOTO:  A construction worker walks past a 1Malaysia Development Berhad (1MDB) billboard at the Tun Razak Exchange development in Kuala Lumpur, Malaysia © Reuters. FILE PHOTO: A construction worker walks past a 1Malaysia Development Berhad (1MDB) billboard at the Tun Razak Exchange development in Kuala Lumpur, Malaysia

KUALA LUMPUR (Reuters) – Malaysian prosecutors on Wednesday filed new graft charges against former prime minister Najib Razak and the former chief executive of scandal-linked state fund 1MDB, in the latest cases over alleged theft of billions of dollars from the fund.

Anti-graft investigators this week questioned Najib and the former fund official over accusations that the former premier’s office had tampered with a 2016 government audit into the fund, 1Malaysia Development Berhad (1MDB).

The audit was commissioned amid reports of skyrocketing debt and financial mismanagement at the fund, founded by Najib in 2009.

Najib had "secured protection from disciplinary, civil or criminal action related to 1MDB" by directing for the audit report to be amended before it was finalised, according to a prosecutors’ charge-sheet read to him in court.

Najib pleaded not guilty to a charge of abusing his position as prime minister, a conviction on which carries a jail term of up to 20 years, or a fine of 10,000 ringgit ($ 2,402), or both.

The fund’s former chief executive, Arul Kanda Kandasamy, pleaded not guilty to abetting Najib.

Najib’s lawyer, Muhammad Shafee Abdullah, said his client could not have tampered with the audit, as he was only accused of having directed changes to a draft of the report, rather than the final version.

"In this charge, it’s quite clear that it is no longer the allegation…that he had in fact tampered with the audit report," Muhammad Shafee told reporters.

Malaysian officials had said the audit report changes Najib ordered had included removing a mention of the presence of financier Low Taek Jho at a 1MDB board meeting.

Low, who is at large and has previously denied wrongdoing, has been charged by both Malaysian and U.S. authorities, who describe him as a central player in the alleged theft of about $ 4.5 billion dollars from 1MDB.

Civil lawsuits filed by the United States say billions of dollars were diverted from 1MDB by high-level officials of the fund and their associates, and that about $ 1 billion made its way into Najib’s personal bank accounts.

Najib, who was ousted in May by a coalition led by Prime Minister Mahathir Mohamad, faces 38 charges of money laundering, graft and breach of trust, most of them linked to 1MDB. He has denied wrongdoing and his trial is due to begin next year.

Najib’s wife Rosmah Mansor, his deputy Ahmad Zahid Hamidi and other officials of his administration have also been charged with corruption. All have pleaded not guilty.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.

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