• Says EU27 stand united and is ready for all Brexit scenarios

Arjen van Dijkhuizen, the senior economist at ABN AMRO, notes that a new element in the re-escalation of the trade war has been the USD/CNY exchange rate breaking the 7 level, for the first time since 2008.

• “We have adjusted our USD-CNY forecasts down (for 2019 from 6.90 to 7.20 and for 2020 from 6.70 to 7.50). However, we have maintained our view that the People’s Bank of China (PBoC) would not tolerate a free fall of the yuan, as it learned lessons the hard way during the turbulence back in 2015-16. In that episode, capital outflows surged on sharp CNY depreciation expectations and Chinese FX reserves dropped by 25%.
• All told, we now expect the PBoC will tolerate some more yuan weakness to preserve China’s competitiveness in the wake of higher tariffs, but will act to keep the depreciation modest. Developments over the past week lend support to this view.”

A report from the University of Michigan revealed on Friday the preliminary reading for the Reuters/Michigan index of consumer sentiment fell to 92.1 in early August, its lowest level since the start of the year.

Economists had expected the index would decrease to 97.2 this month from July’s final reading of 98.4.

According to the report, the index of current U.S. economic conditions dropped to 107.4 in August from 110.7 in the previous month. Meanwhile, the index of consumer expectations declined to 82.3 this month from 90.5 in July.

Monetary and trade policies have heightened consumer uncertainty - but not pessimism - about their future financial prospects, the report noted. 

Arjen van Dijkhuizen, the senior economist at ABN AMRO, believes the highly export-oriented Eurozone is one of the victims of global trade conflicts and the global slowdown in manufacturing and trade.

• “Over the past few weeks, Q2 GDP growth numbers were published for individual eurozone countries and for the eurozone as a whole. As expected, quarterly growth in the eurozone fell to 0.2% qoq, from 0.4% qoq in Q1.
• Meanwhile, in Germany, quarterly growth dropped back into negative territory (-0.1% qoq) for the first time since Q3-18. Moreover, the leading ZEW index came in much weaker than expected and dropped back to multi-year lows.
• German weakness is concentrated in exports and industry. Germany is heading for a recession, as Q3 numbers point to a contraction as well. We expect the German economy to remain weaker than the eurozone aggregate, which should be close to stagnation in the second half of this year but not in recession.”

Before the bell: S&P futures +0.81%, NASDAQ futures +0.96%

U.S. stock-index futures surged on Friday amid expectations of robust stimulus from central banks.

Global Stocks:

Arjen van Dijkhuizen, the senior economist at ABN AMRO, notes that China’s activity data for July published this week were weak as industrial production slowed to 4.8% YoY from June’s reading of 6.3%, the slowest pace in 17 years.

• “Retail sales slowed to 7.6% yoy (June: 9.8%, consensus: 8.6%). Fixed investment growth was marginally lower in July (5.7% yoy ytd) compared to June. Lending data for July published early last week were also weaker than expected. Bloomberg’s monthly GDP estimate dropped to a post global financial crisis low of 6.0% yoy, from June’s spike of 7.1%.
• While part of the weakness in July’s data seems to relate to payback from the surprisingly strong June data, the picture emerges that the Chinese economy is not out of the woods yet, with headwinds from the trade/tech conflict with the US having risen over the past months. We expect the authorities to step up fiscal and monetary easing (including RRR and interest rate cuts) to keep China’s growth slowdown measured.”

Wall Street. Stocks before the bell

(company / ticker / price / change ($/%) / volume)

Merck (MRK) initiated with an Outperform at SVB Leerink

Walmart (WMT) target raised to $125 from $118 at Telsey Advisory Group

Intel (INTC) upgraded to Market Perform from Under Perform at Northland Capital; target $48

The Commerce Department reported on Friday the building permits issued for privately owned housing units climbed by 8.4 percent m-o-m in July (the largest advance since June 2017) to a seasonally adjusted annual pace of 1.336 million, while housing starts fell by 4.0 percent m-o-m to an annual rate of 1.191 million.

Economists had forecast housing starts decreasing by 1.7 percent m-o-m last month and building permits surging by 3.1 percent m-o-m.

Data for June was revised down to show homebuilding declining to a pace of 1.241 million units, instead of falling to a rate of 1.253 million units as previously reported.

According to the report, permits for single-family homes, the largest segment of the market, rose 1.8 percent m-o-m at 838,000 in July (the highest level in eight months), while approvals for the multi-family homes segment surged 21.8 percent m-o-m to a 498,000 unit-rate.

In the meantime, groundbreaking on single-family homes rose 1.3 percent m-o-m to a rate of 876,000 units in July (the highest level in six months), while housing starts for the multi-family tumbled 16.2 percent m-o-m to a 315,000-unit pace.

Nordea Markets analysts notes that in the coming Monday, an important deadline concerning the U.S. sanctions against Huawei looms large and will be a key event to watch for markets.

• “If Trump gives US companies (and Huawei) a Christmas present similar to the one just delivered to households – it could perhaps buttress risk sentiment, or vice-versa. The semiconductor sector, and by extension global and US capex activity, does look like it would need some positive news on the Huawei front.
• On Tuesday, Italian lawmakers have summoned Prime Minister Giuseppe Conte to appear before the Senate. This might lead to a confidence vote during the week. Lega’s Salvini is pushing to bring down the government. If PM Conte is voted down, it would switch attention to the Italian president, who must decide the next steps. If President Mattarella decides there now no way of creating a new stable government, he will call for a election (likely in October) – but it is a theoretical possibility that other parties can manage to form a new government without including the Lega. Italian political risks nonetheless pose another headwind for the Euro-area banking sector, on top of weak growth, a surge in regulation, negative rates, and überflat yield curves.
• On Wednesday, minutes from the FOMC’s fateful July 31 meeting is due. What can force the Fed to go beyond the “mid-cycle rate cut”? Was the Fed prepared for the surge in volatility triggered by its not-dovish-enough decision? And what is the Fed’s plan on the liquidity front?
• We are not looking forward for the next batch of Euro-area PMI figures, due Thursday 22 August. The Sentix recently crashed to its lowest level since 2014 and ZEW expectations fell to its lowest level since 2011 in August. The EA ought to be feeling some tailwinds from lower rates, a weaker EUR and a modest pick-up in money growth – but as in Asia other shocks appear to be mitigating these positive impulses.
• “At the back end of the coming week, Thursday to Saturday, the world’s foremost yield curve apologists (central bankers) will gather in Jackson Hole to discuss “challenges for monetary policy”. While primarily of academic nature, these speeches can at times be extremely relevant for the market. It is widely believed that Ben Bernanke announced QE2 at this conference in 2010.”

FX strategists at UOB Group keep the neutral stance on Cable in the very near term.

• "24-hour view: Contrary to our view of a slide towards 1.2025, GBP squeezed sharply to as high as 1.2150 in the European session before paring most gains to finish 1.2080 in NY. The hesitant price action suggests that GBP bulls have not regained control just yet. For today, we can reasonably expect consolidation between 1.2035 and 1.2130.
• Next 1-3 weeks: While we held the view yesterday (30 Jul, spot at 1.2225) that GBP has moved into a ‘negative phase’ and that it “could trade to 1.2110”, the subsequent rapid pace of decline was not exactly expected (GBP plunged to an overnight low of 1.2120). The downward acceleration over the past couple of days could be attributed to the lack of significant support levels. From here, if GBP were to crack 1.2110, it could lead to further steep decline as the next support is more than 100 pips lower at 1.1985. That said, 1.1985 is just a minor low in Jan 2017 (on the weekly chart) and it is left to be seen how much support it can offer (if GBP were to move to this level). Below this level, the more significant support would be the Oct 2016 ‘flash crash’ low of 1.1491. All in, despite being oversold, the current weakness in GBP is not showing sign of stabilizing just yet. Only a break of the 1.2195 ‘key resistance’ (level was at 1.2220 yesterday) would suggest that the decline in GBP is ready to take a breather”.

NVIDIA (NVDA) reported Q2 FY 2019 earnings of $1.24 per share (versus $1.94 in Q2 FY 2018), beating analysts’ consensus estimate of $1.15.

The company’s quarterly revenues amounted to $2.579 bln (-17.4% y/y), beating analysts’ consensus estimate of $2.551 bln.

The company also issued downside guidance for Q3 FY 2019, projecting revenues of $2.842-2.958 bln versus analysts’ consensus estimate of $2.98 bln.

NVDA rose to $157.80 (+6.07%) in pre-market trading.

Deere (DE) reported Q3 FY 2019 earnings of $2.71 per share (versus $2.59 in Q3 FY 2018), missing analysts’ consensus estimate of $2.84.

The company’s quarterly revenues amounted to $8.969 bln (-3.4% y/y), missing analysts’ consensus estimate of $9.385 bln.

The company also issued lowered guidance for FY 2019, projecting revenues of +4-5% to $34.68 bln (versus analysts’ consensus estimate of $34.85 bln) and net income of $3.2 bln (down from its prior guidance of $3.3 bln).

DE fell to $142.00 (-1.19%) in pre-market trading.

Analysts at National Australia Bank (NAB) notes the latest escalation in the U.S.-China trade war has reverberated through financial markets.

• "The policy response will be important – we now expect two further 25bp cuts in the fed funds rate this year. China is also likely to use policy measures to offset any tariff impact, including allowing further depreciation of its currency. 
• The pick-up in Advanced Economy (AE) growth in Q1 was not sustained in Q2, and we expect AE growth to slow further in H2 2019 before stabilising in 2020. Trade exposed Emerging Markets are struggling, with exports from East Asia falling significantly. 
• We have lowered our 2019 global growth forecast to 3.1% (from 3.2%) but our forecasts for 2020 (3.3%) and 2021 (3.5%) are unchanged. Trade policy remains a key risk and there are also other geo-political risks."

Francesco Pesole, an FX Strategist at ING, notes the EUR/USD came under pressure yesterday and touched 1.11 after comments by ECB’s rate-setting committee member Olli Rehn fostered expectations that the Bank will deliver a heavy package of monetary easing in September.

• "Indeed, market expectations about the September meeting are already aggressively on the dovish side: 18bp of easing is priced in, close to our call for a 20bp cut. Rehn’s remarks exacerbated the existing battered sentiment on EUR after the weak data-flow this week, but EUR/USD may have run short of more downside drivers today. In turn, the 1.110 level could play as a fairly solid support on the day.
• By contrast, the euro may continue to weaken against CHF, which should benefit from three key factors including ECB’s easing expectations, escalating trade tensions; and rising political uncertainty in Italy. In our view, EUR/CHF has the potential to edge below 1.08 in the coming weeks. In terms of economic releases, investors may want to keep an eye on June export data today, mainly with the aim of spotting any slowdown in eurozone exports caused by global trade tensions."

Analysts at TD Securities are expecting the U.S. housing starts and building permits to rebound at 0.3% and 3.1% m/m in July, respectively, following declines in the month before.

• “UMich's sentiment index likely declined modestly to a still-firm 97.0 level in August from 98.4 before. Attention, however, will be paid to the long-term inflation expectations series, which has stayed stuck at the low-end of the historical range.”

Francesco Pesole, an FX strategist at ING, note that sterling had an unusual positive day yesterday, mainly benefiting from some position-squaring related upside pressure and a weaker euro. 

• "We think any rally in GBP is likely to be short-lived as the lingering uncertainty about Brexit should discourage investors from jumping on long-sterling positions to play any rebound in risk appetite.
• Hence, we look for EUR/GBP to move back above the 0.9200 level in the coming days."

The trade war between the U.S. and China has dragged on for more than a year, and it’s starting to turn into a brewing currency war, said analysts.

The yuan depreciated past 7 per dollar last week for the first time since the global financial crisis of 2008, which prompted the U.S. Treasury Department to designate China as a currency manipulator.

In a recent report, the Bank of America (BofA) Merrill Lynch Global Research predicts what might happen to the Chinese yuan in three scenarios.

Scenario 1: A full blown trade war — the yuan depreciates 10%. Chinese imports from the U.S. are only a third of American imports from China, the bank pointed out. This means that China cannot match the U.S. tariffs in terms of quantity. However, one thing Beijing can do is to devalue the yuan by 10%, canceling off the impact of a 10% tariff on Chinese goods.

Scenario 2: A drawn out impasse — the yuan remains “unchanged.” “In a protracted impasse, RMB is likely to remain range bound, only because Beijing would be wary of both angering the US by allowing the RMB to weaken or adding even more headwinds facing Chinese exporters by allowing the RMB to strengthen,” the bank said, referring to the yuan’s other name, the renminbi.

Scenario 3: An imminent trade deal: The yuan appreciates “modestly.”

In this situation, the value of the yuan will go up but will be limited. This is because “any deal is likely to include stipulation that would limit the room for any future RMB depreciation,” the bank explained. “If Beijing feels that the downside for the RMB is limited, it is likely to want to limit the upside for the RMB, especially if it thinks any RMB appreciation becomes difficult to reverse politically.”

Analysts at National Australia Bank suggest that they have fine-tuned their forecasts for Australia’s growth in Q2 (now see 0.4 to 0.5% q/q) and see growth of 1.6% this year, before a small improvement to around 2¼% on a year-average basis in each of the out years.

“The unemployment rate is expected to lift slightly (reaching 5.5%), with employment growth slowing on the back of sub-trend growth. The key dynamic behind this slower growth is a weaker household sector with modest consumption growth (weak wage growth being a key headwind) and ongoing falls in dwelling investment. The public sector and net exports are likely to show some strength, offsetting some of this weakness. We also anticipate a solid performance from the business sector, with private investment likely to rise in aggregate on the back of growth in the non-mining sector, while mining should at least stabilise. However, a weak starting point, with low inflation and sizable spare capacity in the labour market are likely to see the RBA cut the cash rate further (indeed, their own forecasts embody a further 50bps of cuts).” analysts said.

According to the report from Eurostat, the first estimate for euro area (EA19) exports of goods to the rest of the world in June 2019 was €189.9 billion, a decrease of 4.7% compared with June 2018 (€199.3 bn). Imports from the rest of the world stood at €169.3 bn, a fall of 4.1% compared with June 2018 (€176.6 bn). 

As a result, the euro area recorded a €20.6 bn surplus in trade in goods with the rest of the world in June 2019, compared with +€22.6 bn in June 2018. Economists had expected a decrease to €16.3 bn.

Intra-euro area trade fell to €160.5 bn in June 2019, down by 6.6% compared with June 2018.

Prime Minister Boris Johnson’s government would win a vote of no confidence put forward by the opposition Labour Party, energy minister Kwasi Kwarteng said on Friday.

On Thursday Labour urged rebel lawmakers in the ruling Conservatives to help block a no-deal Brexit by bringing down Johnson’s administration and allowing Labour leader Jeremy Corbyn to form a caretaker government before a general election.

“I’m strongly of the view that the government would win a vote of no confidence, I don’t see Jeremy Corbyn being able to come together with the numbers, nor do I see any prospect of him leading a so called national unity government. He’s the most unpopular leader of the opposition we’ve ever had and the idea that he’s going to lead a unity government I think is ridiculous,” Kwarteng told.

AUD/USD is holding sideways near term and has not overcome any resistance of note and continues to hold above the .6738 January 2019 low as this support is reinforced by .6720, the 2016-2019 support line (connects the lows), according to Karen Jones, analyst at Commerzbank.

“The market did recently trade through these levels BUT did not CLOSE below here. This move however looks exhaustive and we would allow for some consolidation/correction near term. Rallies will need to regain the .6832 June low as an absolute minimum in order to alleviate immediate downside pressure. This resistance is reinforced at .6865 (mid May low). Above here lies .6924 55 day ma ahead of very tough band of resistance, namely .7036/61. This is the location of the 200 day ma and the 8 month downtrend. Failure at .6720 on a closing basis will suggest ongoing weakness to the 78.6% retracement at .6124 and the 2008 low at .6020.”

The U.S. economy is taking a turn for the worse and there’s a 40% chance America could experience a recession before the 2020 presidential election, according to Ray Dalio, founder of the world’s largest hedge fund, Bridgewater Associates.

“Recessions are always inevitable, the only question is: ‘When?’” Dalio told CNBC’.

“I think that in the next two years, let’s say prior to the next election, there’s probably a 40% chance of a recession,” he added.

An economic slowdown globally will prompt central banks, including the U.S. Federal Reserve, to ease monetary policies even further, said Dalio. But cutting interest rates this late into the economic cycle may not be effective in stimulating the economy, he added.

If that happens, economies around the world will likely resort to weakening their currencies to boost growth, he said. A weaker currency makes exports relatively cheaper and, in some cases, benefits financial markets. “So, I think we are entering an environment that, over the next three years, you will see more currency wars. And whether there are overt interventions or whether their monetary policies that produce that,” said Dalio.

According to Karen Jones, analyst at Commerzbank, GBP/USD pair is showing embryonic signs of recovery as the market remains under pinned by the January 2017 low at 1.1988, implying that it should hold the initial test.

“Below here lies the 1.1491 3rd October low (according to CQG). Rallies, if seen, should struggle circa 1.2210/1.2320. It stays negative while contained by its 3 month downtrend at 1.2359 today. Only above the downtrend this would introduce scope to the 55 day ma at 1.2462 and the June high at 1.2784. Only a rise above the June high at 1.2784 would indicate that a bottom is being formed (not favoured).”

New U.S. tariffs on Chinese goods could deal another blow to the Asian economic giant — and it’s not clear how much more Beijing can do to prop up its economy, Bruce Kasman, chief economist and head of global economic research at J.P. Morgan said.

Since the ongoing tariff fight between Washington and Beijing started about a year ago, Chinese authorities have used both monetary and fiscal policies to limit the economic damage brought on by elevated U.S. tariffs. Those measures have worked to some extent, according Kasman.

Growing U.S.-China tensions, and slowing Chinese and European economies are among the largest risks to global growth in the near term, several economists have said. Those stresses in the world economy could spill over to the U.S., according to Kasman.

Worries about risks outside the U.S. prompted the Federal Reserve to cut interest rates in July. Investors have also become increasingly concerned about a potential looming recession. Kasman said there’s a 40% chance of a global recession in the next six to nine months.

Karen Jones, analyst at Commerzbank, notes that EUR/USD pair has eased back from resistance at 1.1285 and the 200 day ma at 1.1290.

“It has started to erode the 1.1106 support and is now weighing on the downside. This leaves attention on the 1.1027 recent low and the 1.0961 2018-2019 support line. Below here lies the 78.6% retracement at 1.0814/78.6% retracement.Key resistance is 1.1354/71, the 2018-2019 down channel and the 55 week ma. A weekly close above this latter level is needed for us to adopt an outright bullish stance. The market will need to regain the 55 week ma and channel at 1.1360/77 to generate upside interest.”

Japan surpassed China as the largest foreign holder of U.S. Treasury securities in June.

Japan has added about $21 billion since May, making its holdings the largest since October, 2016. Japan now holds $1.12 trillion Treasurys, and China has $1.11 trillion, a $2 billion increase from the month earlier, according to U.S. Treasury department data.

China has been a less aggressive buyer of the U.S. sovereign debt, and market players have speculated that one action it could take in the trade war with the U.S. is to lighten up on its U.S. holdings. But there are no signs that is happening, according to traders.

The U.K. is the third-largest holder with $342.3 billion, up from $323.1 billion a month earlier.

ANZ analysts suggest that it’s clear that concerns over oil demand have become the driving factor in oil markets with recent escalation in trade tension making the sentiment overwhelmingly bearish.

“With a trade deal looking highly unlikely in the short term, bullish supply factors are likely to remain a secondary concern. As such, we have cut our 3mth price target for Brent to USD65/bbl. Trade talks took an abrupt turn when US President Trump announced a 10% tariff on a further USD300bn of Chinese imports. And while he has subsequently delayed its implementation, it’s clear both parties are still far apart. We recently looked at the implications of a global recession on oil demand. While that isn’t our base case, its probability is rising by the week. We still believe fundamentals are constructive, with the market tightening in H2 2019. Supply constraints persist, and Saudi Arabia’s commitment to further restraint is highly supportive. Refining margins are also elevated, and likely to see further upside as IMO buying increases. However, they are likely to take a back seat while the trade conflict persists.”

MUFG Research discusses GBP outlook in light of yesterday' UK inflation data for the month of July.

"The pound was carried only briefly yesterday on the back of UK inflation data that surprised on the upside. Core CPI data surprised on the upside, coming in at 1.9% over an expected 1.8%. Headline CPI was similarly higher at 2.1%, over expectations of 1.9%. This was enough to drive the pound higher against the dollar, testing a ceiling around the 1.2100 level for the third day in a row on a data surprise. However it will likely prove insufficient to support the pound much above the 1.2050 level. This data further muddies the water for the BoE when it comes to the domestic economy in the UK," MUFG adds.

Calling economic and financial market signals for the economic outlook “mixed,” Minneapolis Federal Reserve Bank President Neel Kashkari signaled that he is likely to support further reductions in U.S. interest rates to support growth.

Trade tensions are making businesses cautious, he said, and the inversion of the U.S. yield curve that this week sent global stocks plummeting “is an indicator that people are nervous.” At the same time, the jobs market is strong, and so is consumer spending.

As Fed policymakers gear up for their September rate-setting meeting, he said, they will be assessing all of the data to make a decision. “I am leaning towards the camp of, ‘yes we need to give more stimulus to the economy, more support, we need to continue the expansion and not allow a recession to hit us,’” he said.

EUR/USD

Resistance levels (open interest**, contracts)

$1.1272 (4160)

$1.1235 (2622)

$1.1181 (773)

Price at time of writing this review: $1.1100

Support levels (open interest**, contracts):

$1.1078 (3733)

$1.1052 (4729)

$1.1019 (4035)

Comments:

- Overall open interest on the CALL options and PUT options with the expiration date September, 6 is 103575 contracts (according to data from August, 15) with the maximum number of contracts with strike price $1,1400 (8832);

GBP/USD

Resistance levels (open interest**, contracts)

$1.2263 (1172)

$1.2209 (893)

$1.2173 (322)

Price at time of writing this review: $1.2098

Support levels (open interest**, contracts):

$1.2017 (2079)

$1.1987 (1448)

$1.1953 (1528)

Comments:

- Overall open interest on the CALL options with the expiration date September, 6 is 30203 contracts, with the maximum number of contracts with strike price $1,2750 (4128);

- Overall open interest on the PUT options with the expiration date September, 6 is 23605 contracts, with the maximum number of contracts with strike price $1,2100 (2079);

- The ratio of PUT/CALL was 0.78 versus 0.79 from the previous trading day according to data from August, 15

* - The Chicago Mercantile Exchange bulletin (CME) is used for the calculation.

** - Open interest takes into account the total number of option contracts that are open at the moment.