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Major US stocks rose significantly as US President Donald Trump said China wants to close a deal, signaling a potential de-escalation of trade tension between the two largest economies in the world.

Speaking to reporters at the G7 meeting in Biarritz in France on Monday, President Trump said that on Sunday evening, Chinese representatives called the US Department of Commerce and asked to return to the dialogue. “They were very badly hurt, but they understand that it’s right, and I really respect that. This is a very positive event for the whole world, ”Trump added.

During a joint press conference between President Trump and his French counterpart Macron, the head of the White House reiterated his view that China wants to enter into a trade deal with the United States, and believes that they are sincere in this desire. Meanwhile, Mr. Macron said Trump told the G7 leaders that he would like to conclude an agreement with China. He added that the sooner an agreement is reached, the faster the uncertainty will dissipate, and this is also the desire of the American president.

Investors also studied data from the Department of Commerce, which showed that orders for durable goods in the US grew in July much more than expected. According to the report, orders for durable goods rose 2.1% in July after a downward revision of 1.8% in June. Economists had expected orders to grow 1.1% from the 2% increase reported the previous month. However, with the exception of the jump in orders for transport equipment, orders for durable goods fell 0.4% in July after rising 0.8% in June. The rollback came as a surprise to economists, who expected that the number of orders for transport equipment would increase by 0.1%.

Most DOW components completed trading in positive territory (25 out of 30). Johnson & Johnson shares (JNJ; -0.30%) fell more than the rest. The biggest gainers were The Walt Disney Company (DIS; + 1.97%).

All S&P sectors recorded an increase. The consumer goods sector grew the most (+ 0.9%).

At the time of closing:

Dow 25,898.83 +269.93 +1.05%

S&P 500 2,878.39 +31.28 +1.10%

Nasdaq 100 7,853.74 +101.97 +1.32%

• The vice-chairman came out and said he wants to see a deal made under "calm" conditions
• China losing millions of jobs
• The tariffs have hit them very hard, we've collected over $100 billion in tariffs
• Consumer prices have not risen because China is devaluing its currency
  
• Says he is not satisfied with the WTO reforms

• Says will scrap digital tax once an international agreement is found
• Believes "very good accord" has been found on digital tax

Analysts at Royal Bank of Canada (RBC) believe that ongoing trade concerns should continue to take the shine off of what otherwise has looked like relatively solid economic data.

• “The end-of-month Q2 GDP report should confirm the economy performed reasonably well in the second quarter. Data to-date supports our forecast that GDP growth rebounded in Q2. We are looking for a 3% gain, a marked improvement following subpar growth of less than half a percent in each of the two prior quarters.
• A big chunk of the rebound in Q2 came from the oil & gas sector as earlier stresses (low global oil price benchmarks, wide Canadian price spreads, and mandated Alberta production cuts) eased. Activity outside of oil & gas production also picked up.
• Residential investment probably increased for the first time in six quarters with housing markets finding a near-term bottom in the spring. But business investment will still be a soft spot in Q2 with trade uncertainty dampening sentiment. And a big export-led surge in the often-volatile net trade balance will bump up the growth rate in the quarter but clearly looks unlikely to be repeated given rising global trade tensions.”

Rabobank's analysts believe that the Fed Chairman Powell’s speech at Jackson Hole suggests that he is leaning toward a September rate cut and did not lay out a reaction function regarding the Fed’s rate path beyond September.

• “Earlier today other FOMC participants showed that three weeks after the divisions at the July meeting there is still a lot of disagreement in the Committee.
• While Powell’s speech was supposed to be the main event of the day, Jackson Hole was overshadowed by a further escalation in the US-China trade war. There is now a strong feedback loop between trade policy and monetary policy that will force the FOMC to make more insurance cuts in the coming months, most likely in September and October.”

Analysts at TD Securities note that New Zealand’s trade deficit for July came in at NZ$685m as compared to a NZ$365m surplus in June, exceeding market expectations of a NZ$254m deficit.

• “Exports for July rose to $5.03b from $5.01b in June. Imports shot up to $5.71b in July from $4.65b in June, reaching an 8-month high. This surge was driven by the increase in demand for capital goods. Crude oil imports rose by around NZ$100m from June. Over all, the 12-month trade deficit rose to 5.463b.”

According to the positioning data is for the week ending 20 August 2019, Leveraged Funds reverted to USD selling ahead of the release of the July FOMC minutes and Fed Chair Powell’s speech at Jackson Hole, notes the analysts at ANZ.

• “Overall net long USD positions are at their lowest since mid-June 2018.
• EUR saw the largest net buying during the week by leveraged funds. Funds also sought out JPY. Brexit fatigue may be behind net buying of GBP for the second consecutive week by both leveraged funds and asset managers. Commodity currencies saw mixed positioning changes.
• Post the CFTC cut-off date, China announced retaliatory measures including additional tariffs on USD75bn of US goods, with President Trump responding with increased tariffs on USD550bn of Chinese imports. This further escalation of trade tensions will trigger volatility in financial markets and near-term positioning.”

U.S. stock-index futures rose on Monday after the U.S. President Donald Trump said China had called U.S. trade officials Sunday evening and asked to “get back to the table” for talks.

Global Stocks:

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

The Chicago Federal Reserve announced on Monday the Chicago Fed national activity index (CFNAI), a weighted average of 85 different economic indicators, came in at -0.36 in July, sharply down from a revised +0.03 in June (originally -0.02), pointing to a slower economic growth.

Economists had forecast the index to come in at 0.11 in July.

At the same time, the index’s three-month moving average edged down to -0.19 in July from -0.15 in June.

According to the report, all four broad categories of indicators that make up the index dropped from June, and all four categories made negative contributions to the index in July.

Production-related indicators made a negative contribution of -0.25 to the CFNAI in July, down from +0.09 in June. Meanwhile, the contribution of the sales, orders, and inventories category to the CFNAI dropped -0.05 in July from -0.01 in June, while the contribution of the personal consumption and housing category to the CFNAI ticked down to -0.06 in July from -0.05 in June. The contribution of the employment-related indicators to the headline indicator worsened to -0.01 in July, down slightly from a neutral value in June.

The U.S. Commerce Department reported on Monday that the durable goods orders rose 2.1 percent m-o-m in July, following a revised 1.8 percent m-o-m surge in June (originally a 2.0 percent m-o-m gain). That was the fastest rate of growth since August 2018.

Economists had forecast a 1.1 percent m-o-m increase.

According to the report, orders for durable goods excluding transportation fell 0.4 percent m-o-m, following a revised 0.8 percent m-o-m advance in June (originally a 1.2 percent m-o-m advance) and missing market expectations of a flat m-o-m performance.

Orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, rose 0.4 percent m-o-m in June, after increasing 0.9 percent m-o-m in June (revised from +1.5 percent m-o-m). Economists had called for no change in core capital goods orders in July.

Shipments of these core capital goods dropped 0.7 percent m-o-m in July after a revised flat m-o-m performance in the prior month (originally a 0.5 percent m-o-m climb).

Lyft (LYFT) upgraded to Buy from Neutral at Guggenheim; target $60

Aline Schuiling, the senior economist at ABN AMRO, suggests the impact on Eurozone’s GDP growth of any fiscal stimulus always is less than one-on-one, as part of the stimulus leaks away via higher imports, higher cyclical government tax income and higher private sector savings.

• “The shape of the stimulus is also relevant for its impact, with direct government spending or investment having a more direct and often stronger impact on growth than indirect stimulus such as tax cuts. As a rule of thumb, a fiscal stimulus equal to 1% of GDP, lifts eurozone GDP by around 0.5-0.7%. This means that our range of estimations of the room for fiscal stimulus could lift eurozone GDP growth by between around 0.25 and 0.75 pps.
• Depending on the shape and size of the stimulus, it could start having an upward impact on growth in the course of 2020.  Our current base case scenario is that growth will remain stuck at modest levels well below the trend rate throughout 2020.
• A fiscal stimulus package in line with maximum potential size according to our calculations (around EUR 160bn) could lift growth to close to the trend rate in the course of 2020. Still, governments are not moving very quickly, so we might stay at the lower end of the range of potential stimulus.”

Analysts at National Bank Financial (NBF) suggest the week will feature Canada's Q2 GDP on Friday and monthly readings to date hint at a strong contribution from trade, the result of surging exports in the quarter.

• “Investment in residential and non-residential structures may also add to the headline growth number based on previously released data on construction spending. Judging from retail sales data, growth in consumption could have slowed in the quarter but should still contribute to GDP thanks in part to stellar employment gains.
• All told, GDP may have expanded no less than 3.0% in annualized terms in Q2 following lackluster showings in 2018Q4 and 2019Q1 (+0.3% and +0.4%, respectively). That would leave the Canadian economy on pace for a 1.4% expansion in 2019.
• Looking at monthly data, the handoff to Q3 looks decent, with June GDP on pace to expand 0.1% on gains in the retail and wholesale sectors.”

Danske Bank's analysts noted the U.S.-China trade war went from bad to worse to an unprecedented level on Friday with a tit-for-tat escalation of imposing tariffs from either side of the front.

• “On Friday afternoon, China announced countermeasures to Trump's 10% tariffs on USD300bn of Chinese goods. Beijing will add 5-10% tariffs on USD75bn of US imports on 1 September and 15 December.
• Trump responded violently. The president 'ordered' US companies to find an alternative to China, and said that he would respond to China's tariffs in the afternoon (US time). After US markets closed, Trump announced that he would raise tariffs by 5% on all US imports from China, which amount to around USD550bn. The US will raise tariffs on USD250bn of Chinese imports to 30% from 25% on 1 October. The 10% tariffs on USD300bn of Chinese imports will be raised to 15% on 1 September and 15 December.
• With the latest tit-for-tat escalation, it's nearly impossible to say how the end game of the trade war will play out. Near term, we should watch out for: a) China's response to Friday's tariffs, b) China's countermeasure to the blacklisting of Huawei and its affiliates, which Beijing says that it will announce soon, c) information about trade talks set to take place in September, and d) signs that China considers imposing restrictions on exports of rare-earth metals. We expect that China will respond to the US's blacklisting of Huawei and Friday's tariffs.”

• If we do, they can stay
  
• We haven’t been happy with the WTO, but we’re getting treated better in the two now and we appreciate that

Analysts at TD Securities noted that Germany's IFO Survey revealed the business morale in the country fell to the lowest levels since 2012 in August.

• “The August German IFO survey fell more than expected, dropping to 94.3 (mkt 95.0) from a slightly upwardly revised 95.8 in July. Both the expectations and current assessment indices fell more than expected, to 91.3 (mkt 91.8) and 97.3 (mkt 98.8), respectively.
• While the forward-looking indicators in the latest PMI indicated some weakness in the IFO, the survey is now languishing at its weakest level in close to 7 years, reinforcing expectations that the economy will slide into recession after a Q2 contraction in growth.
• Worsening trade war headlines suggest little respite for German manufacturers. EUR was already under pressure and maintained its declines after the release.”

• In no-deal Brexit scenario, UK must still honour commitments that were taken by 28 member states
• EU position on Brexit is united, singular, well-known 

Swiss National Bank statistics indicate that it kept up currency interventions to weaken the franc last week, albeit at a slower pace.

Sight deposits rose about 2.5 billion francs to 591.7 billion francs. The increase is less than the 3.8 billion-franc jump the previous week, which was the biggest since 2017. However, it’s still almost five times the average for the whole of 2019.

The amount of cash commercial banks have at the SNB has increased over the past month as the franc rallied to its strongest in two years against the euro. That suggests the central bank is making good on its long-running pledge to intervene, in conjunction with a -0.75% deposit rate, to keep the currency from appreciating.

Fears about the global economy have piled pressure on the haven franc, as has the prospect of additional monetary stimulus in the euro area. The ECB is expected to join a global wave of easing next month and cut its deposit rate further below zero. Investors are betting bets the SNB will follow suit with a rate cut of its own.

• US is in a much better position now than at any time in negotiations with China

He is also tweeting about trade issues with China: "Great respect for the fact that President Xi & his Representatives want "calm resolution." So impressed that they are willing to come out & state the facts so accurately. This is why he is a great leader & representing a great country. Talks are continuing!"

With the US 10yr bond yield having collapsed by as much as 20bps over the past few sessions, Westpac's Financial Markets Strategy team provided their take on how much lower can US bond yields go and said that there is little to be gained from pushing against the current trend.

“Current Fed pricing for 2019 reflects 2 rate cuts and a greater than 50% chance of a third, and so the market’s Fed call is very similar to our own forecasts of a cut at each remaining meeting this year. That suggests that valuations across the curve are very tight. However, price action this year has paid those that were either long or square and tactically bought the dip. The circumstances behind that sentiment and momentum only increased, so we see little reason to be sceptical about further positive momentum in bond markets this week. Even so, it is timely to ask how low US 10yr yields can go?” The current yield is now only a handful of basis points off the all time low set in 2016. We think yields can sustain around 1.5% and could move lower if the Fed signalled that the current cycle might be extended beyond its current “mid-cycle” pre-emptive categorisation.”

The Bank of Japan is responsible for deciding whether to ramp up stimulus to support the economy, but should weigh the impact its monetary policy will have on the banking sector, the country’s top financial regulator said on Monday.

There is mounting speculation the BOJ may be forced to join other major central banks in expanding stimulus as early as next month to protect economic growth as the U.S.-China trade war continues to drag on Japan’s export-reliant economy.

Toshihide Endo, commissioner of the Financial Services Agency (FSA), said sliding global bond yields and the BOJ’s prolonged ultra-loose monetary policy were only among various factors weighing on regional banks’ profits.

Structural woes, such as a shrinking population, were also exerting pressure on Japan’s regional banks to revamp their business models into those less reliant on traditional lending, Endo said.

Gold will extend its winning ways as the U.S.-China standoff harms growth, risking a deeper slowdown and inviting more central-bank easing, according to UBS Group AG, which jacked up price forecasts with a prediction the precious metal may hit $1600 within three months.

“The trade war between the U.S. and China has escalated to a new level,” Giovanni Staunovo and Wayne Gordon, analysts at the wealth-management unit, said in a report received on Monday. “Gold has demonstrated its safe-haven qualities and we stay long the metal, a trade we initiated in mid-May.”

After its revisions, UBS has a three-month trading range of $1,450 to $1,600 an ounce, plus a six-month forecast of $1,600 and 12-month view of $1,650. Previously, both the half-year and 12-month outlooks were set at $1,500.

“The main risk to our call is a back flip by Trump or concessions and deescalation by China, paving the way for a trade deal ahead of the U.S. presidential elections in 2020,” the UBS analysts said.

Karen Jones, Team Head FICC Technical Analysis at Commerzbank, suggested the cross needs to surpass the 120.55/72 band in order to regain upside pressure.

“EUR/JPY is on the defensive but with a second 13 count and TD support at 116.36 we are cautious of blindly following this lower. Initial resistance is the 20 day ma at 118.55 and the 120.06 25th July low. Key short term resistance is the 55 day ma and the 3 month downtrend at 120.55/72. The market will need to regain this on a closing basis to reassert upside interest. TD support at 116.36 guards the 114.86 2017 low. The break lower last week saw the market erode a 2012-2019 support line and this leaves a negative bias entrenched while below the downtrend”.

According to the report from Ifo Institute for Economic Research, the headline German IFO Business Climate Index came in at 94.3 in August, weaker than last month's 95.7 and missing the consensus estimates pointing to a reading of 95.1. Meanwhile, the Current Economic Assessment arrived at 97.3 points compared to last month's 99.4 and 98.6 anticipated. On the other hand, the IFO Expectations Index – indicating firms’ projections for the next six months, came in at 91.3 for August, down from previous month’s 92.2 reading and missed market expectations of 91.5.

Comments by Ifo economist, Klaus Wohlrabe

• German industrial sector is in a recession, services is now following

• There will be GDP stagnation at most in Q2

• The last time industrial companies demonstrated such pessimism was back in 2009

• Latest developments in trade war not yet reflected by the latest survey

The pair has now shifted its attention to the 0.9716/0.9659 area following Friday’s sharp pullback, noted Karen Jones, Team Head FICC Technical Analysis at Commerzbank.

“USD/CHF crept higher all week, and then charted an outside day to the downside on Friday that wiped out the weeks gains, this places it on the defensive and attention is on key support is the .9716/.9659 band (location of the 13th August low, 25th June low, the January low and Fibo support). Below .9659 (last weeks low) targets the .9543 September 2018 low. Longer term we target .9211/.9188, the 2018 low. Key resistance, remains the 200 day ma at .9955, and we continue to look for this to cap the topside”.

The Danske Analysts note that markets will watch out for further trade war escalation and 'tit-for-tat' headlines, among the first-tier macro news from Germany and the US.

“In Europe focus is on the German Ifo index for August. Last week's PMI figures finally signalled some stabilization, but the ZEW survey gave a different signal. We think the battered German economy is not yet out of the woods and hence look for a further deterioration in today's Ifo expectations and current situation assessment on the back of ongoing geopolitical uncertainties. In the US, preliminary capex orders in July are due, which will be interesting in the light of the ongoing manufacturing slowdown and trade war uncertainty. It seems that many companies are reluctant to invest in the current environment.”

• This is a very positive development for the world

• We will have a further statement on China

Analysts at Westpac keep their bearish bias intact for the New Zealand economy while expecting a 2.3% growth rate for 2020 versus previously anticipated 3.1% expansion.

"We expect growth to reach a peak of 2.8% in 2021, as the cocktail of monetary and fiscal stimulus has its greatest impact. Part of the reason for our more cautious near–term outlook is the state of the global economy. The US–China trade war has intensified, and aside from the direct impact of tariffs, the uncertainty generated by the conflict is proving to be toxic for business confidence and investment decisions. Business confidence has been low since the 2017 election, and it has fallen even further in recent months. To date, the labour market has been resilient to the downturn in the business sector, with the unemployment rate falling to an 11–year low of 3.9% in June. However, there are signs that hiring is slowing. We expect that unemployment will push back up to 4.2% by the end of this year. We think it’s only a matter of time before New Zealanders turn their eyes back to the housing market. We’re also expecting a continued spend–up from the Government over the coming years. With the 2020 election coming into sight, we are forecasting that the Government will introduce plans for around $1bn per annum of additional spending at each Budget – a level of spending that we think can be achieved while still running small surpluses, ensuring that it is politically palatable."

Japan’s top government spokesman denied on Monday that Tokyo made too many concessions in trade talks with the United States, saying the fact the two countries were able to reach a broad agreement was “very valuable.”

The United States and Japan agreed in principle on Sunday to core elements of a trade deal that U.S. President Donald Trump and Prime Minister Shinzo Abe said they hoped to sign in New York next month.

The agreement, if finalised, would cool a trade dispute between the two allies just, but some Japanese commentators say Tokyo gave up too much.

At a news conference in Tokyo, Chief Cabinet Secretary Yoshihide Suga was asked if the United States had dropped its threat to impose additional tariffs on Japanese automobiles.

“Negotiations are still underway so I’d like to refrain from commenting,” Suga told reporters.

“But I believe that won’t be the case,” he added, because the two countries’ leaders had confirmed, including at a summit in September, that Washington would not impose higher tariffs on auto and auto parts while trade talks were under way.

“Japan and the U.S. have negotiated based on the joint statement last September. And related ministers agreed based on that, so it was very valuable,” Suga said.

China is willing to resolve its trade dispute with the United States through "calm" negotiations and resolutely opposes the escalation of the conflict, Vice Premier Liu He, who has been leading the talks with Washington, said on Monday.

The increasingly bitter trade war between the world's two largest economies sharply escalated on Friday, with both sides levelling more tariffs on each other's exports. U.S. President Trump announced an additional duty on some $550 billion of targeted Chinese goods on Friday, hours after China unveiled retaliatory tariffs on $75 billion worth of U.S. goods. However, Trump appeared on Sunday to back off on his threat to order U.S. companies out of China.

Liu, speaking at a tech conference in southwest China's Chongqing, said nobody benefited from a trade war. "We are willing to resolve the issue through consultations and cooperation in a calm attitude and resolutely oppose the escalation of the trade war," Liu, who is President Xi Jinping's top economic adviser, said.

"We believe that the escalation of the trade war is not beneficial for China, the United States, nor to the interests of the people of the world," he added.

"U.S. companies are especially welcome in China, and will be treated well. We welcome enterprises from all over the world, including the United States, to invest and operate in China, Liu said." Liu said.

The WSJ reports the weekend’s comments by the US President Trump’s top Economic Adviser Kudlow and Treasury Secretary Mnuchin, as they clarified on Trump’s Friday’s tweet, ordering US companies to look for alternatives to China after China said it would add more tariffs to US imports. 

Kudlow said that Trump has no intent to invoke emergency powers and force companies to relocate operations from China.

Mnuchin noted that Trump wants US firms to start looking beyond China while adding that US President’s reference to the Fed Chair Powell as enemy not 'literal'.

China’s President Xi has become an enemy on trade issues, Mnuchin said.

EUR/USD

Resistance levels (open interest**, contracts)

$1.1235 (2454)

$1.1207 (2453)

$1.1189 (920)

Price at time of writing this review: $1.1143

Support levels (open interest**, contracts):

$1.1108 (4100)

$1.1076 (4579)

$1.1037 (4178)

Comments:

- Overall open interest on the CALL options and PUT options with the expiration date September, 6 is 108606 contracts (according to data from August, 23) with the maximum number of contracts with strike price $1,1400 (8844);

GBP/USD

Resistance levels (open interest**, contracts)

$1.2387 (1741)

$1.2346 (1178)

$1.2321 (933)

Price at time of writing this review: $1.2265

Support levels (open interest**, contracts):

$1.2251 (1139)

$1.2211 (1303)

$1.2184 (1535)

Comments:

- Overall open interest on the CALL options with the expiration date September, 6 is 30201 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 25074 contracts, with the maximum number of contracts with strike price $1,2100 (1934);

- The ratio of PUT/CALL was 0.83 versus 0.82 from the previous trading day according to data from August, 23

* - 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.