e-markets.nordea.com/article/45374/week-ahead-ceasefire-deja-vu 27 July 2018 Week Ahead: Ceasefire déjà vu Andreas Steno Larsen | Morten Lund | Martin Enlund | Kjetil Olsen | Erik Johannes Bruce | Jan von Gerich | Torbjörn Isaksson | Jan Størup Nielsen | Anders Svendsen | Andreas Wallström | Amy Yuan Zhuang | Tuuli Koivu | Joachim Bernhardsen | Tatiana Evdokimova | Denis Davydov | Susanne Spector Nothing concrete was agreed between Juncker and Trump, outside of a trade related ceasefire. While that situation feels a little like a déjà vu of the Chinese trade talks, the strong reporting season ensures solid risk appetite at the moment. Read the report as pdf here. Markets are breathing a sigh of relief after Wednesday’s trade meeting between the EU’s Juncker and Donald Trump ended up in an agreement to put the trade war on hold. While the conciliatory tone is obviously a step forward compared to the stories that Trump’s administration contemplated imposing auto-taris already before year-end, it is hard to see anything tangible resulting from the meeting. Trump and Juncker have basically agreed to make an agreement on a date when they can meet and agree on an agreement again. Not particularly concrete. Trump cited two important European concessions in the negotiations with Juncker. I) That the EU will buy more US soybeans, II) that the EU will buy more LNG (liquid natural gas). Ad I) Given the recent conflict with China, China has bought soybeans increasingly elsewhere (eg from Brazil), which is why US soybean prices have dropped. Hence, US soybeans would have been attractive to the EU for pricing reasons anyway. Ad II) This was in principle already agreed at the NATO summit a few weeks back, as NATO is trying to find a way out of the dependency on Russian energy. Overall, we are reluctant to write o the risk that the ceasefire will be short-lived. Just a friendly reminder to our readers that this was a Reuter’s headline on 20 May “US, China putting trade war on hold, Treasury’s Mnuchin says”. Well, here we are a few months later.
Andreas Steno Larsen | Morten Lund | Martin Enlund | Kjetil Olsen | Erik Johannes Bruce | Jan von Gerich | TorbjörnIsaksson | Jan Størup Nielsen | Anders Svendsen | Andreas Wallström | Amy Yuan Zhuang | Tuuli Koivu | JoachimBernhardsen | Tatiana Evdokimova | Denis Davydov | Susanne Spector
Nothing concrete was agreed between Juncker and Trump, outside of a traderelated ceasefire. While that situation feels a little like a déjà vu of the Chinesetrade talks, the strong reporting season ensures solid risk appetite at themoment.
Read the report as pdf here.
Markets are breathing a sigh of relief after Wednesday’s trade meeting between the EU’s Junckerand Donald Trump ended up in an agreement to put the trade war on hold. While the conciliatory toneis obviously a step forward compared to the stories that Trump’s administration contemplated imposingauto-taris already before year-end, it is hard to see anything tangible resulting from the meeting. Trumpand Juncker have basically agreed to make an agreement on a date when they can meet and agree on anagreement again. Not particularly concrete.
Trump cited two important European concessions in the negotiations with Juncker. I) That the EU willbuy more US soybeans, II) that the EU will buy more LNG (liquid natural gas).
Ad I) Given the recent conflict with China, China has bought soybeans increasingly elsewhere (eg fromBrazil), which is why US soybean prices have dropped. Hence, US soybeans would have been attractive to theEU for pricing reasons anyway.
Ad II) This was in principle already agreed at the NATO summit a few weeks back, as NATO is trying to find away out of the dependency on Russian energy.
Overall, we are reluctant to write o the risk that the ceasefire will be short-lived. Just a friendly reminder toour readers that this was a Reuter’s headline on 20 May “US, China putting trade war on hold, Treasury’sMnuchin says”. Well, here we are a few months later.
In terms of market repercussions, the threat of being faced with a 25% tari on European exported cars hasbeen one of the key factors holding back Bund yields over the past months. European auto-companies havesubstantially underperformed wider indices – a development that has usually coincided with lower Bundyields. A trade ceasefire hence paves the way, at least temporarily, for higher Bund yields.
Chart 2: Better auto-stoxx performance could pave the way for higher Bund yields
If Trump’s administration continues to view trade as a zero-sum game, they can still take comfort in therelative equity developments in the US versus key trading partners since the escalation of the trade rhetoric.Measured in USD, the S&P 500 has outpaced DAX, Shanghai Composite and TOPIX substantially since April.This fact heightens the risk of a re-escalation. If focus in the trade war turns from being trade-related tocurrency-related, we see this as a downside risk to our short-term positive USD view.
Chart 3: No market-based trade scare from Trump in sight. S&P 500 outpaces peers
Surprise, surprise, surprise
On the risk appetite-positive side, the Q2 reporting season continues to deliver. Actually, it is amongthe most positive earnings seasons versus expectations seen in a long time (see the surprise indicator below).In that light it is a tad surprising that the S&P hasn’t rallied more on the back of the overwhelminglypositive Q2 reports. We interpret this as a sign that the market was already positioned towards a riskappetite-positive reporting season. In other words, less negative news is needed to cause a correctioncompared to the other way around.
If US macro momentum starts to fade more than expected, this could trigger renewed risk o.
Chart 4: Q2 reporting season among the most positive seen in a long time versus expectations
Despite the strong reporting season, the ratio between cyclicals and defensives in S&P 500 remains belowthe levels seen earlier in the year. This is one factor holding back the 10yr treasury yield from rising. Bothvariables are likely held back by the fading PMI momentum, which should be expected from here. Nohelp to the flattening 2s10s in the US curve from this front.
Chart 5: Neither cyclicals nor the 10yr treasury yield have yet closed in on year highs
From a PMI perspective, longer bond yields shouldn’t expect much help next week. Both copper andShanghai Composite developments over the past month suggest downside risks to the Chinese PMI. Wecontinue to see more risk on the downside for Global PMIs, albeit from good levels.
Chart 6: Copper indicates downside for Chinese PMI momentum
A Japanese twist and shout
The Bank of Japan (BoJ) has been rumoured to tweak its yield-curve control (YCC) via a so-calledreversed operation twist, which aims to allow the long-end of the curve to rise, while purchases are movedinwards on the curve. Higher long-dated rates and a steeper yield curve would provide support for Japanesebanks, which is likely the ultimate goal of a reversed twist operation, should the BoJ opt for it.
Higher Japanese rates would also mean less buying of US and European bonds. Due to the reverse operationtwist speculation, the Bund yield at least temporarily bounced 10 bp of the intra-day lows recorded on Fridaylast week. This is a big move after the ECB’s forward guidance “killed” market volatility. Draghi made noattempt of reviving it with his holiday attitude on Thursday (ECB Watch: Summer in the City (of Frankfurt)
Chart 7: Steeper JPY curve should lead to steeper EUR curve
What is most important in the week ahead?
We can look forward to an action-packed week, as several interesting key figures and central bank meetingsare on the agenda.
The central bank meeting that could prove the most significant to global markets is the BoJ meeting onTuesday. If the BoJ against our expectations opts for a change of the YCC, allowing longer-bond yields torise slightly, while concentrating buying inwards on the curve, we don’t view this is a major policy signal. Werather view it as a helping hand to the domestic banks.
Recently, the purchase pace of the QQE programme has not tapered, indicating that market conditionshave not allowed the BoJ to automatically taper further. Inflation is still running miles below the 2% targetin Japan. So operation “reverse twist” or not, the BoJ is not nearing the exit door any time soon. If the BoJmeeting proves to be a non-event, expect some slight reflattening of yield curves across the globe.
Chart 8: The BoJ has not managed to taper asset purchases recently (see red circle)
From the Euro zone, the inflation print on Tuesday will be closely scrutinised for any surprises. It will takea solid surprise to lure EUR rates out of their summer lull. We don’t expect the inflation print to rock the boat,as the ECB’s forward guidance seems very well anchored in markets for now.
On Wednesday, the US ISM Index will be released ahead of the FOMC meeting. We see mainly downsiderisks to the ISM figure based on the regional surveys. We also expect the FOMC meeting to be uneventful,as there is neither a press conference nor any updated forecasts. The recent hot topic of the flattening yieldcurve may be a worry for some FOMC members, although chair Powell did not sound worried in July.
Thursdays Bank of England meeting and inflation report will be interesting. The market is pricing a highprobability of a rate hike (>90%). We though think that the MPC will be divided on whether to hike or not andjudge that the decision will be a much closer call, than what the market pricing suggests. Ultimately we thinkthe MPC will vote to keep rates unchanged by a 5-4 margin. This is an o-consensus call.
On Friday, the monthly US job report will be published. Most attention will again be on wage growth. Thelatest reading on average hourly earnings was 2.7% y/y, but we think it will only be a matter of time until itsurpasses 3%. This will confirm the Fed and Chair Powell in their current stance.
Chart 9: Big discrepancy between market pricing and Fed dot plot
From Scandinavia, the Swedish Q2 GDP report will take up most of the attention on Monday. We seeQ2 GDP at 0.4% q/q and 2.5% y/y, thus somewhat lower growth than in the previous quarters. In general, weexpect Swedish growth to slow in the quarters ahead.
PMIs from both Norway and Sweden will be published on Wednesday. The Swedish PMI serves asan important pre-warning for the Euro zone. A further setback in the Swedish PMI is a canary that moreweakness should also be expected in the Euro zone further down the road.
In Sweden, the Q2 GDP report is released and from the Euro area, the German and Spain inflation figures willgive some indications of what to expect from the Euro-area inflation numbers released on Tuesday. Across theAtlantic, the Dallas Fed Manufacturing Outlook Survey is released.
Tuesday (31/7)
The day begins early with the Bank of Japan monetary policy decision and PMI figures from China but today’smain releases come from the Euro area as inflation and GDP figures are released. The day also includes CorePCE prices – the Fed’s preferred inflation gauge and consumer confidence numbers from the US.
Several interesting events will draw market attention today. On the data front, we get the PMI numbers fromSweden and Norway and Caixin PMI data from China. The US ISM manufacturing release will also be in focusand the ADP Nonfarm Employment numbers will give some early indications of Friday’s US job report. Finally,the Fed meeting in the evening will be watched closely, although there is no press conference scheduled afterthe meeting. In the EM space, the Central Bank of Brazil is expected to keep its interest rate on hold while theCentral Bank of India is expected to hike rates by 25bp.
Today’s main event is the Bank of England’s interest rate decision and consensus expects a hike. The CzechNational Bank and Bank of Mexico meetings will also be in focus. From the US, factory order data arereleased but otherwise today’s calendar is rather light in terms of key figures.
Friday (3/8)
All focus will be on the US job report and especially on the average hourly earnings numbers. The day alsoincludes ISM non-manufacturing from the US and retail sales figures from the Euro area. Final Euro-area PMIsare also due out and house prices are due from Norway.
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