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  • Chinese stocks and yuan rally sharply ahead of Trump-Xi meeting
  • Johnson and Hunt are final two Tory candidates with Johnson as a 92% favorite to win
  • U.S. existing home sales expected to remain in strong shape 
  • U.S. Markit PMIs will be watched for any fresh weakness in business confidence

Chinese stocks and yuan rally sharply ahead of Trump-Xi meeting -- The Chinese markets have rallied sharply this week on the thaw in US/Chinese relations.  President Trump on Tuesday said he had "a very good telephone conversation" with President Xi and said they would hold an "extended" meeting at the G-20 meeting that begins this coming Friday in Japan.  The Shanghai Composite index on Thursday rallied to a new 7-week high and closed sharply higher by +2.38%.  The Chinese yuan on Thursday rallied to a 5-week high and closed sharply higher by +0.77%.

There was some additional good news on Wednesday when USTR Lighthizer told Congress that he planned to have a phone call with his Chinese counterpart late this week.  He did not name his counterpart, which raised some questions about whether Vice Premier Liu is being replaced as China's lead trade negotiator.

The markets are hoping that the Trump-Xi meeting will produce a framework for the resumption of talks and that Mr. Trump will back off his threat for a 25% tariff on another $300 billion of Chinese goods.  Both sides have warned that there isn't likely to be any full agreement at the Trump-Xi meeting since there is still much to discuss.  Commerce Secretary Ross this past weekend said, "I think the most that will come out of the G-20 might be an agreement to actively resume talks."

China seems intent on sticking to its clearly delineated red lines, which are that (1) there will be no post-agreement U.S. tariffs on Chinese goods, (2) any agreement about Chinese commodity purchases will be in realistic qualities, and (3) the agreement respects the dignity of both parties, which refers to China's refusal to pass any extensive new legislation to implement the agreement.  Any new negotiations may not get far if Mr. Trump isn't willing to back off some of his demands on China.

Johnson and Hunt are final two Tory candidates with Johnson as a 92% favorite to win -- Conservative MPs on Thursday voted for Boris Johnson and Jeremy Hunt to be the final two candidates sent to the 160,000 grassroots Conservative Party members for a final vote.  The winner is expected to be named in the week of July 22.  Mr. Johnson has 92% betting odds of becoming the next Tory leader and Prime Minister, versus odds of only 7% for Jeremy Hunt, according to

Mr. Johnson over the next few weeks of campaigning is likely to continue to downplay the odds of a no-deal Brexit and stress that his preference is a renegotiation of the withdrawal agreement.  After he likely becomes Prime Minister in late July, however, Mr. Johnson will be put to the test about whether he can cajole the EU into softening the Irish backstop, which is the main obstacle to getting a withdrawal deal through Parliament.  If the EU is unwilling to soften the deal, Mr. Johnson will then be in the same untenable position as Prime Minister May when his October 31 Brexit deadline arrives.  The only question then would be whether Mr. Johnson breaks his promise not to extend the Brexit deadline, or whether he manages to do an end-around Parliament and execute a no-deal Brexit.

As a surprise move, Mr. Johnson might also decide to call a snap election before the Brexit deadline in an attempt to regain a Conservative Party majority in Parliament.  In case of an election, Mr. Johnson could legitimately seek a delay of the October 31 Brexit deadline.

U.S. existing home sales expected to remain in strong shape -- The market consensus is for today's May existing home sales report to show a +1.4% increase to 5.27 million, more than reversing April's small -0.4% decline to 5.19 million.  Home sales in April were in generally strong shape at 8% below the 12-year high of 5.64 million units posted in November 2017. 

While there are doubts about the U.S. economy, home sales could at least get a boost as talk grows about Fed rate cuts.  The 30-year mortgage rate has plunged by -110 bp in the past 7 months from November's 8-year high of 4.94% to the current level of 3.84%.  The current mortgage rate is only 2 bp above the early-June 1-1/4 year low of 3.82%.  This week's plunge in T-note yields could push the mortgage rate even lower in the coming days.

U.S. Markit PMIs will be watched for any fresh weakness in business confidence -- The markets will carefully watch today's Markit PMI reports to see if business confidence continued to slip in June.  The FOMC is fully expected to ease at its next meeting on July 30-31, but only if the intervening economic and inflation data is weak enough to indicate that a rate cut is necessary.

There has already been some weak business confidence data this week.  Monday's June Empire manufacturing index plunged -26.4 points to -8.6 and Thursday's June Philadelphia business confidence index fell by -16.3 points to 0.3.  Monday's June NAHB housing index of builder confidence fell -2 points to 64, which was weaker than market expectations of +1 to 67.

The consensus is for today's June Markit PMI reports to show little change following May's large declines.  The consensus is for today's June Markit manufacturing PMI to be unchanged at 50.5 after May's -2.1 point decline to 50.5, which was the lowest reading in at least eight years.  The consensus is for today's June Markit services PMI to show a +0.1 point increase to 51.0 after May's -2.1 point drop to a 3-1/4 year low of 50.9.  The Markit PMIs are already in weak territory and are hovering not far above the boom-bust level of 50.0.




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