- Weekly global market focus
- Washington political uncertainty undercuts the markets
- Markets hope for tariff deferral at next week’s high-level US/Chinese trade meetings
- US/Chinese trade war may expand to capital restrictions
Weekly global market focus — The U.S. markets this week will focus on (1) US/Chinese trade developments ahead of next week’s high-level trade meetings, (2) any further reporting on last Friday’s report by Bloomberg that the Trump administration is considering ways to curb U.S. investment in Chinese securities, (3) week-two of the House impeachment inquiry and any developments on the Ukraine controversy, (4) a busy week for Fedspeak capped by comments on Friday by Fed Chair Powell, (5) any spike in money market rates on today’s end-quarter statement date.
The European markets this week will focus on Brexit and any further debate among ECB members about the ECB’s decision to restart QE. Key Eurozone economic reports this week include (1) Monday’s national CPI reports and Tuesday’s Sep Eurozone CPI report (headline expected unch at +1.0% y/y and core expected +1.0% vs Aug’s +0.9%), (2) today’s German Aug retail sales report (expected +0.5% m/m after July’s -1.6%), (3) final-Sep PMI reports on Wed and Thu, and (4) Thursday’s Eurozone Aug retail sales report (expected +0.3% m/m after July’s -0.6%).
UK Prime Minister Johnson is expected to submit a new proposal for the Irish backstop to the EU late this week after the 4-day Conservative Party conference concludes on Wednesday. Meanwhile, MPs opposed to a no-deal Brexit will be formulating new lines of attack to prevent a no-deal Brexit on the current October 31 Brexit deadline.
In Asia, the Chinese stock market today will react to last Friday’s alarming report that the Trump administration is considering ways to restrict capital flows into Chinese investments. After today’s session, the Chinese stock markets will be closed for the remainder of the week for Golden Week and Wednesday’s National Day celebration of the 70th anniversary of the founding of People’s Republic of China. The Japanese markets will focus on Monday night’s Q3 Tankan report (large manufacturing business conditions index expected -6 to 1 after Q2’s -5 point drop to 7).
The Chinese markets today will react to Sunday night’s mixed PMI reports. China’s national Sep manufacturing PMI rose by +0.3 to 49.8, which was slightly stronger than expectations of +0.1 to 49.6. The Sep non-manufacturing PMI fell by -0.1 to 53.7, which was slightly weaker than expectations of +0.1 to 53.9. The Sep Caixin China manufacturing PMI was expected to fall -0.2 to 50.4.
Washington political uncertainty undercuts the markets — The markets will be subject to political uncertainty in coming months after House Speaker Pelosi last Tuesday announced a formal impeachment inquiry into President Trump. The House and Senate last Friday left town for a 2-week recess. However, the House Intelligence Committee will remain in session this week to pursue the Ukraine controversy with subpoenas and interviews.
The betting probability at PredictIt.org is currently at 71% that President Trump will be impeached by the House before the end of his first term, up from 31% on Sep 21 before the Ukraine controversy emerged. However, the probability that the Senate will convict Mr. Trump and eject him from office during his first term are much lower at 21%. That means that the betting odds are 79% that President Trump will serve out his first term and stand for reelection.
Markets hope for tariff deferral at next week’s high-level US/Chinese trade meetings — Chinese Vice Premier Liu will travel to Washington next week for high-level meetings with USTR Lighthizer and Treasury Secretary Mnuchin. Meanwhile, the clock is ticking down to new U.S. tariffs on Chinese goods. President Trump has announced that the tariff will be raised to 30% from 25% on the original $250 billion of Chinese goods and that a 15% tariff will be imposed on the last $160 billion of Chinese goods on Dec 15. The Trump administration on Sep 1 imposed a 15% tariff on about $110 billion of Chinese goods.
The markets are hoping that there might be an “interim” agreement next week whereby Mr. Trump agrees to delay the Oct 15 tariff hike and the Dec 15 tariff and perhaps even roll back the Sep 1 tariff in return for Chinese ag purchases and IP commitments. China last week made a series of announcements about increased purchases of U.S. ag products.
US/Chinese trade war may expand to capital restrictions — The markets were alarmed by last Friday’s report from Bloomberg that the Trump administration is considering ways to restrict American capital flows into Chinese securities. Bloomberg reported that the Trump administration is considering such measures as (1) delisting Chinese companies listed in the U.S., (2) limiting exposure of American investors to the Chinese markets through government pension funds, and (3) putting limits on whether U.S. index firms can include Chinese stocks in their indexes.
Bloomberg said that President Trump has approved discussion of the issue but that exact measures have not yet been worked out or approved by Mr. Trump. Bloomberg said that the capital restrictions might be used as leverage in the current trade negotiations. However, other Trump officials said that the capital restrictions would be kept separate from the trade negotiations, meaning the threat of capital restrictions could continue even if there is a trade agreement.
Chinese stocks trading in the U.S. were hit hard on Friday by the news with Alibaba (BABA) falling -5.2%, JD.com (JD) falling -6.0%, and Baidu (BIDU) falling -3.7%. ETFs with significant Chinese stock exposure fell sharply with the Invesco China Technology ETF (CQQQ) falling -2.8%, the iShares China Large-Cap ETF (FXI) falling -1.2%, and the iShares MSCI China ETF (MCHI) falling by -2.2%.