US stocks closed sharply higher after Beijing struck a conciliatory tone in the trade war with China’s Commerce Ministry saying that what “should be discussed now is about removing the new tariffs to prevent escalation.” The NASDAQ led the gains with 1.48% while the S&P and the DOW closed up 1.27% and 1.25% respectively. Yield on 2Y and 10Y USTs closed higher at 1.5200% and 1.4945% respectively
In an attempt to avert defeat at the hands of Labour and pro-European Tory MPs, Prime Minister Boris Johnson is stepping up efforts to reach a deal with the EU. Boris’ decision to suspend parliament for five weeks has distressed opponents of a no-deal Brexit and Labour would want to pass a law instructing the premier to seek a delay to Brexit rather than crash out of the EU; some 20 to 40 Tory MPs are reportedly considering supporting Labour and the numbers would be tight for or against the passing of the law. Boris has instructed his chief Brexit negotiator, David Frost, to meet his EU counterparts twice a week throughout September to get a revised deal ahead of the resumption of Parliament in October: that Boris has softened his previous stance of not negotiating with the EU unless the Irish backstop is removed should appeal to some Tory MPs who do not want a no-deal breakaway. The pound closed lower at $1.2181 while yield on 10Y and 30Y UKTs closed lower at 0.4348% and 0.9803% respectively.
Hawkish ECB policymakers have begun to announce their warnings over excessive stimulus ahead of the bank’s September 12 meeting. Dutch central bank governor Klaas Knot echoed the earlier sentiments of his German counterpart Jens Weidmann saying the outlook is not weak enough to merit bond purchases. Bank President Mario Draghi had in July primed the market to expect some form of stimulus this September with quantitative easing being on the table as well. While policymakers are in support of a rate cut – Knot signaled openness to it – the fundamental disagreement is over whether this alone will suffice. Knot’s argument is that the bank should keep some ‘firepower’ for when future contingencies materialise. The euro closed lower at $1.1057 while yield on 10Y and 30Y DBRs closed higher at -0.692% and -0.180% respectively.
Asian markets were up in early trading on news that China is more interested in renewed trade negotiations than further escalation of the trade war with the US. A spokesperson for China’s Commerce Ministry was quoted as saying China would not immediately respond to the latest tariff hikes by the Trump administration and that the two sides have been discussing details of the September round of face-to-face talks. The NIKKEI and ASX cemented early gains in the afternoon, trading at 1.25% and 1.34% respectively, while the HANG SENG and the CSI slid from early highs to trade 0.06% and 0.40% in the negative.
The latest downgrade of Lebanese government debt by Fitch last Friday from B- to CCC is set to make debt servicing more difficult for the nation. Saddled with the third highest debt-to-GDP ratio in the world at about 150%, stagnation in the economy has worsened an already precarious situation. The country spent about half of its 2018 revenues on debt servicing. Reports surfaced this month of the parallel market rate for the Lebanese pound slipping to 1,560 per dollar signalling cracks in the central bank’s management of the exchange rate which had been held at about 1,500 pounds to the dollar for more than two decades. A heavy outflow of hard currency has also added to the country’s woes to the extent that banks have begun calling clients offering rates as high as 15% on the Lebanese pound equivalent. LEBAN 29s and 35s were lower, trading in the low 66s and high 65s respectively.
Argentina’s hard currency bonds slipped towards 40 cents on the dollar after the government laid out a series of measures to try to lighten the debt load. In a bid to shore up the currency and avoid another default, the government wants investors in short-term notes issued in the local market to accept longer maturities. Foreign reserves have already plunged $10 billion over the past month and coupled with an economy in deep recession and soaring inflation prospects for President Mauricio Macri to get re-elected look gloomier than ever. The market is not too optimistic about opposition frontrunner Alberto Fernandez taking office holding the belief that his inauguration will usher a return to the populist policies of the tenure of his running mate – Cristina Fernandez de Kirchner. The peso closed slightly firmer at 57.8830 to the dollar while ARGENT 28s and 47s tumbled to trade in the high 40s and low 41s respectively.
A report released by Russia’s Economy Ministry showed that inflation is set to slide to 3% at the end of 2020 down from a previously projected 3.8% amid stalling retail demand. The Economy Ministry is laying the blame on the central bank continuing the conflict between the two with Minister Maxim Oreshkin laying the blame on unchecked consumer lending. Curiously, the ministry’s estimate is a full percentage point below the central bank’s even as the ministry says the forecast assumes “considerable” easing, although declining to put a figure to it. The report also showed GDP growth falling to 1.7% from a previous 2% in 2020. The ruble closed firmer at 66.5780 to the dollar while RUSSIA 29s were slightly up, trading in the high 107s as RUSSIA 47s went lower, trading in the high 118s.
The South African rand is set for a tough month following the pressures from the embattled state-owned electricity company, Eskom Holdings, coupled with escalating tensions between the US and China. The fact that China accounts for more than 21% of the nation’s export earnings gives some real exposure to the trade war and analysts are placing bets on a weakening of the rand. The yield on 5-YR SOAF treasuries was 3.480% while the ZAR was trading at 15.3294 against the USD.