The Weekly Update

A roller coaster week saw further trade rhetoric grab market attention with Trump’s comments such as “Tariffs are the greatest”, and renminbi “has been dropping like a rock” not helping market stability. Fortunately, on Thursday, US-EU trade talks appeared to calm markets. US Q2’18 GDP came in at 4.1%, marginally below expectations; although still a strong reading, Friday saw the S&P fall, dragged by the US tech sector. Meanwhile, the dollar closed the week 0.20% higher, the yield on the 10-year UST moved 6bps higher to 2.96%, and Brent gained 1.67%.

Elsewhere, the offshore renminbi suffered a 0.54% fall against the dollar last week. As we have mentioned time and time again, we do not think a weaker currency is in China’s interests as it pushes forth with consumer-driven growth reform. Also, according to a spokesman, “China doesn't want to boost its exports through competitive devaluation while the nation's sound economic fundamentals are providing support to the currency”. With the renminbi having fallen to 12-month lows, and policymakers highlighting their confidence in recently announced measures to temper further depreciation and maintain stable economic growth, we continue to believe that over the longer term the renminbi will continue to broadly appreciate against the dollar, we, therefore, see this as a renminbi buying opportunity.

China unleashed a raft of measures to counter the potential ill effects of the Trump Trade Wars on its economy, and in particular the renminbi last week. We have often spoken of the nation’s plethora of firepower which it can deploy to maintain stability, and recent actions have displayed just how these can be utilised. ‘Proactive’ fiscal policy and ‘reasonably adequate’ liquidity conditions were stated as the main ingredients to support growth and structural reform. Policymakers will also continue to maintain social financing at appropriate levels and a number of projects will be brought forward to meet development goals and better the country’s livelihood. Local governments will also be encouraged to issue around RMB 1.35tn (~USD 200bn) in special bonds which will be used to fund local infrastructure projects. Whilst monetary policy will be neither tight nor loose. China’s most recent GDP release for Q1’18 remains above policymakers’ target of “around 6.5%”, at 6.7%yoy; so if necessary, there is room for growth to soften without any drastic monetary policy easing requirements or use of the nation’s huge USD 3.1tn fx reserves.

Elsewhere, as expected the ECB kept rates and QE policy on hold, with President Draghi presenting a dovish tone. At the post-meeting, Q&A Draghi continued to call the outlook for growth as “broadly balanced” and noted some improvement in recent survey data. He highlighted the prominence of trade risks as a concern, noting that it is “too early” to assess the impact of the Trump-EU trade agreement, where on Wednesday the US and EU apparently agreed to “work together toward zero tariffs, zero non-tariff barriers, and zero subsidies on non-auto industrial goods”. We still await to hear of further developments on the auto sector and metals tariffs already enforced. Elsewhere, Mexico’s AMLO (who is to take office in December) appears to be taking a proactive role on issues such as NAFTA, having written to Trump advocating that the US and Mexico work together on the key issues of "trade, migration, development, and security". AMLO thinks "it is worthwhile making an effort to conclude the renegotiation of” NAFTA as “uncertainty could slow down investments”. While an element of caution is probably warranted, Mexico’s constructive dialogue with the US is positive for investor sentiment, particularly following the agreement between the US and EU. Also, on Friday, US Trade Representative Robert Lighthizer said that Nafta countries are hopefully in the final stages of reaching an agreement.

This week, the main highlights will be the US PCE readings on Tuesday, the US employment report on Friday, and the FOMC notes from the Tuesday and Wednesday meetings; Bloomberg is currently pricing a very small (1.3%) chance of a hike at the August meeting, however, as most expect the Fed may hike in September (81.3% chance priced in). The BoJ will meet on Tuesday, where its expected the central rate will be left at 0%, however, after the broader sell-off across bond markets last week, the market consensus is that the central bank may look to raise the upper bound on the 10-year benchmark from 0.1%, and adjustments to currently ultra-loose monetary policy may be discussed. The BoE meeting and inflation report release on Thursday will we watched by many, as a 25bps rate hike, to 0.75%, is expected, and currently priced in by the market (77.5% by Bloomberg) following the strong inflation report. Global trade rhetoric will also remain a key focus in the coming week as will US and European company earnings.

In terms of data, Monday’s US pending home sales for June may be of interest following the weak readings in May. Tuesday kicks off with a number of PMI readings from China, for July, with the Caixin Manufacturing PMI following on Wednesday. However, the key data feature on Tuesday will be the June US PCE report, along with a number of sentiment readings for July; interestingly the Q2’18 core PCE was released at 2.0%qoq, on Friday, down from 2.3% in the first quarter. US ISM readings follow on Wednesday, with factory orders and durable good orders grabbing attention on Thursday. Markets will close the week with the US employment report, where market consensus is currently looking for: a fall in unemployment to 3.9% (from 4.0% from June), a marginal pick up in average hourly earnings in July, 0.3% mom, however, the yoy reading is expected to remain at 2.7%. Later we will have the flash Markit US PMI readings for July, and the non-manufacturing ISM print.

Please read this important information before proceeding. It contains legal and regulatory notices relevant to the information on this site.

This website provides information about Stratton Street Capital LLP ("Stratton Street"). Stratton Street is authorised and regulated by the UK's Financial Conduct Authority. The content of this website has been prepared by Stratton Street from its records and is believed to be accurate but we do not accept any liability or responsibility in respect of the information of any views expressed herein. The information, material and content provided in the pages of this website may be changed at any time by us. Information on this website may be out of date and may not be updated or removed.

The website is provided for the main purpose of providing generic information on Stratton Street and on our investment philosophy for the use of financial professionals in the United Kingdom that qualify as Professional Clients or Eligible Counterparties under the rules of the United Kingdom Financial Conduct Authority (the "FCA"). The information in this website is not intended for the use of and should not be relied on by any person who would qualify as a Retail Client. Products and services referred to on this website are offered only at times when, and in jurisdictions where, they may be lawfully offered. The information on this website is not directed to any person in the United States. The provision of the information on this website does not constitute an offer to purchase securities to any person in the United States (other than a professional fiduciary acting for the account of a non-U.S person) or to any U.S. person as such term is defined under the Securities Act of 1933, as amended.

The website is not intended to offer investors the opportunity to invest in any Alternative Investment Fund ("AIF") product. The AIFs managed by Stratton Street are not being marketed in the European Economic Area ("EEA") and any eligible potential investor from the EEA who wishes to obtain information on the AIFs will only be provided with materials upon receipt by Stratton Street of an appropriate reverse solicitation request in accordance with the requirements of the EU Alternative Investment Fund Managers Directive ("AIFMD") and national law in their home jurisdiction. By proceeding you confirm that you are not accessing this website in the context of a potential investment by an EEA investor in the AIFs managed by Stratton Street and that you have read, understood and agree to these terms.

No information contained in this website should be deemed to constitute the provision of financial, investment or other professional advice in any way. The website should not be relied upon as including sufficient information to support any investment decision. If you are in doubt as to the appropriate course of action we recommend that you consult your own independent financial adviser, stockbroker, solicitor, accountant or other professional adviser. Past performance is not necessarily a guide to the future. The value of investments and the income from them may go down as well as up. An application for any investment or service referred to on this site may only be made on the basis of the offer document, key features, prospectus or other applicable terms relating to the specific investment or service.

Where we provide hypertext links to other locations on the Internet, we do so for information purposes only. We are not responsible for the content of any other websites or pages linked to or linking to this website. We have not verified the content of any such websites. Such websites may contain products and services that are not authorised in your jurisdiction. Following links to any other websites or pages shall be at your own risk and we shall not be responsible or liable for any damages or in other way in connection with linking.

By using this site, you should be aware that we may disclose any information that we hold about you to any regulatory authority to which we are subject, or to any person legally empowered to require such information.

This website uses cookies to improve user experience, by clicking the "I Accept" button below means you consent to the use of cookies on our website.