Hold The Champagne Corks

Submitted by Michael Every of Rabobank

Positive Chinese PMI data (which we are sceptical of representing the true state of the economy) and a potential future fiscal shift in Germany (which our rates strategy team do not see heralding upwards pressure on Bund yields) both saw global bond yields up markedly yesterday, even when local data tanked, as in Australia. That lasted right the way through to a series of blows that saw some of the sting come out of bonds (10-year US Treasuries closed up 6bp having been as high as +10bp), but equities still started December in poor form.

First, China countered the US HKHRDA legislation with a banning on US naval vessels making shore-leave in Hong Kong, and banned five US-based NGOs, including Human Rights Watch and Freedom House, from the Special Administrative Region “for inciting separatist activities”. While a relatively mild response in practical terms, the bilateral atmosphere is further strained.

Second, the US ISM data tanked, dropping to a recessionary 48.1 with new orders down to the August low of 47.2 and employment at 46.6. Recall that with US imports from the world ex-China up y/y and Chinese imports from the world ex-US down in most cases, a slight pick-up in China, even if true, is more than outweighed by a down-turn in the US.

Third, US President Trump re-imposed 15% steel and aluminium tariffs on both Brazil and Argentina, claiming that they had both allowed their currencies to depreciate too much. The direct economic effects of that move are limited on all fronts – but at the same time the message is that excess FX weakness vs. the USD will not go unanswered by the White House, even when national security is not being blamed. Factor that in when you think what is bound to happen to CNY at some point if China carries on down its present growth and debt path: yesterday was interesting in that CNY slipped to around 7.04 despite the good Chinese data,…yet the broad DXY saw the USD drop markedly too and JPY gain. In other words, stocks down, bonds down, USD down and CNY down, and risk-off JPY up. Merry Xmas!

Fourth, US Commerce Secretary Wilbur Ross (who for those who recall these things, always looks like John Gielgud’s Spitting Image puppet, having to be woken with a stick at the start of each sketch) stated that Trump is prepared to levy more duties on China if the phase one trade deal is not agreed. That gives us what Ross called “a logical deadline” of 15 December unless things move or are moved. Trump himself stated “The Chinese want to make a deal, we’ll see what happens.” Do they, now Bloomberg suddenly says that China is once again ‘winning the trade war’? (I wish the authors of these puff piece would go to sleep in a corner like John Gielgud.) CNY and CNH will be watching closely, of course, and market chatter is if 15% tariffs go up, then both crosses will be at 7.15 shortly afterwards – and from there….well, let’s see.

Fifth, the US stated it will impose USD2.4bn of 100% tariffs on French products, including champagne and *cheese*, in response to France’s imposition of a digital tax on US tech giants. These measures will happily not take place until well after 1 January, giving us all a chance to enjoy New Year first, but this will of course not go down well in La Belle France. What fun the NATO 70th birthday bash in London today and tomorrow will be, as we noted yesterday: it is likely to have as many fireworks as October’s 70th anniversary of the People’s Republic of China did – but for all the wrong reasons.

Indeed, all the points above, perhaps the market will now hold the champagne corks that it has been popping for months now in expectation that all is well and yields should be going up, not down?

Elsewhere, we heard ECB President Lagarde testify to the EU parliament, and plead for time to learn German and central-bank speech,….and how to say Green New Deal (or at least Green Bonds) in German given as part of a review of ECB policy it was suggested that climate change will be linked to QE.

And over in the US, the Republicans are reportedly set to release a rebuttal of impeachment charges against President Trump even before they are levelled: expect the Democrats to conclude the complete opposite, and they have the numbers to impeach; but hold the champagne yet again, as it’s and then it’s off to the Senate, where the Republicans have the numbers, and then to the 2020 election, where many talking heads, and the market, are still saying Trump has the numbers.

And this morning starts on the kind of note the Chinese PMI data singularly fail to suggest should be happening: two more bond defaults after non-payment by the close yesterday, totalling around USD500m, following another last week. With the surge in China’s debt in recent years, and the ongoing structural slowdown in growth, this is just the tip of the iceberg.