- China’s government approved the creation of a bond link between Hong Kong and the mainland.
- S&P upgraded Indonesia one notch to investment grade BBB- with stable.
- Fitch revised the outlook on Vietnam’s BB- rating from stable to positive.
- Egypt will announce a package of social spending soon.
- Moody’s changed the outlook on Poland’s A2 rating from negative to stable.
- Brazil press reported that meat-packing company JBS has submitted compromising tape recordings to the Supreme Court.
- Chile central bank surprised markets with a 25 bp cut but signaled a move to a neutral bias.
In the EM equity space as measured by MSCI, Hungary (+2.6%), Indonesia (+2.0%), and Peru (+1.4%) have outperformed this week, while Brazil (-11.1%), Poland (-1.8%), and Egypt (-1.7%) have underperformed. To put this in better context, MSCI EM fell -0.3% this week while MSCI DM was flat.
In the EM local currency bond space, India (10-year yield -11 bp), Korea (-7 bp), and Peru (-4 bp) have outperformed this week, while Brazil (10-year yield +155 bp), Argentina (+28 bp), and Turkey (+22 bp) have underperformed. To put this in better context, the 10-year UST yield fell 8 bp to 2.25%.
With the Fed contemplating whether to hike again next month and start “normalizing ” its balance sheet before the end of 2017, the two other major central banks are facing far bigger problems.
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Two months after the BOJ quietly started tapering its QE program, when it also hinted it may purchase 18% less bonds than planned…
… Governor Haruhiko Kuroda admitted last week that the Bank of Japan’s bond holdings are currently growing at an annualized pace of only ¥60 trillion ($527 billion), 25% below the bottom-end of its policy range, and confirming that without making any formal announcement, the BOJ has quietly followed the ECB in aggressively tapering its bond buying program.
For the week starting May 14th, 2017
- New Zealand Retail sales.
- China Industrial Production
- US Empire state Manufacturing index
- Australia Monetary Policy Meeting minutes
- UK CPI
- ECB Notwotny speaks
- ECB Coeure speaks
- US Housing starts/building permits
- US Capacity Utilization/Industrial Production
- US Building permits
- NZ Global Dairy Trading prices index
- NZ PPI QoQ
- UK Employment statistics
- EU Final CPI YoY
- Canada Manufacturing Sales
- Crude oil inventories
- Japan Preliminary GDP
- Australia Employment
- UK Retail Sales
- ECB Mersch speaks
- US Unemployment claims
- Feds Mester speaks on the economy/monetary Policy
- ECB Constancio speaks
- Canada CPI
- Canada Retail Sales
- Fed’s Bullard speaks on the economy and monetary policy
Overseas use of the yuan for trade and other payments has fallen dramatically as government efforts to stem capital outflows sideline Chinese President Xi Jinping’s ambition to take the currency global.
Yuan trade settlement had surged after Beijing first allowed it in 2009, with the proportion of Chinese cross-border trade settled in the currency peaking at 27% in 2015. But its share fell to 19% in 2016, marking the first year-on-year decline, and slumped further to 14% in January through March of this year. Excluding trade with Hong Kong, where the yuan is often used, would likely push the figure even lower.
The yuan was used for just 1.8% of international payments in March, ranking sixth behind the U.S. dollar, euro, pound, yen and Canadian dollar, according to the Society for Worldwide Interbank Financial Transactions, or SWIFT. The Chinese currency had placed fourth in August 2015 with a 2.8% share, overtaking the yen.
Overseas yuan holdings are shrinking as well. In Hong Kong, the largest yuan hub outside mainland China, yuan deposits hit a six-year low of 507.2 billion yuan at the end of March. This represents a drop of nearly half from 1 trillion yuan in December 2014.
This trend stems mainly from stepped-up capital controls. The Chinese government has gradually imposed stricter curbs since 2015, aiming to rein in outflows and the ensuing softening of the yuan. A measure implemented last November made advance approval necessary for currency conversions or overseas transfers — including in yuan — exceeding $5 million.
Two weeks ago Bank of America caused a stir when it calculated that central banks (mostly the ECB & BoJ) have bought $1 trillion of financial assets just in the first four months of 2017, which amounts to $3.6 trillion annualized, “the largest CB buying on record.”
After yesterday’s violent gap up in stocks across the globe in response to the “expected” outcome from the French election, today the risk on sentiment has continued if to a lesser extent, with stocks in Europe, Asia all rising while S&P futures point to a higher open. Yen, gold decline, while the euro traded as high as 1.09 this morning before fading some gains; oil is up modestly.
While today’s surge may have been more muted, world stocks hit a new record high on Tuesday, with investors still cheering Macron’s victory in the first round of the French presidential election, supported by speculation about U.S. tax reform and the overnight report that Trump has conceded on the border wall, eliminating a government shutdown as a potential risk. As shown below, the MSCI All World Index has jumped to a new all time high, boosted by strong Asian markets.
MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.6%, hovering near its highest level since June 2015 hit earlier in the session, on its fourth straight day of gains. Japan’s Nikkei rose more than 1 percent to a three-week high aided by a weaker yen. South Korea’s also advanced 0.7 percent to its highest level since April 2015. China equities climbed from a three-month low on speculation that a selloff over concerns of a regulatory crackdown were overdone. Australia and New Zealand were closed for Anzac Day.
European stocks hovered near a 20-month high, with the Dax flirting with all time highs. The Stoxx Europe 600 index edged 0.2% higher after jumpin 2.1% on Monday to the highest since August 2015, with property and technology shares helping to underpin a global rally. French shares pulled back 0.1 percent, having risen 4.1 percent on Monday in their biggest daily gain since August 2012. Futures on the S&P 500 added 0.1 percent. The index climbed 1.1% Monday to within 1% of its all-time closing high.
These gains helped push MSCI’s world stocks index to a fresh all-time high after chalking up its biggest rise since shortly after Britain’s vote last June to leave the European Union.
India’s foreign exchange reserves rose by USD 889.4 million to USD 369.887 billion during the week ended April 14, helped by increase in foreign currency assets, the Reserve Bank said.
They had declined by USD 956.4 million to USD 368.998 billion in the previous reporting week.
The reserves had touched a life-time high of USD 371.99 billion in the week to September 30, 2016.
Foreign currency assets (FCAs), a major component of the overall reserves, surged by USD 881 million to USD 346.248 billion in the reporting week, RBI said.
Expressed in US dollar terms, FCAs include the effects of appreciation/depreciation of non-US currencies, such as the euro, pound and the yen, held in the reserves.
Gold reserves remained unchanged at USD 19.869 billion, the apex bank said.
The special drawing rights with the International Monetary Fund was up by USD 3.1 million to USD 1.446 billion.
India’s reserve position with the Fund, too, rose by USD 5.3 million to USD 2.323 billion, RBI said.
China’s State Council on Wednesday approved 380 billion yuan ($55.1 billion) in tax relief that will mainly favor farmers and small businesses in a move that is seen as both economic and political.
The second large-scale tax cut to follow last year’s comes as China’s economy is forecast to slow down in the latter half of 2017, during which the Communist Party will convene its 19th National Congress and reshuffle top leadership.
China will modify its value-added tax this July by removing the 13% bracket while retaining the 6%, 11% and 17% tiers. The 13% rate currently applies to farm products and natural gas, but they will move to the 11% category. Farmers as well as households that purchase rice and vegetables will likely benefit from this change.
For smaller companies, those that pay 300,000 yuan or less in annual taxable revenue qualify for preferential tax treatment. The ceiling will be lifted to 500,000 yuan. Furthermore, small businesses and startups will be allowed to deduct 75% of research and development costs, up from 50%. These tax breaks will remain in effect until the end of 2019.
The Chinese government enacted about 500 billion yuan worth of corporate tax cuts in 2016. Helped also by a surge in infrastructure spending, the real economy grew 6.9% during the January-March period this year, marking the second quarter of economic acceleration. However, the People’s Bank of China, the country’s central bank, has been gradually raising market interest rates in order to rein in the real estate bubble.
- Malaysia’s central bank said it will allow investors to fully hedge their currency exposure.
- Egypt declared a 3-month state of emergency after two deadly church attacks.
- South Africa’s parliamentary no confidence vote has been delayed
- Argentina central bank surprised markets with a 150 bp hike to 26.25%.
- Brazil central bank accelerated the easing cycle with a 100 bp cut in the Selic rate.