Monex Morning Report – Fri 4 Sep 2020

OVERNIGHT HIGHLIGHTS

Dow ends more than 800 points lower as tech plunge gives stocks worst day since June; Stock slide to extend in Asia

France unleashes 100 billion euro stimulus to revive economy; Fed’s Evans calls for more fiscal aid, signals further monetary easing

Top Market News

Pelosi, Mnuchin informally agree on stopgap bill to avoid U.S. government shutdown

U.S. House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin have informally agreed on a stopgap funding bill to avoid a government shutdown at the end of the month, ABC News reported on Thursday, citing a person familiar with a phone call between the two officials.

Originating Source

Fed’s Evans calls for more fiscal aid, signals further monetary easing

The head of the Chicago Federal Reserve on Thursday called on Congress to deliver more fiscal aid and signaled U.S. monetary policy would be eased further and interest rates kept at ultra-low levels for years to help the economy recover its pre-pandemic strength. Even with further government stimulus, and assuming progress in controlling the coronavirus, Chicago Fed President Charles Evans predicted U.S. output won’t return to pre-crisis levels until late 2022. At that point, he forecast, unemployment will still be between 5% and 5.5%. He added that inflation will likely remain below the Fed’s 2% goal for some time. “Given my outlook, I expect this means highly accommodative monetary policy will be appropriate for some time to come,” Evans said in remarks to the Lakeshore Chamber of Commerce in Hammond, Indiana.

Originating Source

Fed’s Bostic says he will watch trajectory of inflation when setting policy

The Federal Reserve’s understanding of the relationship between employment and inflation has shifted and determining when to raise interest rates will depend more on the trajectory of inflation than the exact level, Atlanta Fed President Raphael Bostic said on Thursday. Bostic said he would not be concerned with inflation going above the Fed’s goal of 2%, reaching up to about 2.4%, if prices remain stable. “As long as we see the trajectory moving in ways that suggest that we are not spiraling too far away from our target, I’m comfortable just letting the economy run and letting it play out,” Bostic said in an interview with the Wall Street Journal. The U.S. central bank announced last week that it was revising its approach for setting monetary policy to focus more on addressing shortfalls in employment and less on inflation. Bostic said policymakers noted that the relationship between inflation and employment was weaker from 2012 to 2018 than it had been in previous decades.

Originating Source

Euro zone public deficit levels unsustainable, ECB’s Wunsch says

Some euro zone countries are running unsustainable public finances as they try to cope with the coronavirus pandemic but they may still struggle to exit crisis fighting policies, European Central Bank policymaker Pierre Wunsch said on Thursday. “We are going to have public deficits that probably would not be sustainable,” Wunsch, Belgium’s central bank chief told a conference hosted by think tank Bruegel. “Exit is not going to be easy… (but) we have time, it’s not like we have to solve these issues in the next six months or even two years,” he added.

Originating Source

France unleashes 100 billion euro stimulus to revive economy

France will spend 100 billion euros to help pull its economy out of one of Europe’s worst coronavirus-induced slumps, under a recovery plan that revives pro-business reforms championed by President Emmanuel Macron with a greener tinge. The $118 billion stimulus equates to 4% of gross domestic product, meaning France is ploughing more public cash into its economy as a percentage of GDP than any other big European country, an official said ahead of its formal launch later on Thursday. France’s recession, marked by a 13.8% second quarter GDP contraction that coincided with a COVID-19 lockdown and expected to generate an 11% drop in 2020 as a whole, has also been one of the region’s deepest.

Originating Source

Xi says he’ll never back down in facing foreign interference

Chinese President Xi Jinping said nothing will come between the Chinese people and the Communist Party that has governed them for more than 70 years, setting a combative tone at a difficult moment in U.S.-China relations. Speaking at an event marking the anniversary of China’s victory over Japan in the Second World War, Xi outlined areas where China will “never” accept foreign interference. He took aim in particular at threats to the Chinese Communist Party’s continued one-party rule. “The Chinese people will never allow any individual or any force to separate the CCP and Chinese people, and to pitch them against each other,” Xi said. “The Chinese people will never allow any individual or any force to distort the CCP’s history, and to vilify the CCP’s character and purpose.”

Originating Source

Next round of UK-U.S. trade talks to begin on September 8: UK minister

Britain will hold a new round of talks with the United States on a trade deal next week, trade department minister Greg Hands said on Thursday, adding that the government talks to both sides of the U.S. political divide before this year’s election. Britain has prioritised striking a trade deal with the United States as it seeks to carve out new business relationships around the world following its exit from the European Union, and with it all EU-negotiated trade deals. “I can announce today that the next round (of talks) will start next Tuesday, the 8th of September,” Hands told parliament.

Originating Source

US sanctions 11 foreign firms for helping Iran export petroleum

The United States on Thursday imposed sanctions on 11 foreign companies, accusing them of helping to facilitate Iran’s export of petroleum, petroleum products and petrochemicals in violation of American sanctions. The Treasury said it slapped sanctions on six companies based in Iran, the United Arab Emirates and China that it said enable the shipment and sale of Iranian petrochemicals and support Triliance Petrochemical Co Ltd, a Hong Kong-based company blacklisted by the US. The State Department also imposed sanctions on five companies for engaging in transactions related to Iran’s petroleum and petrochemical industry, as well as on three executive officers of the blacklisted companies.

Originating Source

Top Trump News

The Nov. 3 election

U.S. President Donald Trump has urged residents in the critical political battleground of North Carolina to try to vote twice in the Nov. 3 election, once by mail and once in person, igniting a furor for appearing to urge a potential act of voter fraud. “Let them send it in and let them go vote,” Trump said in an interview on Wednesday with WECT-TV in Wilmington, North Carolina. “And if the system is as good as they say it is, then obviously they won’t be able to vote” in person. Trump has repeatedly asserted, without evidence, that mail-in voting – expanded by some states because of the coronavirus pandemic – would increase fraud and disrupt the November election, although experts say voter fraud of any kind is extremely rare in the United States.

Originating Source

Joe Biden

President Trump on Wednesday said Democratic presidential candidate Joe Biden is less “sharp” mentally than a nonagenarian World War II veteran. Trump, speaking in North Carolina on the 75th anniversary of World War II ending, cited Hershel “Woody” Williams as an example of how advanced age doesn’t always result in senility. “I promised him I would not tell that he’s 97 years old, I promised. I’ll tell you, he’s 100 percent sharp. He’s 100 percent sharp. I know a 78-year-old that’s not so sharp, but he’s 97, and he’s 100 percent, because has nothing to do with that — 78 is young. Depends who’s 78, that’s all,” Trump said.

Originating Source

Pressure from Trump

Challenged last month on the government’s failure to contain the coronavirus in the United States, Mike Pence, the vice-president, said: “We think there is a miracle around the corner.” For months, critics of the Trump administration have worried that the White House would pressure the Federal Drug Administration (FDA), the CDC and other agencies to rush a hasty coronavirus vaccine to market before the election. Now it appears that Donald Trump could be in a position – as the confirmed US death toll from Covid-19 approaches 200,000, and just as undecided voters are looking for a sign on which way to swing – to announce that a vaccine is imminent.

Originating Source

Economic Indicators

Australia Balance of Trade

Australia’s trade surplus fell to AUD 4.61 billion in July 2020 from a downwardly revised AUD 8.15 billion in the previous month and below market consensus of an AUD 5.4 billion surplus. This was the smallest trade surplus since February, amid the prolonged impact of the COVID-19 pandemic and escalating tensions with China. Exports plunged 4 percent month-over-month to an over two-year low of AUD 34.49 billion, while imports jumped 7 percent to a four-month high of AUD 29.89 billion. Considering the first seven months of the year, the country’s trade surplus widened to AUD 46.92 billion from AUD 40.56 billion in the same period of 2019.

China Composite PMI

China General Composite PMI rose to 55.1 in August 2020 from 54.5 a month earlier, signaling the second-quickest rate of expansion in overall business activity since December 2010. The manufacturing sector expanded the most since January 2011, while services activity growth remained solid. New order growth eased to a three-month low but remained marked overall, while employment expanded for the first time so far this year. On the price front, input cost continued to rise solidly, which led to the strongest increase in composite output charges for two years. Lastly, the gauge for business expectations maintained a positive trend.

Germany Services PMI

The IHS Markit Germany Services PMI was revised higher to 52.5 in August 2020 from a preliminary estimate of 50.8, still below July’s final reading of 55.6. The latest figure pointed to a sharp slowdown in the service sector activity, as growth slowed in the Hotels & Restaurants and ‘Other Services’ sub-sectors amid a resurgence in COVID-19 cases, while the dominant Renting & Business Activities category fell back into contraction. Inflows of new work rose at a slower pace led by a steep and accelerated decrease in new export business. At the same time, employment rose only fractionally and more slowly than in July, while business confidence weakened. Turning to prices, input costs rose the most since February, while average charges levied by services firms continued to fall.

Euro Area Composite PMI

The IHS Markit Eurozone Composite PMI was revised higher to 51.9 in August 2020 from a preliminary estimate of 51.6 and compared to July’s 54.9. The lastest reading pointed to loss of growth momentum in the private sector, as few restrictions were reimposed following the resurgence of COVID-19 cases in some countries across the region. New orders rose for the second straight month, albeit at a weaker pace, while export sales continued to fall extending the current period of contraction to nearly two years. The job shedding rate slowed to its lowest in six months, with all nations registering a decline in employment, namely Spain, France and Germany. On the price front, input cost inflation quickened to a six-month high, while output charges continued to drop in line with the trend since March. Finally, sentiment remained positive, still slightly down compared with the previous month.

United Kingdom Services PMI

The IHS Markit/CIPS UK Services PMI was revised lower to 58.8 in August 2020 from a preliminary estimate of 60.1 and compared to July’s final 56.5. The latest reading pointed to the steepest month of expansion since April 2015 due to the reopening of the UK economy after the lockdown period in the second quarter. Inflows of new work increased the most since December 2016 helped by stronger demand across the housing market, rising spending as a result of the UK government’s Eat Out to Help Out scheme. Meanwhile, new work from abroad decreased for the seventh successive month, while employment and backlogs of work continued to fall. On the price front, input cost inflation slowed amid subdued wage pressures, while average prices charged by service providers were broadly unchanged.

Euro Area Retail Sales MoM

Eurozone’s retail trade fell by 1.3 percent from a month earlier in July 2020, following a downwardly revised 5.3 percent increase in June and compared to market expectations of a 1.5 percent growth. Countries across the region continued to relax COVID-19 containment measures, while a resurgence in the number of infections weighed on demand. Non-food products sales dropped 2.9 percent (vs 11.8 percent in June) due to lower trade of textiles, clothing, footwear (-10.6 percent vs 34.9 percent), computer equipment, books and other (-6.7 percent vs 16.6 percent), pharmaceutical and medical goods (-1.7 percent vs 5.2 percent) and electrical goods and furniture (-1.6 percent vs 10.6 percent).

United States Initial Jobless Claims

The number of Americans filling for unemployment benefits fell to 881K in the week ended August 29th, after the Labor Department changed its seasonal adjustment methodology to smooth the swings in employment. It is the lowest level since the effects of the pandemic started to being felt back in March and below market expectations of 950K. Still, it remained well above 665K filed at the peak of the Great Recession in March 2009, as the labor market continued to struggle amid rising COVID-19 cases. Initial claims started to fall in May, as many non-essential businesses started to reopen following weeks of closure due to the pandemic. Beginning this week, the Department of Labor changed the methodology used to seasonally adjust the claims to reflect additive factors as opposed to multiplicative factors.

Exports from the US increased 8.2 percent to $168.1 billion in July of 2020, reaching the highest value since March. Still, exports remained below pre-pandemic levels, reflecting the ongoing impact of COVID-19, as many businesses continued to operate at limited capacity or ceased operations completely, and the movement of travelers across borders remained restricted. Exports of goods increased $12.3 billion to $115.5 billion, mainly due to passenger cars ($2.1 billion); consumer goods ($2.6 billion); gem diamonds ($0.7 billion); artwork, antiques, and other collectibles ($0.6 billion); industrial supplies and materials ($2.5 billion); crude oil ($1.1 billion); other petroleum products ($0.4 billion); semiconductors ($0.8 billion); and civilian aircraft engines ($0.5 billion). Exports of services increased $0.4 billion to $52.6 billion, mainly due to transport ($0.3 billion) and charges for the use of intellectual property ($0.1 billion); while sales for travel decreased $0.4 billion.

United States ISM Non Manufacturing PMI

The ISM Non-Manufacturing PMI for the US fell to 56.9 in August of 2020 from 58.1 in the previous month and in line with market expectations of 57. Still, the reading pointed to the third straight month of expansion in the non-manufacturing sector as the economy recovers from the coronavirus hit. Slower increases were seen for business activity (62.4 vs 67.2) and new orders (56.8 vs 67.7) and prices increased the most since November of 2018 (64.2 vs 57.6). Also, employment fell less (47.9 vs 42.1). “Respondents’ comments are mostly optimistic and industry specific about business conditions and the economy as businesses are starting to reopen. Industries that have not reopened remain concerned about the ongoing uncertainty.

Economic Calendar

Friday

US Nonfarm Payrolls (Aug)