What Asia Investors Need to Know for the Week Ahead (Oct 14-Oct 18)

Market Analysis /
Stephen Innes / 14 Oct 2019
  • China and the US have agreed to an outline of a ‘Phase One’ deal, in which China will buy more agricultural products and the US will indefinitely delay the increase in tariff rates
  • The ‘deal’ represents the most material breakthrough since the trade war started, but it neither rolls back existing tariffs nor reverses the damaging spillover of tensions into technology areas
  • The RMB may strengthen further especially if the fixings are lowered this week

Phase 1 Trade Deal

President Trump said on Friday that the United States and China have "agreed in principle" on a phase one deal, marking the first tactile accomplishment in their 18-month trade war but kicked the can on the testy intellectual property theft, forced technology transfer and complaints about Chinese industrial subsidies.
 
While the President touted the outcome as "one of the biggest deals", the lack of specificity – and the fact this baby stepped agreement could take weeks to iron out – quickly cooled trader optimism while raising fears this could be more of the same continuous loop of de-escalation re-escalation.

Huawei at the epicentre?

Treasury Secretary Mnuchin said 'good progress' was made on 'technology transfer', but there is not yet a deal.
The President has yet to formally announce whether he will extend a license allowing Chinese telecommunications company Huawei to continue buying American parts when it expires November 18. But, more importantly for the Chinese tech giant, will the permissions extend to software such as Google's Android, allowing Huawei access to Google Play? If this breakthrough happens, it will provide a significant boost to the heavyweight giants of the tech sectors in both China and the US markets.
 
US equity markets sold off into the close with traders viewing the deal in a tentative light as a tariff detente falls well short of bridging the critical trust gap which is an implicit removal of a significant chunk of existing tariffs. But the next 48-72 trading hours are critical, given memories of how quickly the post-G-20 trade calm evaporated.

 
CEO impact

Still, one of the critical issues is that uncertainty regarding trade tariffs frightens business leaders and curbs corporate reinvestment and expansion. A detente should, at a minimum, remove a significant level. 

Despite the usual negativity that continues to permeate every pocket of the market, ultimately this deal could calm markets and may even provide a springboard if promises to roll back tariffs are followed through.

 
US Week Ahead
 
This week's US economic calendar could meaningfully influence expectations for the October 30 FOMC meeting.
 
Concerning the data, Wednesday's US retail sales and Thursday's industrial production reports will be the critical focus for Fed policymakers. There is also a deluge of Fed speak – most significantly Vice Chair Clarida who will have the last word before the Fed's blackout period begins when he speaks on Friday about the economic and monetary policy outlook.
 
Given the deterioration in forward-looking sentiment data, signs of slowing in the labour market and nary an improvement in the global growth outlook, the market’s base case remains for a 25-basis point cut at the Fed's October meeting.

Source: CME FedWatch Tool

 

Key dates and events on the ASEAN Docket
 
Chart of the Week ahead 
 
Asia’s key bellwether USDCNH and phase 1 FX implications for the RMB spot printed a 7.1685 high early last week before retracing, then went another leg lower to 7.0705 on headlines that the US is considering a currency pact in a partial trade deal.
 
While the outcome from the latest US-China talks may still be mildly positive for the RMB in the near-term, even with hedge funds and asset managers who were thought to have piled into the so-called “Yuan accord” trade. In addition, there could also be a short-term positive reaction by other Asian currencies that are sensitive to RMB movements, such as the KRW, TWD, MYR and SGD. However, much of the near term reaction depends on the PBOC reference rate this week, depending on how far the fixings are pegged below USDCNY 7.07.

Source: AxiTrader

Key Central Bank meetings in Asia

Singapore

In response to muted growth, analysts expect the Monetary Authority of Singapore (MAS) to set the SGD NEER slope to neutral on October 14. And while a consensus view is building that Singapore is likely to avoid a technical recession, growth remains sub-par supporting this view. Even though the economic condition for a re-centring of the slope is probably not dire enough yet, the MAS may allude to this possibility in the statement and explicitly shift to an easing bias.


Korea

On October 16, most economists expect the Bank of Korea (BoK) to cut its policy rate by 25bps, in response to weaker growth and benign inflation.
 
But, like other global central banks, the BoK is likely facing debate over the effectiveness of what further policy easing could bring, suggesting the BoK may lean on the government to do the bulk of heavy lifting to support growth through fiscal policy measures.
 
Key China data releases
 
On October 15, China reports critical inflation data where analysts expect CPI inflation is likely to remain elevated at 2.9% in September vs 2.8% in August (due to skyrocketing pork prices) while PPI is expected to fall further to -1.5% from -0.8% in the same period, suggesting continued pressure on corporate profits.
 
On Friday, October 18, the widely anticipated China "data dump" will be released.

Economists tip China’s GDP growth to slow to 6.1% year on year in Q3 from 6.2% in Q2. Despite the slowdown in the quarter, hard economic data could provide a more soothing view on growth through the quarter as analysts expect retail-driven activities to improve in September, thanks largely to positive domestic demand.

 

Expanded ASEAN Calendar

 

View all the events here: AxiTrader Economic Calendar

 

Read more market views from Team AxiTrader: https://www.axitrader.com/int/market-news-blog/.

The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.

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