Stocks recoup after warning shot

Summary

Stock markets are recovering from China’s shot across Washington’s bows with the yuan.

Yuan bounces, unlike a rock

The yuan’s 13-month low offers the Trump-distracted dollar impetus to complete its first bi-weekly rise since late May. Coincidence as an explanation for the dollar setting a new peak against China’s currency soon after the U.S. President said the "Chinese currency was dropping like a rock" taxes plausibility. Instead, it was the subtlety - even skill - of the PBOC’s approach that was probably on show overnight. Having reduced the midpoint of the range over which onshore yuan can vary with Hong Kong for the seventh straight session, persistent reports suggested the central bank informally mandated dollar selling by large institutions aimed at moderating CNY.

A taste of trouble

The upshot is that after touching ¥6.8106, the highest since 27^th June 2017, USD/CNY last traded at ¥6.778. The effect was a fleeting taste of the potential destabilisation a free-falling yuan can wreak on global FX, but only momentary pain. In that ‘moment’ the euro threatened to crater even further, the yuan’s liquid proxy the Aussie tested $0.7311/27 critical support and safety instincts saw flows gravitate to the yen. Eventually though, the euro’s range held, as did Aussie support and a severe risk-off alert was largely stood down. Only Japan’s stock market amongst leading APAC indices failed to rebound after the country’s inflation readings stayed as sluggish as ever. Shanghai stocks ended 2% higher.

Into the FX arena

Whether or not Beijing is intentionally steering its currency lower as a means of defraying the impact of punitive U.S. tariffs is unlikely ever to be clarified. However, market events remind everyone that the yuan is an effective pivot of global foreign exchange sentiment, with cross asset tail risk too. Say USD/CNY reaches the culturally resonant level of ¥8. Even then, it would be difficult to disprove that renminbi weakness was not entirely down to the barrelling dollar. An additional margin of comfort for Chinese exporters would be an involutional side effect, albeit welcome. Neither Washington nor Beijing appear ready to back off their stances in the trade conflict. Yet China has almost run out of levers in that sphere. Chances are rising that financial markets will become a new front.

Advantage FTSE again

The greenback’s melt-up is again more of a boon for the FTSE 100’s dominant multinational exporters than elsewhere around Europe, so Britain’s benchmark noses ahead for second morning. Europe’s STOXX, Germany’s DAX and smattering of other indices step above the flat line though. Oil retracement higher helps. Gilt, bund and Treasury yields also find room on the upside, whilst a bid for spot gold looks mostly linked to the dollar returning a sliver of Thursday’s gain. So, a clearer appetite for risk looks to be just below the surface. An intraday swing higher for Europe could be seen once U.S. cash trading begins. Microsoft’s umpteenth quarter of around 90% cloud infrastructure revenue growth boosted the stock 4% after hours. Nasdaq futures continue to reflect that demand. The appearance of an agitated Trump though caps Europe’s automobile sector, for fear threats against the industry could yet be enacted. Less than thrilling earnings so far from the medium-sized end of corporate Europe also drag.

GE boost possible

Much sentiment will hinge on General Electric’s Q2 report ahead of Wall Street’s open. GE is furiously undoing decades of overleveraged acquisitions and a bloated structure and hopes are low. Positive surprises, including asset sales, have helped the stock off 9-year lows in recent weeks. Investors are responding to management’s apparent recognition of the urgent need to reduce debt. Absent a massive shortfall vs. EPS and revenue expectations (down 40% and 0.8% on the year respectively) a steady share price reaction, at worst, is likely. The chastened bellwether could still stabilise the market’s mood.

Watch Canada CPI

Canadian inflation data this afternoon could open another pathway for the U.S. dollar to ease into the end of this week’s sprint. Canadian CPI is up from 1% annualised in June 2017 to 2.2% in May, with 2.4% forecast in June. That outcome will help confirm growth in Canada is so far resilient to geopolitical currents, enabling the Loonie to regain C$1.325. Despite smooth gains elsewhere, the greenback has grappled thereabouts for weeks.