Could Fed be Compromised ?

Could Fed be Compromised ?

08/21/2018.Tue, Sunny, Air Polluted

Summary：Market recovered from trade tension and take Trump's words in a decently serious way at least in UST market.

Euro Session:

A share spent most of the session in a weak tone until the report that CSRC called strategists from security companies to review the present market, with the leading of blue chips, CSI finally close in positive territory. Around 4 o'clock in the afternoon, there came the report that China state funds, or the so-called national team, said to buy blue-chip stocks to stabilize market! "Guojiadui" did catch the market off guard this time.

 

 

After EU session stepped in, most EU equities edged higher while EGBs almost flat. BTP spreads volatility had continued to weigh on FTSE MIB performance recently, but not this session. Actually the spread between the core and periphery was narrowing somewhat. Sentiment was not bad.

 

EUR slowly retreated from previous session high to where it was before the breaking headlines of China-US summit. EU economies are more open to trade than the US and Japan and thus more exposed to emerging market shocks. But with the fading of trade tension, its internal issues, such as Italy budget, and the France Labor market reform , could dominate the market now.

 

From 6:40, EUR and GBP both rebounded strongly and decisively. Around 10:40, Italian Cabinet Undersecretary Giorgetti said in an interview that Italy would not rule anything out when asked about if Italy will breach the 3.0% deficits as a % of GDP. This story made the rally hesitate for while and then flied one. It takes me quite a lot of time to figure out where the momentum came from.

Economy data:

2:00. GE July PPI 0.2% mom vs 0.2% mom, prior 0.3%. 3% yoy vs 3%, prior 3%.

US Session:

When market became more and more heated about what Powell could address this weekend, Trump dominated the later EU and whole US session by his big mouth again. About in the midnight, Trump reportedly criticized Fed Chair Powell at an event, saying that he had expected a “cheap-money” Fed Chair but instead got rate hikes. And around 4:00 in the morning(usually it takes 2 hours to public the formal report after the interview , according to one friend of mine in Reuters), Reuters reported Trump said he will continue to criticize the Fed if they raise interest rates and that “I should be given some help by the Fed.” Trump said he believes the Fed is doing “what’s good for the country” but admitted that he is “not thrilled” with rising rates.

 

From the late yesterday afternoon, The market seemed to have already known what would hit the tapes. UST rates and USD both headed down. Gundlach just warned the historic-high short position of UST could be squeezed yesterday, while the falling of 10yr from 2.87% to 2.81% proved him God another time.

 

It looks like Trump has already get ally inside Fed. Atlanta Fed’s Bostic still sees three hikes this year, and said that he would vote against hike that will “knowingly invert the curve.” He described the risks to the outlook as balanced, noting tax reform as a potential upside risk and trade uncertainty as a potential downside one. In this notes, I talked about the independence and credibility of Fed, but never expect things like 6bps' move overnight. This kind of sharp volatility definitely mean the market trust such a story to a very decent extent.

Economy data:

No

Key Data And Events Ahead:

No. Could WH official stand out to argue the independence of Fed is well intact ?

Comments:

Besides Jackson hole, the trade talk could be another critical events this week. It was said US bid list has been more practical, such as reduction of subsidies, elimination of overcapacity in steel , aluminum cessation of pressure on technology transfer and strengthening Yuan etc. At the moment, it's still unclear if the fundamental differences in trade policy between two sides would be resolved. With the shift of US economy paradigm from consumption-oriented to both consumption and manufacturing driven, in short term , all the major economy in the planet have to fight for fund flow, especially "cheap money", while in long term, market share is the ultra destination.

 

Right now, the OIS market give 1.7% probability for Trump's words while 10yr UST gave 6 bps. The varied pricing level could mean the story is still under questioned. Once Fed was neutralized or the market take the probability seriously, the inflation expectation could fly sky high. Then the commodity could the most valuable asset. But now , I do think copper is close to the turning point. Copper is down nearly 20% YTD and from its June peak. Dr Copper has a history of being correlated with China GDP. And with our policy recently shifted to focus on stabilizing growth and supporting domestic demand, We can believe the copper price could already bottomed or near the bottom. Besides, we can still see significant potential for additional fiscal stimulus. Besides, there are a handful of positive factors now, the low capacity utilization of power plant in Chile, and the delay of renewing labor agreement in giant mines... Another asymmetric trading opportunity ?

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近期重要时间点：

8月20-23日，200bn听证会，期间可能有贸易谈判

8月23-5日，Jackson Hole 研讨会,Powell讲话在24日，Monetary Policy in a Changing Economy

8月26日，意大利财长Tria访华

9月3日，第二批A股纳入MSCI

9月5日，200bn听证会后申诉材料提交截止日

9月13日，ECB议息

9月18日，EU A50会议

9月20日，EU非正式峰会

9月26日，FOMC

9月，日本LDP选举,半岛峰会在平壤

9月27日，意大利提交财政预算案

10月16日，EU A50会议

10月25日,ECB议息

10月31日，BOJ议息

11月6日，美国中期选举开始

11月8日，FOMC

11月11日，美国阅兵

12月13日，ECB议息，EU 峰会

12月20日，FOMC

12月22日，改革开放40周年

2019年3月21日，EU 峰会

2019年3月29日，脱欧谈判截止

Disclaimer：This material was prepared in private name and out of pernaonal hobby,definitely based upon facts and robust analysis with delicate consideration of highly professionality.But with no means to conduct any trade , and before using the contents of this note in any internal or external communication, please ensure you are comfortable and fully aware this could not be sufficient enough as any action base.

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