US Rates Continue to Drop but the Dollar Remains Buoyed
The dollar is strong on Wednesday even as US rates continue to edge lower. This is because US rates are not falling as fast as its counterparts. Riskier asset are mixed as the Shanghai Composite rose 1.9% and the Nikkei rose 0.58%. European shares are mostly lower with the DAX down 0.5% mid-day and the FTSE down 0.18%. Commodity prices are mixed, with crude oil down 0.9%, copper up 0.6%, and gold up 0.1%.
The Trade Dispute is Playing Out in Full View
The trade dispute between the US and China continues, which decreases the chances of a trade deal near-term. President Trump is very leery of the mainstream media, which and prefers Twitter to get his message across. Unfortunately, he has made this an issue where China has to feel like they are the loser if a deal moves forward which is not going to work. If he figures out a way to move forward without tweeting, he might have a chance to convince China to reengage. Many are pinning their hopes on the late June G20 summit, but that is weeks away and the markets could drop as volatility increases ahead of that meeting. This now appears to be a game of chicken with markets betting on which side will capitulate.
Growth in Europe grew in line with expectations. Eurozone Q1 GDP grew 1.2% year over year. Germany reported Q1 GDP which slightly disappointed coming in at 0.6% year over year compared to expectations of a 0.7% rise. Italy industrial orders weakened in March, contracting -3.6% year over year compared to a revised -3.1% in February. Slowing growth is a sign that the ECB might need to pull the trigger on accommodation in the near future.
Chinese Data is Soft
China reported weak April Industrial production and retail sales. Industrial production increased 5.4% year over year compared to expectations that it would increase by 6.5% year over year. Retail sales rose by 7.2% year over year compared to expectations that it would increase 8.6% year over year. Tariffs are going to continue to hurt China, but it might not be enough to bring them back to the negotiating table. Many believe they will try to run out the clock and negotiate with another administration if Trump loses in 2020.
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