Daily Market Pulse

US-China Tensions Escalate after US shuts down Houston Consulate


The first signs of trouble came when Houston police and firefighters arrived at the Houston Consulate following witness reports that papers were being burned outside the consulate in open containers. In videos posted by local Houston media outlets, fires could be seen in multiple containers. The US State Department subsequently confirmed in a statement that it had ordered the consulate closed “to protect American intellectual property and Americans’ private information”. Futures on the S&P 500 Index are lower and European stocks fell. The yuan fell, Hong Kong shares continued their decline, and both gold and silver reversed some of their recent gains. Senate Republicans and the Trump administration are struggling to reach a consensus on further stimulus plans. With time running out as the current plan runs out at the end of next week, the market is closely following the tapes for further direction. 


The euro has rallied 1.3% and is being seen as a potential safe haven following the landmark deal reached by EU leaders to create a recovery fund and pull the Euro bloc out of the deepest recession since WWII. EUR/USD hit its highest level since January 2018 after the agreement was announced yesterday afternoon. If the European politicians continue to quell the fears of any breakup in the EU bloc, the market will take that as a positive signal. The market has taken a “risk-on” approach with the USD weakening more than equities are strengthening which could be interpreted as a more medium to longer-term market indicator. It will be important to monitor inflows into Europe post the Euro recovery fund agreement to see if there is further momentum.


With the confirmation of the EU recovery fund and subsequent pressure on the USD, GBP/USD has remained supported. The EUR/GBP cross rate (which is a good indicator) has followed EUR/USD higher initially, however, GBP/USD underperformed following an article noting that EU-UK negotiations are not progressing well and developments pointing closer to a no-deal at this point and time. With the large USD move, coupled with reports of EU-UK negotiations struggling, the market is searching for near direction during the summer months. The FT cited unnamed senior government officials, that the government has abandoned hopes for reaching a trade deal with the US before the presidential election in November, which could mean there will be no hope for a deal by the time Britain leaves the EU by year-end. 


USD/JPY is not correlating with equities, yields, or escalating tensions between the US & China. As stocks trade on the positive side, the market has little appetite to gain a medium-term conviction, and sideways price action is the result. Japan published an estimate of the Manufacturing PMI which was better than consensus at 42.6 vs previous 40.1.


USD/CAD had a major break lower yesterday on the back of the overall market selling USD. The market will be watching for Canadian CPI out this morning with headline inflation measure likely to show a significant increase, driven largely by higher gasoline prices during the month. Core measures of inflation are forecasted to remain challenged as Covid-19 related impact on pricing facing challenges from lower rents and declining mortgage interest costs. WTI oil futures hit three and a half month peak at $42.40 which helped the CAD move to its six-week highs. 


The Mexican Peso moved lower yesterday, but with little conviction moving into the US open has kept the currency pair range-bound. The market seems to invest in riskier assets like the Peso when we hear positive news around a coronavirus vaccine. Equities moved higher joining stocks around the world after the EU reached an agreement on a stimulus package. Emerging market currencies had their highest moves since March, led by Brazil, Chilean Peso, and the Czech koruna. On the news front, Mexican President Andres Manuel Lopez Obrador said that former Pemex CEO will reveal whether Mexico’s energy reform was approved through corrupt deals. 


China vowed retaliation after the US forced the closing of the Chinese consulate in Houston. This is being reported as one of the biggest blows to diplomatic ties between the US and China in decades. The US gave a three-day notice to close the consulate and Chinese Foreign Ministry spokesman Wang Wenbin said China plans to “react with firm countermeasures” if the Trump administration didn’t “revoke this erroneous decision”. The consulate was closed with the statement from the US State Department that it was “to protect American intellectual property and American private information”. The market is expecting an impact on both equities and FX as the aftermath plays out in the coming days, and US equity futures are lower pre-open. The USD surged against the CNY and volatility remains high. 


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