Summary:
- China’s trade balance shrinks in May, but not with the US
- Japanese BoJ likely to cut its inflation forecasts when it meets next week
- Turkey’s Erdogan signals a state of emergency could be lifted soon
Asian trading is bringing quite massive falls across equity markets even as Wall Street closed yesterday little changed while there is more talk about a possible RRR cut in China. However, the trade data from China was in the spotlight, and even as a trade surplus declined in May in general, all eyes were turned to a balance with the US, and it even widened. One may suspect that it could be a prime reason why Asian traders refrain from buying riskier assets, in this respect one cannot forget about the G7 summit beginning in Canada today (another possible risk factor or an excuse to be cautious). Overall Chinese trade balance shrank appreciably to $24.92 billion from $28.78 billion, and the result seems to be yet more upbeat as the consensus had looked for the number well above $30 billion. The major reason why the balance narrowed down last month is a surge in imports equal 20.6% while exports shot up 12.6% in a year-over-year basis. The crazy increase in imports was largely driven by higher raw material prices, but it reflects stronger demand in the economy as well.
China-US trade surplus is currently running above its upper bound of the 5-year average. Source: Bloomberg
Nevertheless, the data did not reassure investors at all as the China’s surplus with the US widened to $24.58 billion from $22.15 billion. Notice that US President Donald Trump cites a huge deficit the US holds with China as a pivotal justification for his protectionist policies which led to a series of new levies. Glancing at the chart above one may spot that in April and May the Chinese trade surplus was running above its upper bound of the 5-year average, and if it keeps going there, it could give rise to fresh harsh comments or even acts taken by Donald Trump. Let’s end the Chinese thread with some revelations from local newspaper China Securities Journal as it claimed that the PBoC has room to cut the reserve requirement ratio (RRR) despite rate hikes delivered by the Federal Reserve. Let’s recall that there had been conjectures the bank could lower this rate once May’s FX reserve would fall, and they did so.
Chinese Hang Seng (CHNComp) is again bouncing off its upper bound of a triangle pattern, hence a pullback at least toward 11800 appears to be on the cards. Source: xStation5
Moving further it needs to remind of three major central banks’ meetings taking place next week (Fed, ECB, BoJ). The first guesswork regarding the ECB has already surfaced, now it’s time for the BoJ. Namely, the NIKKEI reported the BoJ is likely to cut its inflation forecasts next week. Notice that the Japanese central bank already slashed the 2018 CPI projection to 1.3% from 1.4% at its latest meeting abandoning de date when the price objective will be reached. There was also the trade data from Japan producing a surplus equal 573.8 billion JPY in April, a healthy decrease from 1190.7 billion JPY in the previous month. Notice that along with China Japan seems to deserve investors’ attention as well as it holds a permanent surplus with the US.
The USDJPY keeps trading above its important support area at 109.45. If the pair is able to remain there, a possible corrective move toward the green rectangle could provide a decent short-term opportunity. Source: xStation5
At the end let’s go back to Turkey where the central bank delivered substantial rate hikes on Thursday. The move has been sufficient to lift real rates well above zero being an important factor for the bruised lira. Today Reuters comes with reports that Turkish President Recep Erdogan considers lifting a state of emergency after general elections taking place on 24 June. Keep in mind that it came into effect following a failed coup attempt in 2016. After a change in his rhetoric with regard to monetary policy it could be viewed as another encouraging signal for the TRY.