Risk Appetites Squashed by Weak Chinese Imports/Exports and Moody’s Downgrade of 10 US Banks

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Marc Chandler
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Overview: The combination of falling Chinese imports and exports, Moody's downgrade of ten US small and medium-sized banks is serving to squash risk appetites. Equities are weak, but bond markets are strong despite the surprise tax on Italian banks announced yesterday and the kick-off of the US $103 bln refunding today. Outside of Japan and Australia, Asia Pacific equity markets were lower led by a 1.8% drop in the Hang Seng and a nearly 2.2% loss of the mainland shares that trade there. The 0.65% fall in Europe's Stoxx 600 offset the gains of the past two sessions plus some. US equity futures are around 0.5% lower. Bond are rallying strongly. European benchmark yields are mostly 10-12 bp, including Italy and Spain. Greece is the lagged today. The 10-year US Treasury yield is off nearly nine basis points to 4.0%, a five-day low.

The US dollar is bid, rising against all the G10 currencies. The risk-off tone is seeing the dollar-bloc and Scandis hit the hardest (~0.5%-0.90%), while the euro and Swiss franc are around 0.25% lower. Emerging market currencies are lower, led by the South Korean won and Polish zloty. The firmer dollar and lower rates seem to practically neutralize each other in terms of the impact on gold, which is trading quietly at little changed levels around $1935. September WTI is at a three-day low near $80.60 in the European morning. It had reached a new high for the year yesterday around $83.30.

Asia Pacific

Japan's labor income and household spending was weaker than expected in June. Consumption rose by 2.1% in Q1 23, its fourth consecutive quarterly advance, but looks to have slowed in Q2 and is expected to slow further in Q3. June household spending was 4.2% lower than a year ago (-4.0% in May), while cash earnings have risen by 2.3% (2.9% in May). The first official estimate of Q2 GDP is due next week (August 15), and the economy may have expanded by around 0.8% quarter-over-quarter, but the risk is on the downside. Private consumption is expected to have been flat (median forecast in Bloomberg's survey). Business spending is seen slowing and inventories may have been liquidated after rising in Q1. The biggest swing may be in net exports. They shaved Q1 GDP by 0.3 percentage points and may have added 0.9 percentage points to Q2 GDP. On balance of payments terms, Japan reported a small trade surplus in June (~JPY329 bln), its first trade surplus since October 2021. The broader measures, the current account surplus narrowed in June, consistent with its seasonal pattern (JPY1.51 trillion vs. JPY1.86 trillion in May). The Q2 23 surplus was about JPY5.27 trillion after roughly JPY2.75 trillion in Q1 and JPY2.35 trillion in Q2 22.

China's imports and exports fell more than expected in July, but the result was a larger trader surplus. Exports fell by 14.5% year-over-year in July. They had fallen by 12.4% in June. Imports fell by 12.4%, accelerating from the 6.8% decline reported in June. It was the fifth consecutive decline in imports and the third straight decline in exports. The trade surplus swelled to $80.6 bln from $70.6 bln, the largest in three months. Part of what is happening in related to prices. The volume of crude oil imports rose even though the value fell. There is also a demand function too. Weaker Chinese demand was evident in electronic products and falling imports (double digits) from Japan, Taiwan, South Africa, and Canada. Imports from the US were off 11.2% and -3% from Europe. Exports to the US were down by slightly more than 23%. in July. 

The dollar recovered from a marginal new five-day low yesterday (~JPY141.50) to recoup the pre-weekend losses and return to the JPY142.50 area. Today, the greenback has extended its gains to almost JPY143.45. Some dollar buying may be related to the $2.1 bln of options at JPY143 that expire tomorrow. Last week's high was near JPY144.00 and that remains the next target ahead of high for the year set at the end of June near JPY145. The poor Chinese news hit the Australian dollar, driving it slightly through last week's low (~$0.6515). There are options for A$525 mln at $0.6500 that expire today. The year's low was set at the end of May slightly below $0.6460. The inability to resurface above $0.6600, the neckline of a possible double top at $0.6900. If valid, the measuring objective is around $0.6300. The dollar gapped higher against the Chinese yuan for the second consecutive session. Yesterday's gap was closed in subsequent activity. Today's gap is found between yesterday's high (~CNY7.1945) and today's low (~CNY7.2030). Last month's high was closer to CNY7.2270. The PBOC set the dollar's reference rate at CNY7.1565 compared with the median forecast in Bloomberg's survey of CNY7.1859. It is the strongest dollar fix in almost a month, and some see it as a sign that officials are accepting some yuan weakness.

Europe

The light economic calendar gives an opportunity to review market expectations for the round of central bank meetings. Among the major central banks, the Bank of England is seen as most likely to hike (~83%). The swaps market has about a 36% chance of an ECB hike, while the futures market has about a 14% chance of a Fed hike. The odds of a Bank of Canada rate hike are seen around 28%. The Swiss National Bank holds its quarterly meeting next month and the swaps market has slightly less than a 30% chance that it hikes by a quarter-of-a-point. The market sees practically no chance that the Reserve Bank of Australia changes its policy rate when it meets in early September. 

Turning to the central bank balance sheets, the ECB and Bank of England's balance sheets have been reduced by a little more than 9.5% so far this year. The unwinding from the peak has been a little larger in the eurozone than the UK (18.4% vs. 14.1%). But proportionately, the ECB's balance sheet is slightly more than 52% of EMU's GDP, while the BOE's balance sheet amount of a little less than 33% of the UK's GDP. By comparison, the Fed's balance sheet has fallen 4.1% of this year and is the smallest since July 2021. The balance sheet is 8.2% below its peak and is slightly more than 31% of US GDP. 

The euro has been trending lower since the July 18 peak near $1.1275. It reached almost $1.0910 on August 3. The daily momentum indicators have turned sideways after falling. The key may be the downtrend line off that mid-July high. It comes in today near $1.1025. Last Friday's high was slightly above $1.1040 and $1.1050 is the (38.2%) retracement objective of the recent downtrend. On the downside, it is holding just above yesterday's low (~$1.0965) and below it is the pre-weekend low near $1.0935. Sterling closed firmly but held below Friday's high that was just shy of $1.28. The Fibonacci retracement is around $1.2820 and the downtrend line in sterling comes in around $1.2860. On the downside, a break below yesterday's low (~$1.2715) would disappoint. Last Friday's low was near $1.2690. The intraday momentum indicators are stretched.

America

There was a time in the mid- to late 1980s when the Asian country that vexed American policy makers was Japan that the US monthly trade balance was The report that shook the foreign exchange market. However, since then, the US reports a preliminary goods balance, and economists have improved their forecasting of it. Also, while US officials have weaponized access to the dollar, it is not a function of bilateral trade imbalances as it was from roughly 1985-1995. For understandable reasons, market participants are more interested in the employment report and CPI. The June trade balance will be released today. The advanced goods deficit narrowed by about $4 bln in June and the market expects the overall trade deficit to have narrowed by around the same amount to $65 bln. The US recorded a trade shortfall of roughly $344 bln in the first five months of the year compared with a $446 bln deficit in the same year ago period.

Canada reports its June merchandise trade balance today, too. Recall that in May, Canada's goods deficit unexpectedly surged to C$3.44 bln, the largest shortfall since October 2020. The median forecast in Bloomberg's survey was for a C$1.2 bln surplus and adding insult to injury the April surplus was halved to C$890 mln. The median forecast is for a C$2.8 bln deficit. In the January-May period, Canada recorded a trade deficit of about C$1.54 bln. In the first five months of 2022, Canada's good trade was in surplus by C$14.3 bln.

The US dollar set a two-month high against the Canadian dollar at CAD1.3400 yesterday and is extending its gains into the CAD1.3440 area today. It is approaching the 200-day moving average (~CAD1.3455). Above there, and the CAD!.3500-20 area comes into view. The daily momentum indicators are getting stretched but the price action remains constructive. The US dollar traded quiet yesterday between MXN17.0235 and MXN17.1500 and int remains in that range so far today. Last week, the dollar rallied to almost MXN17.4300 before finishing the week below MXN17.10. Key data for Mexico still lies ahead:  CPI tomorrow and Banxico’ s meeting the following day.