Dollar takes breather as trade concerns linger, yuan remains in focus

Major currencies marked time on Wednesday while the Chinese yuan recovered from 11-month lows, after efforts by authorities the previous day to calm financial markets which had been rattled by worries about trade wars.

Both the yuan and Chinese equity markets have been on edge ahead of July 6, when US tariffs on $34 billion worth of Chinese goods kick in. Beijing has said it would retaliate with tariffs on US products. The onshore yuan opened at 6.6365 per dollar, after hitting 11 month low of 6.7294 on Tuesday.

Ahead of the US Independence Day holiday on Wednesday, the dollar was down 0.14 per cent against a basket of six major currencies at 94.440, after notching up three consecutive months of gains. China’s central bank moved to soothe markets on Tuesday after the yuan dropped through the psychologically key 6.7 to the dollar mark, hitting its lowest in 11 months as anxieties over US trade frictions deepened.

In a statement posted on the website of the People’s Bank of China, Governor Yi Gang said the central bank was closely watching fluctuations in the foreign exchange market and would seek to keep the yuan at a stable and reasonable level. Cross-border capital flows were under control, Yi said.

A Chinese central bank adviser was also quoted as saying authorities did not expect significant yuan depreciation, which also helped the yuan reverse early losses to move back into positive territory. Investors are awaiting the release of the Federal Reserve’s June meeting minutes on Thursday and Friday’s US jobs data for validation of policymakers’ forecasts for two more rate hikes this year.

Valuations also remain supportive of the dollar, with its trade-weighted basket still below long-term averages. The dollar was down 0.2 per cent to the yen at 111.35 while the euro traded up 0.1 per cent at $1.1665 against the euro.

The Canadian dollar strengthened against greenback on Tuesday as oil prices rose to 3-1/2-year highs and domestic manufacturing data supported the view that the Bank of Canada will hike interest rates next week. The pair last traded at C$1.3115, its highest level in 2-1/2 weeks.

Growth in the Canadian manufacturing sector accelerated in June to its fastest pace in more than seven years, the IHS Markit Canada Manufacturing Purchasing Managers’ Index showed on Tuesday. US crude oil futures settled 0.3 per cent higher at $74.14 a barrel after rising above the $75 mark for the first time in 3-1/2 years. Oil is one of Canada’s major exports.

Elsewhere, the Mexican peso firmed sharply on Tuesday after the newly elected president, Andres Manuel Lopez Obrador, sought to assuage investors, magnifying a global bounce in emerging market assets. Obrador, who cruised to victory over the weekend as the first leftist elected president since one-party rule ended in 2000, has strived to dispel fears he might be averse to private investment when he takes office on Dec. 1.

The peso firmed 2.6 per cent overnight, by far the biggest gainer among Latin American currencies, as improved sentiment over Mexico helped to magnify an emerging markets rally. “We think the latest developments go in line with our view that Lopez Obrador will be more pragmatic than some domestic market participants expect,” said Tania Escobedo, New York-based Latam FX Strategist at RBC Capital Markets. “We think there is space for a rally of Mexican peso in the transition period, as local retail investors that have been overweight cash and US dollar should start shifting back to peso given the opportunity cost in yield.”

Rupee ends weak at 68.74

The rupee ended weak by 17 paise at 68.74 on fresh dollar demand by banks and importers. However, the dollar’s weakness against other currencies overseas capped the rupee’s losses.

The domestic unit opened strong at 68.46 at the interbank forex market today. It hovered in a range of 68.78 and 68.46 before ending at 68.74 at 5 pm local time.

Yesterday, the rupee had ended strong by 23 paise at 68.57 on fresh dollar selling by exporters and corporates. Meanwhile, the benchmark BSE Sensex ended a two-week high of 35,645.40, up 266.80 points.

Asian shares, yuan on shaky ground on spectre of trade war

Asian stocks were on shaky ground on Wednesday while the Chinese yuan stood near 11-month lows as the spectre of a Sino-US trade war haunted investors ahead of an end-of-week deadline for US tariffs on billions of dollars worth of Chinese imports.

MSCI’s broadest index of Asia-Pacific shares outside Japan edged up 0.1 per cent in early trade, a day after it hit a nine-month low. Japan’s Nikkei lost 0.5 per cent. Wall Street dropped on Tuesday, giving up early gains in a truncated session ahead of the Independence Day holiday on Wednesday, while technology shares came under pressure just a day after their solid start for the quarter on Monday. The S&P 500 lost 0.49 per cent while the Nasdaq Composite dropped 0.86 per cent.

Facebook lost 2.3 per cent after the Washington Post reported a federal probe on the data breach linked to Cambridge Analytica was broadened while Tesla fell 7.2 per cent on questions over whether it could sustain the pace of making its Model 3 sedans.

Micron Technology Inc fell 5.5 per cent after its rival firm, Taiwan-based competitor United Microelectronics Corp 2303.TW, said it received a temporary injunction banning chip sales in mainland China. Coming on the heels of escalating tensions between the United States and China over tariffs and investment restrictions, the injunction sparked selling in other US chipmakers.

“We have the issue of Micron just when technology shares started to lose momentum after their stellar performance so far this year. If we see further profit-taking in the sector, that would be worrying given their heavy weighting in major indexes,” said Nobuhiko Kuramochi, chief strategist at Mizuho Securities.

The news hit chip-related shares in Japan. SMC Corp , manufacturer of machines used for chip-making, fell 6.5 per cent while Advantest, maker of chip inspection machines, fell 5.6 per cent. Many investors fear Washington will go ahead with its plan to impose tariffs on $34 billion worth of Chinese goods on July 6, which Beijing has vowed to match with tariffs on US products, raising the risk of a full-blown trade war.

In the currency market, the yuan remained under pressure. The Chinese currency fetched 6.6715 per dollar in early Asian trade, off Tuesday’s 11-month low of 6.7344 after China’s central bank moved to calm jittery financial markets. The People’s Bank of China Governor Yi Gang said in a statement on Tuesday that the central bank was closely watching fluctuations in the foreign exchange market and would seek to keep the yuan at a stable and reasonable level.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, has lost more than 3 per cent in the past two weeks. On the other hand, the Mexican peso surged 2.6 percent, its biggest one-day gain in more than two years, on soothing comments from the country’s newly elected leftist president that he will not ramp up spending.

Currency market

Major currencies were treading water as traders fretted about the fallout of the intensifying trade frictions between Washington and the rest of the world. The euro stood little changed at $1.1658, keeping gains after Germany’s coalition settled a row over migration that had threatened to topple Chancellor Angela Merkel’s government.

The dollar changed hands at 110.56 yen.

Commodities market

Oil prices were supported as larger-than-expected fall in US stockpiles data from the American Petroleum Institute confounded worries about supply shortage. US light crude futures traded up 0.6 per cent at $74.62 per barrel, after rising above $75 for the first time in more than three years on Tuesday.

International benchmark Brent futures stood flat at $77.77. Copper, on the other hand, hit nine-month lows on Tuesday on worries trade frictions could slow down global growth. It last traded at $6,521, up 0.5 per cent on the day but still near Tuesday’s low of $6,490.

Markets await US trade tariff deadline this week

China’s yuan rose sharply against the dollar on Wednesday, a day after the central bank assured markets it would keep the currency stable amid heightened worries about trade frictions, although stocks remained under pressure.

Chinese currency and equity markets have been on tenterhooks ahead of July 6, when US tariffs on $34 billion worth of Chinese goods are set to kick in. Beijing has said it would retaliate with tariffs on US products.

The yuan had its worst month on record in June, losing about 3.3 per cent of its value against the greenback, and the slide continued on Monday, the first trading day of July.

On Tuesday, though, the yuan had rebounded after People’s Bank of China Governor Yi Gang’s remarks and continued to ride the updraft on Wednesday, putting it on track for its first two-day winning streak since the middle of June.

At 0341 GMT, it was trading at 6.6305 yuan per dollar, 0.2 per cent stronger than the late night close on Tuesday.

“Thankfully for regional risk, the PBOC engaged the yuan airbrake yesterday afternoon and at least for the time being, with the help of Chinese state-owned banks who were seen selling dollars to prop up the Chinese currency, is restoring a sense of calm in regional markets,” OANDA wrote in a note.

A trader at a Chinese bank said the PBOC’s signal was clear, but the market would closely watch and react to developments ahead of July 6.

“In the short term, the yuan will continue consolidating at the current level, while sharp, one-way falling might have come to an end,” the trader said.

Key Chinese equity indexes were less enthusiastic, flip-flopping for part of the morning around Tuesday’s closing prices before ending the session in negative territory.

The benchmark CSI300 Index was down 0.85 per cent by the lunch break, and the Shanghai Composite Index was off 0.68 per cent. At 0345 GMT, Hong Kong’s Hang Seng Index was down more than 1 per cent, while an index that tracks mainland companies had fallen about 1.5 per cent.

Services PMI up sharply in June on rise in new business

India’s services sector seems to be back on track. After contracting in May, the Nikkei India Services Business Activity Index rose to 52.6 in June from 49.6 in May. This index is better known as the Purchasing Manager’s Index (PMI) and is prepared on the basis of a survey conducted among purchasing managers of over 400 private companies.

These companies belong to five sectors, namely Consumer Services, Transport & Storage, Information & Communication, Financial & Insurance and Real Estate & Business Services. An index of over 50 shows expansion and one below 50 indicates contraction. The index and subsequent report is prepared by IHS Markit.

According to the report, the rate of expansion in activity was the sharpest in a year. This was supported by the strongest rise in new business since last June. Reflecting improved demand conditions, job growth picked up from May’s five-month low. On the price front, input cost inflation remained solid overall. That said, services providers were unable to fully pass on higher input costs to price-sensitive consumers. The latest upturn points to solid growth that was the fastest since last June.

According to the report, despite an improvement in demand conditions, business sentiment dipped to the lowest since last October. While optimism was relatively weak, firms still anticipate activity to rise in the year ahead. In response to greater output requirements and new work, firms have raised their staffing levels during June. Information and communications have registered the sharpest growth in staffing levels, it added.

Since manufacturing registered the strongest growth in June, the combined (Manufacturing+Services) PMI, better known as Composite PMI Output Index, has risen to 53.3 in June from 50.4 in May. The latest reading is the strongest seen since October 2016 and is indicative of a solid rate of expansion.

Commenting on the latest PMI, Aashna Dodhia, Economist at IHS Markit, said the service economy returned to expansion in June. Encouragingly, the latest performance is the strongest seen in a year, against a backdrop of improving demand conditions, as evidenced by the fastest gain in new business since last June. In response to an improvement in demand conditions, service providers raised their staffing levels at a faster pace than in the previous survey period.

“The PMI data signalled the best improvement in the overall health of the economy since October 2016, propelled by solid growth in both the manufacturing and service economies, with the sharper rise in the former. However, overall input costs rose at the strongest rate since July 2014, and amid a weak rupee and higher oil prices, inflation may remain elevated. Given these circumstances, the chances of a further monetary policy tightening have heightened,” she said.

US dollar, demand weigh on gold prices

Defying conventional logic and widespread expectation, gold prices have been falling steadily. On July 2, the rates fell to a low of $1,240 a troy ounce, close to their mid-December low. In June, the metal lost more than 3 per cent in value at a time when geopolitical instability, worsening trade friction and looming event risks ought to have pushed it higher.

People are actually selling gold when they ought to be buying as per conventional wisdom. This raises doubts about the much-touted safe haven status of gold.

Gold’s downward spiral has caught many by surprise and they find it tough to reconcile with this situation. There are outflows in gold ETFs and less committed speculators are exiting their long positions, precipitating a price fall. If anything, net long positions have been switched to net short positions.

Significant factors

There are two significant factors weighing on gold prices. First is the US dollar. After the June rate hike, the currency has gained strength (quite unlike the weakness we saw soon after the March hike). Moreover, there are clear signals that there will be two more rate hikes in the second half of this year. This is propelling the dollar higher as the Fed’s monetary policy outlook signifies a strengthening US economy.

The second and crucial factor is demand, something this writer has been emphasising often. Demand for gold, especially in two of the world’s largest importers and consumers, is far from robust. As for China, import in May from Hong Kong and Switzerland was rather strong at about 96 tonnes; but total arrivals in the first five months of the current calendar year increased by less than 2 per cent.

The Indian situation does not look healthy either. Imports were down in May and cumulatively, in the first five months, arrivals were down by a staggering 30 per cent.

From June to September demand ebbs because of the agricultural season. The earliest revival of demand is at least three months away, that too subject to a normal southwest monsoon, satisfactory harvests and remunerative prices for growers.

‘Bottom fishing’

The benefit of the international price fall has been denied to the Indian consumers because of a rapidly depreciating rupee. There are now forecasts that the rupee may plunge to 70 to a dollar. In the event, the fall in dollar price will be neutralised by a weaker Indian rupee for domestic consumers.

At the same time, the current low prices may be seen as a buying opportunity; yet, in a falling market there is always the tendency to do what is called ‘bottom fishing.’

While the behaviour of gold has been anomalous in recent times, the metal could at some stage actually become a beneficiary of geopolitical and trade uncertainties.

If the crude oil market continues to say at elevated levels of say $75 a barrel for an extended period of time — say 3 to 6 months — gold’s role as an inflation hedge as well as safe haven status may resurface.

Silver — which more often than not rides on the coattails of gold — has also been dragged down. Recently the metal fell below $ 16/oz.

Going forward, silver looks vulnerable for a variety of reasons. The metal is tied to the base metals complex and the latter is likely to remain weak especially given China’s slowdown.

Also, demand from the electronics sector is expected to be tepid. In the event, speculative capital will move out of silver causing a further price fall in its price.

The writer is a policy commentator and commodities market specialist. Views are personal.

Copper hits 9-month low on US-China trade war fears

London copper surrendered early gains and fell to a nine-month low on Wednesday, while zinc hit its weakest in a year as investors braced for a trade war between China and the United States.

China’s threatened tariffs on $34 billion of US goods will take effect from the beginning of the day on July 6, a person with knowledge of the plan told Reuters, amid worsening trade tensions between the world’s two largest economies.

Washington has said it would implement tariffs on $34 billion of Chinese imports on July 6, and Beijing has vowed to retaliate in kind on the same day. If a trade war happens, “there will be some serious ramifications on the global economy,” said Meng Jie Wu, an analyst at CRU consultancy in Beijing.

Three-month copper on the London Metal Exchange fell as far as $6,423 a tonne, the lowest since late September, and was down 0.6 per cent at $6,451 by 0734 GMT. On the Shanghai Futures Exchange, the most-traded copper slid 2.4 per cent to close at 50,100 yuan ($7,583.67) per tonne.

LME zinc dropped more than 2 per cent to $2,731.50 a tonne, its weakest since July last year, and nickel hit a seven-week low of $14,185.

China is putting pressure on the European Union to issue a strong joint statement against President Donald Trump’s trade policies at a summit later this month but is facing resistance, European officials said.

Growth in China’s services sector accelerated in June to a four-month high, buoyed by a pickup in new businesses and a sustained increase in employment, a private survey showed.

China’s yuan rose sharply against the dollar, a day after the central bank assured markets it would keep the currency stable amid heightened worries about trade frictions, although stocks remained under pressure.

US authorities have demanded Glencore hand over documents about its business in the Democratic Republic of Congo, Venezuela and Nigeria as part of a corruption probe, sending the mining company’s shares down more than 8 per cent.

Indonesia has extended a temporary operating permit for Freeport McMoRan Inc’s Grasberg project, the world’s second-biggest copper mine, until the end of the month while discussions continue over long-term rights.

SME IPOs garner Rs 825 cr in April-June quarter

Small and medium enterprises (SMEs) raised Rs 825 crore through initial public offerings in the first quarter of 2018-19, more than two-fold jump from the preceding financial year.

According to the offer document, funds raised through initial public offers (IPOs) were meant for business expansion plans, working capital requirements and other general corporate purposes.

About 47 companies got listed with initial share sale offers worth Rs 825 crore during April-June quarter of 2018-19 compared with 24 firms which tapped the IPO route to garner Rs 310 crore in the same period of the previous year.

This reflects a significant rise in the amount raised through SME platforms of both the BSE and NSE. Further, the average issue size also increased to over Rs 17 crore during the period under review from Rs 13 crore in the first quarter of 2017-18.

“It has been more than six years since SME market opened up and we have witnessed this market evolving gradually with varying trends: high over-subscriptions, widening shareholder base, venture capital exits through this platform, anchor investor participation and the like.

“This segment will continue to be of interest and will grow leaps and bounds in time to come,” said Mahavir Lunawat, Group Managing Director, at Pantomath Advisory Services Group.

Geographically, Gujarat topped the list as a maximum 17 firms from the state listed on SME bourses, followed by Maharashtra (11), Delhi (5) and Madhya Pradesh (3).

A gradual shift from heavy over sub-subscription to low or minimal subscription pattern was seen in SME IPOs. Out of 47 IPOs, only 7 got subscribed more than 10 times, 14 initial share-sale offers witnessed a subscription between 2 and 10 times and 17 public issues subscribed less than 2 times.

Further, participation from anchor investors have been increasing in the small and medium enterprises segment too.

“Pricing of SME IPOs are generally attractive and due to high demand, post listing the prices rally up to a significant number. Markets have been corrected sharply in 2018 so far and SMEs are no exceptions. Decline in prices of some of the SME scripts was also seen in the quarter,”Lunawat added.

Gold, silver futures rise on positive global cues

Gold prices rose 0.19 per cent to Rs 30,550 per 10 grams at the futures trade due to widening of positions by speculators on positive global cues.

At the Multi Commodity Exchange, gold for delivery in August went up by Rs 57 or 0.19 per cent at Rs 30,550 per ten gram in a business turnover of 239 lots. Similarly, the yellow metal for delivery in October was trading higher by Rs 56 or 0.18 per cent at Rs 30,830 per ten gram in 13 lots.

Market analysts said widening of positions by traders in sync with a firm global trend mainly influenced gold prices at the futures trade. Globally, gold rose 0.31 per cent to $1256.20 an ounce in Singapore.

Silver prices traded higher by 0.30 per cent at Rs 39,828 per kg at the futures trade as speculators raised their bets on firm global cues.

At the Multi Commodity Exchange, silver for delivery in September went up by Rs 118 or 0.30 per cent to Rs 39,828 per kg in a business turnover of 357 lots. Likewise, the white metal for delivery in July gained Rs 78 or 0.20 per cent to Rs 39,156 per kg in 5 lots.

Market analysts said speculative position created by participants owing to a firm global trend influenced prices at the futures trade. Meanwhile, silver rose 0.31 per cent to $16.05 an ounce in Singapore.

Fund managers turn to tech, financials as trade worries rise

Global investors eyeing corporate attributes led by strong domestic business, IP

The rising tensions over global trade policy are prompting some top-performing international fund managers to look for the companies that can emerge as winners.

Fund managers from firms including AllianceBernstein, Causeway Capital Management and Janus Henderson are adding to positions in companies ranging from Italy’s largest bank to China’s largest e-commerce company, all in hopes of avoiding the fallout from a global trade war.

Chief among the corporate attributes fund managers are now looking for are either a strong domestic business that would not be significantly affected by import tariffs, or a dominant market position, or intellectual property that would prompt customers to continue to buy its goods regardless of additional taxes.

‘Growth stories’

“The impact of a tariff is becoming a bigger factor in our decision-making,” said George Maris, a portfolio manager of the $2.2 billion Janus Henderson Global Select fund. Mr. Maris has increased his position in companies such as Chinese e-commerce giant Alibaba Group Holdings that are dominating their domestic markets.

“Secular growth stories overwhelm the threat of increased trade frictions every time,” he said.

U.S. President Donald Trump said he was pushing ahead with tariffs on $50 billion of Chinese imports on Friday, and the smouldering trade war between the world’s two largest economies showed signs of igniting.

Mr. Trump laid out a list of more than 800 strategically important imports from China that would be subject to a 25% tariff starting on July 6 including cars, the latest hard-line stance on trade by a U.S. president who has been wrangling with allies.

The European Union, meanwhile, has challenged aluminium and steel tariffs imposed by the Trump administration at the World Trade Organization and has drawn up a list of goods it would hit with retaliatory measures.

The threat of tariffs, along with rising U.S. interest rates, helped sink global stock markets in February. Since then, major stock indices have recovered most of their gains, with the U.S. S&P 500 index up 4.9% for the year to date and the Stoxx 600 index of companies in the European Union up 2.5% over the same time.

Conor Muldoon, a portfolio manager of the $8.7 billion Causeway International Value fund, said that trade and other macroeconomic concerns are “presenting short-term opportunities.” The fund has been increasing its position in Italian bank UniCredit SpA, for instance, after its shares sold off in March following elections that renewed concerns about whether the country could exit the eurozone.

Mr. Muldoon’s fund is also increasing its position in durgmakers such as GlaxoSmithKline and Japan’s Takeda Pharmaceutical that have strong drug pipelines, he said. Shares of GlaxoSmithKline are up 19.5% year to date, while shares of Takeda are down 32% over the same time after it raised its $62 billion bid for Shire Plc.

Sammy Suzuki, a co-portfolio manager of the $77 million AB International Strategic Core fund, said that the threat of technological disruption in some markets was just as pressing a concern for some global firms as the impact of higher tariffs. As a result, his fund is focusing more on what he calls the “enablers”, which are back-end tech firms that do not trade at as high valuations as companies like Amazon.com and Netflix.

‘Tariff-resistant business’

Spanish firm Amadeus IT Group, for instance, provides the technology backing the reservation systems used by airlines including British Airways, Southwest, and Lufthansa Group. Shares of the company are up 20% for the year to date.

“Even if you wanted to, it’s difficult to rip them out of these companies,” he said.

Mr. Suzuki has also been increasing his position in European luxury goods makers such as Italian apparel firm Moncler and British alcoholic beverage company Diageo, both of which make products that should not be significantly affected by rising trade costs, he said.

“You can find tariff-resistant businesses that are in niches, but it takes work to find them,” he said.