OVERNIGHT DATA AND HEADLINES
Oil prices tumbled and global equity markets fell on Friday as China's move to impose a new security law on Hong Kong further strained U.S.-China relations and clouded economic recovery prospects.
China dropped its annual growth target for the first time and pledged more government spending as the COVID-19 pandemic hammers the economy, setting a sombre tone to this year's meeting of parliament. The omission from Premier Li Keqiang's work report marks the first time China has not set a target for gross domestic product (GDP) since 2002. "We have not set a specific target for economic growth for the year, mainly because the global epidemic situation and economic and trade situation are very uncertain, and China's development is facing some unpredictable factors," Li said at the start of parliament.
China is set to impose new national security legislation on Hong Kong after last year's pro-democracy unrest drawing a warning from President Donald Trump that Washington would react "very strongly" against the attempt to gain more control over the former British colony. China's action could spark fresh protests in Hong Kong, which enjoys many freedoms not allowed on the mainland, after often violent demonstrations of 2019 plunged the city into its deepest turmoil since it returned to Beijing's rule in 1997. The "Hong Kong Human Rights and Democracy Act" approved by Trump last year requires the State Department to certify at least annually that Hong Kong retains enough autonomy to justify favourable U.S. trading terms. U.S. State Department spokeswoman Morgan Ortagus said any Chinese move to impose legislation that did not reflect the will of the people would be highly destabilising and met with strong condemnation. Ending Hong Kong's special status would be a big blow for U.S. firms. The State Department says 85,000 U.S. citizens lived in Hong Kong in 2018 and more than 1,300 U.S. companies operate there, including nearly every major U.S. financial firm.
A measure of British public debt leapt to close to 100% of the country's economic output in April, its highest in nearly 60 years. Government borrowing of 62.1 billion pounds ($75.80 billion) in April alone was just a fraction lower than its total for the whole 2019/20 financial year. That took the stock of public debt to nearly 98% of GDP, also reflecting a lower estimate of the size of the economy based on a recent coronavirus scenario by Britain's budget forecasters.
U.K. retail sales slumped by a record 18%, falling by the most on record in April with sales volumes slumping 18.1% in April from March, a slightly bigger fall than forecast in the Reuters poll. The volume of clothing sales in April plummeted by 50.2% when compared with March 2020, which had already fallen by 34.9% on the previous month. But the share of spending that was done online jumped to 31% of the total, a big increase from 22% in March.
Wall Street ended mixed in a mostly tame finish to a week of strong gains, as investors gauged China-U.S. tensions and amid ongoing uncertainty about the pace of economic recovery from the coronavirus. Dow Jones fell 0.04% to end at 24,465.16 points, while the S&P 500 gained 0.24% to 2,955.45. The Nasdaq climbed 0.43% to 9,324.59. For the week, the Dow added 3.3%, the S&P 500 rose 3.2%, and the Nasdaq climbed 3.4%.
The USD rose, helped by safe-haven demand against a strained and deteriorating U.S.-China conflict. The DXY index was up 0.4% at 99.79. For the week, the index was down about 0.6%.
EUR slipped 0.5%, falling from 1.0930 to 1.0887.
The JPY strengthened 0.01% against the USD at 107.62.
The offshore CNY hit a two-month low of 7.1645. Onshore yuan hit eight-month lows.
AUD was 0.5% lower, dropping from 0.6545 early London to a 0.6506 low but recovered back at 0.6536 late NY.
NZD followed AUD lower, dropping to a 0.6080 low to recover just shy of 0.6100.
USDCAD weakened about 0.2% as oil prices fell and Canadian data showed a record decline in retail sales.
AUDNZD rebounded from an early fall towards 1.0667, trading back up to around 1.0730.
AUDEUR remained a tight 25 point range, trading between 0.5970/0.5995.
Longer-dated U.S. Treasury yields fell as risk sentiment turned sour after Beijing proposed imposing a new security law on Hong Kong.
The U.S. 10-year yield fell to 0.657% from 0.677% late on Thursday, after earlier falling to a one-week low of 0.627%. It has fallen 8.5 basis points since Monday's close.
The 30-year yield was at 1.371%, down from 1.398% on Thursday. The 20-year yield was also lower at 1.127% and the 2-year yield was last at 0.170%
The U.S. yield curve flattened for a fourth straight session, with the 10- and 2-year spreads narrowing to 48.70 basis points.
Italian 10-year government bond yields were on course for their biggest weekly fall in eight weeks after a European Union proposal helped push Italy's 10-year bond yield down 25 basis points last week.
Germany's 10-year benchmark was up 1.3 bps at -0.48%, having fallen earlier to -0.52%. Italian 10-year bond yields were down 2.9 bps at 1.60% after touching a six-week low of 1.597%.
Gold gained as intensifying U.S.-China tensions compounded fears of a slow recovery. Spot gold rose 0.7% to $1,740.04 per ounce, after falling 1.4% on Thursday, and was headed for a small weekly decline.
Chinese iron ore futures rose for an eighth straight session, marking its best week in more than eight months, as strong domestic demand and tightening supply from Brazil drove spot prices to a nine-month high. The Dalian Commodity Exchange's most-traded iron ore contract climbed 0.8% to 716.50 yuan ($100.53) a tonne, closing well off the day's high but defying overall downbeat sentiment in the metals markets. Benchmark 62% iron ore bound for China rose for a fourth consecutive day to hit $98.70 a tonne, the highest since Aug. 6.
Copper prices slid on worries that renewed U.S.-Chinese tensions will further damage a global economy already hit by the COVID-19 pandemic. Three-month LME copper fell 1.9% to $5,287.50 a tonne. LME aluminium fell 1.3% to $1,502 a tonne, zinc rose 0.1% to $1,984.50, lead dropped 0.7% to 1,645 and tin gave up 0.6% to $15,410.
Oil prices tumbled about 2% on rising U.S.-China tensions. Brent crude futures fell 93 cents, or 2.6%, to settle at $35.13 a barrel. U.S. WTI crude ended 67 cents, or 2%, lower at $33.25 a barrel.
ECONOMIC CALENDAR TODAY
Germany - May IFO business climate survey (last 74.3, forecast 78.3). Should begin to recover from record low in April.
US - Memorial Day (Public holiday and unofficial start to summer).
AUD THOUGHTS AND TECHNICAL ANALYSIS
AUD is limping into the long U.S. holiday weekend, down 0.72% at 0.6525, as U.S.-China tensions over Hong Kong accelerated profit-taking after last week’s rise to a new recovery high at 0.6616.
Selling interest continued into the offshore time zones with USD bought across many major currencies and as a result saw most of the commodity index and AUDJPY risk barometer lower (managed to recover from a brief di[ through 70.00 support).
For markets, the Hong Kong issue increases uncertainty over interaction between the world's two largest economies, with U.S. Senate Majority Leader Mitch McConnell warning that a crackdown would "only intensify the Senate’s interest in re-examining the U.S.-China relationship.” Recent global central bank comments suggest economic recovery is far from a sure thing as fears of second-wave COVID-19 outbreaks remain prevalent. Fresh U.S.-China sparring wouldn't help global economic growth and may play into President Trump's new stronger USD mantra.
A public holiday across the US, UK, Singapore and several Asia markets today mean liquidity will be lighter than usual. For Asia, CNY fix will be the focus. Amid concerns around the new Hong Kong National Security Law and further escalation in US-China tensions, onshore USDCNY spot traded new year-to-date high of 7.144 last Friday. The move did not face strong policy resistance and implied the risk that today’s CNY fix would move higher accordingly.
The ongoing China’s NPC may drive the PBoC to manage the pace of RMB fall. China’s NPC is expected to pass a resolution on May 28 to impose a new National Security Law on Hong Kong. Details of the law will be drafted by the relevant NPC Committee, and it could be enacted in the next few months. The US has warned that such actions would undermine Hong Kong’s autonomy. China meanwhile sort to defuse tensions as Foreign Minister Wang Yi noted on Sunday that the law “will not affect the high degree of autonomy Hong Kong enjoys, nor will it affect the rights and freedoms of Hong Kong residents, nor will it affect the legitimate rights and interests of foreign investors in Hong Kong.” No Australian Economic data releases today. Offshore there are tentative signs of a growth rebound as shown in the Eurozone May Flash PMIs, which is likely to be reinforced with tonight's German IFO survey.
For the AUD, opens at 0.6525 this morning with U.S./China headlines dominating direction into this week. AUD remains vulnerable after its 11-big-figure rally from coronavirus-related lows at 0.5510 on March 19, with a good opportunity for recent longs to exit and establish fresh shorts ahead of 200-DMA resistance at 0.6661. AUD bears target 10- and 100-DMA support by 0.6500, then more significant support at 0.6355, the 23.6% Fib of 0.5510-0.6617. Immediate resistance at 0.6617 (May 20 high) then 200-DMA by 0.6661. The rally off March 19 low remains intact for now. Bears need sub-0.6370 to regain momentum.