· The dollar stayed firm against a basket of currencies on Tuesday, supported by trade and political worries and a strong rise in U.S. consumer confidence, even as longer-dated U.S. bond yields dropped to 19-month lows.
The euro rebounded from session lows as investors were relieve that pro-Europe parties won a majority of European parliamentary seats. Currency trading remained light even as U.S. and U.K.-based traders returned from holidays.
At 2:36 p.m. ET, an index that tracks the greenback against the euro, yen, sterling and three other currencies was 0.3% higher at 97.93.
The dollar strengthened after the Conference Board said its gauge on U.S. consumer confidence rose to 134.1 in May, the strongest since November. Analysts had forecast a reading of 130.00.
The euro has recovered, holding steady at $1.117. The euro hit a near 23-month low of $1.11055 last week.
· The yield on the benchmark 10-year Treasury note fell to a 19-month low Tuesday as Wall Street grew more certain that the U.S.-China trade war will last longer and afflict GDP growth more than first thought.
At around 3:33 p.m. ET, the yield on the benchmark 10-year Treasury note, which moves inversely to price, was lower at around 2.264%, off a 19-month low hit earlier in the session. The yield on the 30-year Treasury bond yield traded at 2.705%, off its lowest level since 2017; the 2-year Treasury note yielded 2.127%.
The 3-month Treasury bill yielded 2.356%, keeping a portion of the yield curve inverted. The German 10-year bund yield hit a low of -0.163%, its lowest level since Sept. 30, 2016.
· Speculation that China could use its dominance in rare earth minerals as a weapon in the trade war intensified after a Chinese official warned that products made from the materials should not be used against China’s development.
The comment, reported by CCTV, was taken as a veiled threat aimed at the U.S. and its technology companies that are dependent on the materials. Last week, Chinese President Xi Jinping visited rare earth mining and processing facilities, adding to speculation that China could make the minerals more expensive or unavailable if the trade war continues to expand.
Rare earth imports are a relatively small part of the $420 billion U.S. goods deficit with China, but their worth far outstrips their dollar value. The materials are critical in the creation of such things as iPhones, electric vehicles and advanced precision weapons.
· Bank of America Merrill Lynch strategists, in a note, point out that the U.S. Department of Defense has termed China’s domination of the rare earth market as potentially dangerous, given the offshoring of manufacturing and vulnerabilities in America’s manufacturing and defense industrial base.
China produced about 78% of rare earths in 2018, and owns about 40% of global resources.
· The stock market and economic outlook in the United States are “deteriorating,” according to an analysis from one of Wall Street’s top investment banks.
Renewed trade tensions and a slump in economic data — ranging from falling durable goods and capital spending to a downshift in the services sector — has put U.S. profits and economic growth at risk, Morgan Stanley warned Tuesday.
“Recent data points suggest US earnings and economic risk is greater than most investors may think,” wrote Michael Wilson, the firm’s chief U.S. equity strategist.
Specifically, the stock strategist highlighted a recent survey from financial data firm IHS Markit that showed manufacturing activity fell to a nine-year low in May. That report also revealed a “notable slowdown” in the U.S. services sector, a key area for an American economy characterized by huge job gains in health care and business services.
· J.P. Morgan Chase CEO Jamie Dimon said that the escalating U.S.-China trade dispute is a “real issue” that could damage corporate confidence.
“I think trade is a real issue,” Dimon said Tuesday at a conference in New York. “Trade has gone from being a skirmish to being far more important than that. If this goes south in a bad way, and you have other surprises, that could be part of the thing that changes confidence, changes peoples’ willingness to invest.”
“You’re already starting to see businesses starting to think about moving their supply lines,” Dimon said. “That can obviously slow down business investment and cause uncertainty of all different types.”
· Policymakers pulled out all the stops to fix the financial crisis, but they may have to get even more extreme when the next downturn hits.
Future crises could see a “radicalization” of the types of measures taken to jolt the economy out of its last malaise, according to an analysis by AB Bernstein that looks both at the waning effectiveness of current attempts and the shape future efforts will take.
The second form of “radicalization” would be negative interest rates, something that is getting a higher level of discussion inside the Fed as officials contemplate what the next crisis response might look like. Because of its impact on banking Carlsson-Szlezak calls negative rates “the obvious extension [but] not an obvious policy choice.” However, the Fed already has experience with real negative interest rates, or the difference between the nominal level and inflation, and likely at least would explore taking the next step.
· Malaysia’s economic growth is set to gain an additional 0.1 percentage points from companies moving manufacturing out of China due to the ongoing trade war between Beijing and Washington, according to an economic advisor to Prime Minister Mahathir Mohamad.
Experts have frequently cited Malaysia as one of the countries that could benefit from the trade conflict between the world’s top two economies. That’s because manufacturers based in China may look to circumvent elevated U.S. tariffs by shifting some of their operations to locations in Southeast Asia such as Malaysia, Thailand and Vietnam.
· The race to become the next leader of the Conservative Party, and consequently the next U.K. prime minister, has begun to accelerate with the first round of voting set to take place next week.
CNBC takes a look at the Conservative lawmakers who are vying for power through the prism of Britain’s withdrawal from the EU.
Boris Johnson, the face of the official Brexit campaign in 2016, is the favorite to succeed May. Betting markets put a 40% implied probability on Johnson winning the top job.
· He has recently insisted that Britain must stick to the new October 31 Brexit deadline; that he would attempt to renegotiate the complex and contentious Northern Irish backstop contained within the Britain’s withdrawal agreement with Brussels — something May tried and failed to do repeatedly. But absent changes to that backstop, Johnson has said he would take the U.K. out of Europe without a deal.
Others tipped by betting markets are Dominic Raab, a Brexit supporter and former Brexit secretary. Betting markets put a 14% implied probability on his chances.
Raab is another leadership contender who says Britain must leave the EU on October 31, perhaps even without a deal, and he has hinted that it might be possible for a prime minister to pursue that course of action unilaterally, without parliamentary approval.
· U.S. crude futures gained on Tuesday after flooding throughout the Midwest constrained crude flow from the main U.S. storage hub in Cushing, Oklahoma.
U.S. West Texas Intermediate (WTI) futures settled at $59.14 a barrel, up 51 cents, or 0.9%, from its close on Friday before the long Memorial Day holiday weekend.
“Flooding seems to have impacted distribution hubs around the United States, slowing stuff coming out of Cushing and creating a bid on WTI,” said Phillip Streible, senior market strategist at RJO Futures in Chicago.
Flooded areas of Arkansas and Oklahoma were bracing for more rain that will feed the already swollen Arkansas River, forecasters said on Tuesday. Up to 19 inches (48 cm) of rain have fallen so far in parts of Oklahoma over the month of May, the National Weather Service said, with more on the way.
Meanwhile, Brent crude futures were largely steady, just 3 cents lower at $70.08 a barrel.
· Diesel demand in China fell 14% and 19% in March and April respectively, reaching levels not seen in a decade, according to data compiled by Wells Fargo.
“We believe the accelerating decline is most likely tied to economic factors and the effects of the tariff ‘war’ with the U.S.,” Wells Fargo energy analyst Roger Read said in a note Monday. “If one wants to worry, that is where to focus most closely in our view.”
China said in April its economy grew by 6.4% in the first quarter of 2019. However, global investors and economists have been skeptical of China’s official economic figures for years as they believe they overstate how much China’s economy is growing.
Reference: CNBC, Reuters
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