· The common currency extended its rise on Thursday afternoon as Mario Draghi, president of the European Central Bank, acknowledged risks to the eurozone economy but struck a broadly confident tone on the bloc’s “resilience”.
“The prolonged presence of uncertainties related to geopolitical factors, the rising threat of protectionism and vulnerabilities in emerging markets is leaving its mark on economic sentiment,” Mr Draghi said at a press conference following the ECB’s policy decision. “At the same time further employment gains and increasing wages continue to underpin the resilience of the euro area economy and gradually rising inflation.”
Earlier on Thursday, the ECB vowed to hold interest rates at historic lows until at least mid-2020, from a previous guidance of late 2019.
- Revised forecasts
Meanwhile, Draghi also presented a fresh round of forecasts for economic growth as well as inflation. According to the forecasts, the ECB sees GDP growth of 1.2 percent in 2019, up 0.1 percentage points from its previous forecast in March. For 2020, the ECB forecast the economy to grow at 1.4 percent, down 0.2 percentage points as compared to its previous forecast.
The ECB slightly raised its inflation forecasts for 2019 to 1.3 percent - up 0.1 percentage point from from its previous forecast in March. Meanwhile, for 2020, the ECB revised its forecast to 1.4 percent - down 0.1 percentage points from its earlier forecast in March.
“There is no probability of deflation, there is very low probability of recession, there are no threats of de-anchoring of inflation expectations,” Draghi said.
· The euro jumped half a percent on Thursday after the European Central Bank refrained from hinting at an interest rate cut, merely pushing back the timing of its first post-crisis rate hike.
The euro rose because investors had expected an even more dovish signal from the ECB and for the central bank to acknowledge weakness in economic growth.
· “One of the more dovish outcomes we envisaged did not materialize. The governing council extended its forward guidance timing, but also under-delivered on the TLTRO front,” TD securities told clients.
The ECB said it would lend to banks at a rate just 10 basis points above its minus 0.4% deposit rate in a new targeted longer-term refinancing operation, or TLTRO.
· Money market futures are now pricing in a 45% chance of a 10 basis point euro zone rate cut by the end of year versus 75% before the ECB statement.
· The euro has strengthened recently on the back of dollar weakness caused by rising bets on a U.S. interest rate cut. The single currency was 0.5% higher at $1.1273 after brushing a 1-1/2-month high of $1.1307 earlier this week.
The ECB is trying to give the ailing euro zone a boost but has not yet signaled it will take more policy action later this year as an escalating global trade war unravels the benefits of years of monetary stimulus.
· Japan’s yen approached a five-month high on Thursday after a lack of progress in U.S.-Mexico trade talks hurt risk sentiment and drove investors towards safe-haven currencies.
The Japanese yen has been the main beneficiary from a shift towards assets investors deem safer.
It rose as much as 0.3% to 108.07 yen per dollar, close to its strongest level since Jan. 10, after negotiations in Washington on Wednesday aimed at averting U.S. tariffs on Mexican goods showed little sign of progress.
· The Mexican peso, already saddled with trade concerns, took a hit after credit ratings agency Fitch downgraded its sovereign debt rating on Wednesday by a notch from BBB+ to BBB, just two notches above junk status.
· The dollar index against a basket of six major currencies stooped to a two-month low of 96.749 midweek as benchmark U.S. yields declined sharply this week to 21-month lows on investor risk aversion and heightened prospects of the Federal Reserve cutting interest rates.
· Traders are now pricing in a more than 90% chance of a September rate cut and about 60% probability of three rate cuts this year, according to the CME FedWatch tool. They hope an easing of monetary policy will make up for the damage to the economy inflicted by the trade battles with Mexico and China.
· China’s Ministry of Commerce maintained a harsh tone Thursday on trade talks with the U.S., while remaining vague about one of its most feared countermeasures.
That’s Beijing’s “unreliable entities list,” which was announced last Friday and would supposedly identify foreign entities that present a risk to Chinese companies. That list, when it is released, won’t focus on a specific industry, company or individual, Commerce Ministry Spokesman Gao Feng said at a weekly press conference Thursday, according to a CNBC translation of his Mandarin-language remarks.
He said the government is still working on details that will be unveiled in the near future.
· Anti-China sentiment is rising in Washington — and Beijing should not underestimate that, a former under secretary for international affairs at the U.S. Department of Treasury said on Thursday.
“I worry that Chinese authorities ... underestimate how broadly the anti-Chinese sentiment is in Washington — it runs across the full political spectrum,” said Tim Adams, who is now president and chief executive of the Institute of International Finance (IIF), a trade association.
Similarly, he is concerned that Washington does not understand the rhetoric from Beijing.
“I worry that there are those in Washington who think they understand the Chinese mindset, and that they can force President Xi Jinping to bend (to) the will of Washington’s desires, and maybe not appreciate ... the rhetoric coming out of China, ” he said.
· Embattled Chinese tech company Huawei has struck a deal to build Russia's first 5G wireless network.
The agreement with Russia's largest carrier, MTS, was signed on the sidelines of talks in Moscow between Chinese President Xi Jinping and Russian President Vladimir Putin.
It comes at a critical time for the Shenzhen-based company, which is now on the frontline in an escalating trade war between America and China. The United States is waging a campaign against Huawei, banning it from its own 5G networks and cutting it off from American software and components that it needs for its smartphones and network equipment business.
Washington has also been urging allies to restrict or ban the use of Huawei equipment in their 5G networks, warning that Beijing could use the sensitive data infrastructure for spying. Huawei has repeatedly denied that any of its products pose a national security risk.
· The global head of sovereign ratings at Fitch has said he is “fearful” that the trade standoff between China and the United States will not be resolved soon.
Speaking on a panel at the St. Petersburg International Economic Forum (SPIEF) in Russia on Thursday, James McCormack told CNBC’s Geoff Cutmore that the trade debate has morphed into a situation that may harden positions.
“I am fearful that we are in for a long standoff between China and the United States,” said McCormack.
“There is a risk that we end up with the two biggest economies operating in parallel tracks in many regards and not in a cooperative way and the world economy will suffer from that.”
· Oil prices jumped more than 2% on Thursday, reversing course after falling to near five-month lows in the previous session, following a report that the United States could postpone tariffs on Mexico.
Brent crude futures settled at $61.67 a barrel, gaining $1.04, or 1.7%. U.S. West Texas Intermediate crude futures settled at $52.59 a barrel, up 91 cents, or 1.8%. The benchmarks both rallied more than 2% in post-settlement trade.
U.S. stocks, which oil prices tend to follow, spiked after Bloomberg News reported the United States is considering a delay in the tariffs as talks continue.
Reference: Reuters, CNBC, Financial Times, CNN
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