市場新聞與洞察

President Trump is on the “Tweet Rally” with positive headlines on the trade front and much confidence ahead of the Summit in Hanoi, Vietnam. Singapore Summit The Singapore Summit marked the first-ever meeting between the Head of State of North Korea and the United States. Both leaders signed a joint statement during the Summit and agreed on: Security guarantees New peaceful relations The denuclearisation of the Korean peninsula The recovery of the American soldiers The first meeting was “big” on the geopolitical front and made history, but the Summit delivered little on the specifics or concrete details on a roadmap to complete denuclearisation.

After a wild 2017 whereby a series of new missile was tested, North Korea undertook a few significant steps: No ballistic missiles or nuclear weapons Blown up the entrances to its atomic test site Hanoi Summit The relationship between both countries has undergone a dramatic turnaround, and there were probably more diplomatic communications than before: “If I were not elected president, you would have been in a war with North Korea,” Trump said last week. “We now have a situation where the relationships are good — where there has been no nuclear testing, no missiles, no rockets.” However, the expectations around the second meeting are relatively low compared to last year. The months that followed the Summit provided little optimism that there will be complete denuclearisation. Washington wants more concrete steps from Pyongyang while North Korea demanded the US to take more corresponding measures.

Bearing in mind that 2020 elections are looming, President Trump is under pressure to produce a concrete roadmap to denuclearisation. A lack of major breakthrough could have some negative political ramifications for President Trump. We saw a softer stance by the US President in the run-up to the Summit: "I don't want to rush anybody.

I just don't want testing. As long as there's no testing, we're happy." The President also hinted that North Korea has the potential to become an “economic powerhouse”. Does the vast majority of investors think the same?

How much of their nuclear weapons is North Korea willing to give up for fresh economic investment?

In the month of May, major currencies were stronger against the US dollar as risk sentiment improved and haven currencies like the US dollar, the Yen and Swiss franc have lost momentum. Commodity-linked currencies were among the best performers against the US dollar; lifted by higher commodity prices. Source: Bloomberg The US Dollar As geopolitical tensions continue to rip through markets, protests following the death of Mr George Floyd is spreading nationwide and overshadowing the reopening of states and raising fears of new waves of coronavirus outbreaks, the US dollar might struggle to rebound.

The US dollar index which tracks the performance of a basket of currencies against the greenback is back to levels seen mid-March. US Dollar Index Source: Bloomberg The Antipodeans Australia and New Zealand were able to better contain the spread of the virus and have eased lockdown measures quicker compared to their peers. Both the AUDUSD and NZDUSD pairs are back to trading in the familiar levels seen before the sharp plunge linked to the coronavirus jitters.

However, the US-China tussle is keeping a lid on gains and at those levels, traders will likely await for fresh positive catalysts to push the pairs higher. AUDUSD and NZDUSD (Daily Chart) Source: GO MT4 Australia seems to have gone through the worst of the pandemic and the lockdown measures are slowly easing across the country. While the national health outcomes were better than feared, the reopening of the economy is also happening faster than initially anticipated.

After the Australian Treasury announced the $60 billion accounting error, investors were reassured that the Australian economy was not as severely impacted as initially forecasted. The coordinated monetary and fiscal measures have helped the RBA and the government to provide assistance to households and businesses. The Bank taped into quantitative easing (QE) mid-March for the first time in history and purchased $50 billion of Australian Government Securities (AGS) and semi-government securities (semis).

Given that the measures put in place are working as broadly as expected, the RBA has even started to scale back daily market open operations. Unlike some major central banks, the RBA has also ruled out negative interest rates. Based on the current developments and the prospects of a quicker recovery, the RBA is widely expected to remain on hold on Tuesday and to maintain a less-dovish tone compared to its peers recently.

The recent Governor Philip Lowe’s speech before the Senate Select Committee was also broadly positive about the economy and its recovery. The Aussie dollar may have some room for upside momentum if the Bank maintains its optimistic tone. Other notable events to watch are the GDP numbers and Retail Sales figures on Wednesday and Thursday.

In New Zealand, the economic calendar is relatively subdued for the week. There are enough positive developments to help the Aussie dollar and Kiwi to hold on to gains. However, the Antipodeans may struggle to push the rally seen recently further as US-China risks loom.

The Euro The downside risks for the Eurozone have eased which has helped the Euro to advance higher, but the shared currency was unable to benefit fully from the overall risk-on sentiment and the weakness of the US dollar dragged by the political dynamics within the Eurozone. On the economic calendar, the focus will be on the ECB. Interest rates are not expected to shift, but attention will be on the central bank’s decision to expand the QE program.

Following recent comments from policymakers, market participants are widely expecting more easing next Thursday with an expansion of the Pandemic Emergency Purchase Programme (PEPP) by EUR500 bn. The impact on the shared currency would likely depend on the extent the ECB will go to support the eurozone economy. Until geopolitical risks recede and there is a compromise on the EU recovery plan, the EURUSD pair may struggle to firm outside its current range and significantly above the 1.10 level.

EURUSD (Daily Chart) Source: GO MT4 The Pound The Sterling Pound was the worst performer against the US dollar in May and will likely remain under pressure dragged by Brexit uncertainties. The negotiations have stalled and as the deadline for extending the transition period is coming closer, traders are finding little positive narratives to rule out a no-deal Brexit. All eyes are on the resumption of Brexit negotiations this week.

As of writing, the GBPUSD pair is trading just below the 1.24 level - buoyed mainly by the broad weakness in the US dollar. GBPUSD (Daily Chart) Source: GO MT4

Fed in Focus - US Repo and Funds Rate During the week, it was all about the Repo market. A Repurchase Agreement known as Repo is a form of short-term borrowing for dealers in government securities. The Repo market plays a key role in supporting liquidity in the financial markets.

It facilitates the flow of cash and securities around the financial system which benefits both the financial and non-financial firms. Repo Market Explained In simple words, the Repo market consists of one party lending out cash in exchange for an equivalent value of securities to another party. The Borrower will, therefore, pay a fee to the Lender.

The securities being sold, which is often the Treasury notes are the collateral. Such transactions allow companies that own lots of securities but are short of cash to cheaply borrow money from parties that own lots of cash. As the collateral are government bonds, the risks are generally low.

US Borrowing Costs So ared On Tuesday, the Repo rate soared to record levels above 8% which is more than four times the normal rate. Even though the money market experienced a significant outflow on Friday ahead of the tax deadline, the sharp increase stunned investors and created fears of the abrupt tightening of the US money markets. There was another alarming signal as the surge in the Repo rate caused the average funds rate to rise to the upper end of the Fed’s current target range.

The Fed quickly intervened with a move it has not used in more than a decade and injected billions of dollars in the financial system to calm money markets. The move succeeded in bringing some relief and allowed the Repo rate to drop. The Fed further reassured market participants that it is willing to spend another $75 billion on Wednesday.

Bad Timing At a time where there are deep disagreements within the Federal Reserve over the path of interest rate outlook, the chaos in the repo markets complicated matters. Investors have priced-in a 25-basis point rate cut, but are uncertain about the future “dot plot”. The manufacturing sector is slowing, and trade tensions continue to overshadow the financial markets.

However, the consumer-orientated parts of the economy are holding up. Consumers remain one of the bright spots – Personal Consumption grew at a healthy pace in July. The employment sector also remains strong.

Hawkish Rate Cut This meeting will help traders to gauge how policymakers are assessing the recent economic data and the trade tariffs developments. There have been some sorts of a rethink in the markets regarding further easing. Do the current economic conditions justify more rate cuts?

At this stage, the economic data does not fully justify the second-rate cut, but the Fed will likely proceed with the cut as insurance against slowing growth due to external factors rather than a slowing domestic economy. Irrespective of how the Fed conveys its monetary outlook, the Fed is set to trigger high volatility!

Federal Budget - "Back in the Black" "Returning the budget to surplus, delivering more jobs, providing lower taxes, guaranteeing essential services." We are in the election year, and the government needed a budget that will please voters. Treasurer Josh Frydenberg delivered his first federal budget and conveyed his plans for a stronger economy. The two dominant headlines surrounding the budget are: “Budget in Black, Australia back on track” & “A Tax System that rewards effort and underpins a strong economy” Returning the Budget to Surplus Despite downgrades to domestic economic forecasts and heightened global growth concerns, the Treasurer announced the first budget surplus of $7.1 billion in 2019-20 in over a decade.

However, the budget surplus does not come without a catch. It is conditional upon the Coalition winning the election. The Budget Surplus is also based on optimistic economic forecasts, and if the rosy predictions are softer than expected, the actual revenue flows will be undermined and the surplus will not materialise.

It should be highlighted that the outcome of the 2019-2020 budget will not be known until September 2020, and Australia is facing a softening economy which can make “Budget in Black, Australia back on track” challenging to achieve: The housing sector remains a concern Weak Wage growth persists Retail Sales is sluggish Global Growth is slowing Tax Cuts The Australian Government is keen to build a simpler and more competitive tax system for the hard-working taxpayers and small businesses. There are three main themes to consider in the Government’s plans to build a better tax system: Lower taxes for hard-working Australians Immediate tax relief of up to $1,080 for singles or up to $2,160 for dual income families of low-and-middle-income earners to ease the cost of living. Lowering the 32.5 per cent rate to 30 per cent in 2024-25 Source: www.budget.gov.au From 2018-19, the Government will provide immediate tax relief for the low- and middle-income earners and larger tax benefits will be mapped out over the next couple of years through the Government’s enhanced plan should the Coalition party win the election.

Source: abc.net.au As from 2024-25, the Government will adopt further structural changes to the tax system and improve incentives for working Australians to rewards efforts. Source: www.budget.gov.au Backing small business The Government will be lowering the small business tax rate and will also increase and expand access to the instant asset write-off: “ Increasing the instant asset write-off threshold to $30,000 and expanding access to medium ‑ sized businesses with an annual turnover of less than $50 million to help them reinvest in their business, employ more workers and grow. Around 3.4 million businesses will be eligible to benefit.

Fast-tracking the company tax rate cut to 25 per cent for small and medium ‑ sized companies with an annual turnover of less than $50 million and increases to the unincorporated small business tax discount rate. ” Making Multinationals and big business pay their fair share The Government also want to make multinationals and big business pay their fair share. “$ 12.9 billion in tax liabilities raised from tax compliance activities since July 2016. New funding for the ATO to target tax avoidance by multinationals, big business and high‑wealth individuals.” The reaction following the release of the budget in the financial markets was subdued. The Reserve Bank of Australia was the main event that moved the AUD pairs yesterday.

Trade balance, and Retal Sales figures came in better than expected this morning and helped the Australian dollar to pare the losses made yesterday after Governor Lowe’s Rate Statement. AUDUSD (Hourly Chart) Source: GO MT4

Global central banks have been a crucial part in providing aid and support to the global economy during the coronavirus pandemic. Faced with an unprecedented crisis, central bankers have rapidly deployed various monetary tools to keep credit flowing and support businesses and households. Given that interest rates were somewhat already at record-lows in many major countries, asset purchase schemes were widely used to put downward pressure on long-term rates.

Monetary policies were also accompanied by huge fiscal intervention. Also, in a coordinated action to enhance the provision of liquidity via the standing US dollar liquidity swap line, the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank have even agreed to lower their rates on currency swaps. What's Next?

The two-day Federal Open Market Committee meeting which will end on Wednesday with a statement followed by a press conference will be heavily eyed. Markets will likely look for clues on how the Fed’s is viewing the health of the economy after easing lockdown measures. Even though Friday’s jobs report came much better-than-expected and there was a decline in the unemployment rate from 14.7% to 13.3% in May, it is widely expected that the FOMC will keep rates steady near zero.

The scenario of negative interest rates is also highly unlikely. As the pandemic continues to create havoc on the global economy, it is also reshaping the political dynamics: Quarterly Forecasts Much attention will, therefore, be on the economic and interest rate forecasts. The Fed refrained from providing any forecasts during the pandemic given the tremendous uncertainties about the economic outlook.

This Fed’s meeting has, therefore, the potential to move markets if much details are revealed about future plans and expectations for inflation, GDP and unemployment. The projections are expected to be much worse than the favourable outlook seen in the last forecasts back in December. Dot Plots High unemployment and weak inflation have been the key factors forcing central banks to keep rates at record low levels.

The recent jobs reports came as a surprise and have raised expectations that the labour market may be rebounding at a quicker pace than expected. Investors would, therefore, look for explicit guidance from the Fed on how long they will likely keep rates near zero. Even though the economic outlook remains highly uncertain, the so-called dot plot which shows the entries of the FOMC officials regarding the interest rate forecasts will be scrutinized for guidance.

Latest dot plots – December 2019 Yield Curve Control As short-term interest rates approach zero, there have been recent speculations of the possibility that the Federal Reserve may control the yield curve and cap specific yields to cushion the impact of a downturn. Stock Market Global stocks have rallied significantly since March lows on the back of massive economic stimulus packages from central banks and governments which will likely stay in place for a while. In an extremely low-interest rate environment, quantitative easing and large fiscal policy measures have absorbed the pandemic-induced shocks and camouflaged the stark reality of the impact of the coronavirus.

On Monday, investors drove the S&P500 to a 15-week high, erasing its 2020 losses– lifted by heightened expectations of a quicker recovery and a supportive Federal Reserve. After a great run to the upside, investors appear to be taking a pause and booked profits ahead of the Fed’s decision. Equity traders would want to hear that the Fed will stay accommodative, keep interest rates unchanged and remains committed to supporting the economy while still striking some optimistic tones on the recovery of the economy.

US Dollar The US dollar was mostly weaker against major currencies as risk sentiment has improved lifted by heightened expectations of a quicker recovery following the reopening of economies earlier than initially expected. The surprising nonfarm payrolls have fueled those expectations and kept the greenback on the downside. If the Fed is set to look into the yield curve control as per the speculations, the US dollar may come under more pressure.

Source: Bloomberg Gold Amid the reopening of economies, geopolitical risks and a weaker US dollar, the precious metal has been trading sideways within a $70 range as traders wait for the next biggest catalyst. As of writing, gold has firmed higher above the $1,700. Gold traders will eye the outcome of the Fed’s two-day policy meeting.

XAUUSD (Daily Chart) Source: GO MT4

EU Recovery Fund After a standoff between the EU and Germany, following a critical ruling on ECB’s quantitative easing program by Germany’s constitutional court, the gradual reopening of economies of member states within the Eurozone has brought some optimism. The downside risks for the Eurozone and its shared currency have somewhat eased on the fact that Europe, which was the epicentre of COVID-19 after China, might have gone through the worst phase of the pandemic. The sentiment for the Euro was also buoyed by the EU Recovery fund proposed by Chancellor Angela Merkel and President Emmanuel Macron to help Europe’s mostly hit countries.

Unfortunately, the optimism over the coronavirus fund proposal, which aims to show unity in overcoming the crisis and to achieve quicker economic recovery, was short-lived. Europe’s Frugal Four Amid an unprecedented crisis, the Franco-German proposal was to provide support and reinforce EU financial relations and show that Europe is standing together. Austria, Denmark, the Netherlands and Sweden, dumbed as the “ frugal four ” put forward a counter-proposal that highlights the diversion of opinions in helping the Southern members states.

Grants or Loans The Franco-German proposal is about “overcoming the crisis united and emerging from it stronger ”. Both leaders proposed to make outright grants to help countries in need. They want to launch a temporary fund of 500 billion euro for EU budget expenditure: “This would not provide loans, but rather budget funding for the sectors and regions hit hardest by the crisis.

We firmly believe that it is both justified and necessary to now provide funding for this from the European side that we will gradually deploy across several European budgets in the future.” In contrast, the frugal four wishes to provide loans rather than grants to southern European countries and expect the recipients of loans to comply with the fundamental principles of the EU and commit to strong reforms in repaying the loans. Their two-year and “one-off” proposal appears to also outline how those countries should use the funds and target sectors that are mostly hit based on an assessment. The coronavirus pandemic is testing the solidarity of European members and is threatening to reawaken a euro crisis.

Southern countries like Greece, Italy and Spain lacked the fiscal space they need to put forward an economic stimulus package to support their economies, compared to Northern countries. Disparity? Compromise?

Both proposals are saying “ yes ” to emergency aids to assist with recovery, but the disparity lies on how the funds will be financed to respond to the economic wreckage. The size of the emergency fund, the conditions of the funds or whether it will be grants or loans will be a compromise the markets are expecting to see. However, the type of compromise might be a key factor in determining the relationships of EU members.

Unprecedented times probably need unprecedented Unity. Euro – The Shared Currency The fact that Europe may have gone through the worst phase of the coronavirus has somewhat eased the downside risks of the shared currency. But the current geopolitical tensions with China and uncertainties on the EU Recovery plan are putting a lid on the upside momentum of the Euro.

After the sharp plunge in March, the EURUSD pair has been trading within the 1.08 to 1.09 range. Yesterday, the better-than-expected IFO Surveys in Germany has helped the pair to hold ground and hover around the 1.09 level. The recovery plan could mitigate the selling pressure and allow a probable move above 1.10 level if there is a compromise that satisfies the frugal four.

EURUSD Source: Bloomberg Terminal The immediate attention turns to the European Commission which is supposed to unveil a draft recovery plan on May 27 th, 2020. About GO Markets GO Markets was established in Australia in 2006 as a provider of online CFD trading services. For over a decade, we have positioned ourselves as a firmly trusted and leading global regulated CFD provider.