Monday, December 9, 2019

China’s exports in November get weighed down by US tariffs; will the Swiss franc be influenced more by the SNB or the UK’s elections?

  • China
  • Dollar
  • Euro
  • Pound
  • Stocks

Market recap: November’s NonFarm Payrolls surges past economists’ forecasts

US stocks spiked upwards last Friday, after US labour market data beat economists’ expectations. US NonFarm Payrolls jumped 266,000, topping a prediction of 180,000, while unemployment rates in the US fell to 3.5%. The DJIA surged 1.22%, the S&P 500 spiked 0.91% and the Nasdaq advanced 1.00% as a result. The Dollar Index also gained, rising 0.30%.

But it was not enough for US major indices, already suffering from recent pessimism surrounding the US-China phase one trade deal, to recover. The DJIA and the Nasdaq suffered slight losses over the week, losing 0.13% and 0.10% respectively, while the S&P 500 inched slightly higher for a weekly gain of 0.16%.

China's exports unexpectedly dropped 1.1% in November, instead of economists' forecast of an 0.8% growth. Shipments to the US fell by 23%, the worst since February this year and the twelfth straight monthly decline. The disappointing data highlighted the effect of the trade dispute between the US and China. US equity futures were lower on Monday morning as a result. S&P 500 e-mini futures were down 0.12% as of 7.19am (GMT +4).

Meanwhile, safe haven assets fell on Friday as worries of a slowdown in the US economy faded. Gold fell 1.07% but the yen gained 0.17% against the dollar, likely as a result of the announcement for fiscal stimulus in Japan and as investors stay cautious about the superpowers’ trade war.

Major indices in Asia made slight gains over the week, with the Nikkei, Hang Seng Index and Straits Times Index making a weekly gain of 0.26%, 0.58% and 0.02% respectively.

Crude oil prices rose on Friday after OPEC and its allies agreed to increase production cuts to 1.7mn barrels a day from 1.2mn. Saudi Arabia then said that it would voluntarily reduce its production by 400,000 barrels per day more than the newly agreed-on deal, sending oil prices surging to a 12-week high. Brent crude futures gained 1.58% on Friday to $64.39. But demand concerns on Monday pared back Friday's gains, after China's exports unexpectedly fell way below expectations in November. Brent crude futures eased lower by 0.25% on Monday as of 6.50am (GMT +4).

This morning, Asian stocks look set to extend gains from last week thanks to the upbeat US labour market data, as the Nikkei, Hang Seng Index and Straits Times Index started the week 0.81%, 0.06% and 0.04% higher respectively.

Investors face another busy few days, with monetary policy decisions from the Fed and European Central Bank due this week. But both central banks are unlikely to ease monetary policy from current levels. The UK's general election on December 12th will also be a highlight. Sterling looks like it has more room to rise if election polls are accurate in predicting the ruling Conservative party regains its majority in the UK parliament.

Today’s Analysis: SNB to keep rates unchanged at final monetary policy meeting for 2019

The Swiss National Bank (SNB) will announce its decision on monetary policy later this week on Thursday at 12.30pm (GMT +4). But it is unlikely that the central bank will make any policy changes this month.

During the central bank's last monetary policy meeting in September, it held interest rates steady at -0.75% after revising its growth forecast for the year downwards thanks to rising global risk. Its inflation forecast for the current year was revised slightly lower to 0.4% from 0.6% in June, while next year's inflation was projected to drop to 0.2% from 0.7%. The downward revision to its forecast signals that the SNB will not be moving towards positive interest rates in the coming years. But the highlight of September's meeting was the revision of its tiering system for deposits, subject to negative rates.

The Swiss central bank's new tiering system came into effect on November 1st and means that more of banks' reserves will be shielded from the -0.75% interest rate. While this is beneficial to banks, it also implies that the SNB is giving itself more room for rate cuts that will move further into negative interest rate territory.

While the overall sentiment from the SNB in September was dovish-leaning, geopolitical risk also influences the central bank's decision. As the Swiss currency doubles as a safe haven for investors, the increasing global geopolitical risk has caused it to strengthen against the euro in the past two years. But in the monetary policy statement for September, the SNB continued to reiterate that the franc is highly valued, not deviating from past statements.

Swiss franc continues to gain against the euro, strengthening 2.42% year-to-date

September's meeting and recent global developments imply that the SNB is unlikely to cut rates and instead may adopt a wait-and-see approach while continuing to reiterate its dovish stance. This is likely due to the UK’s upcoming general elections this week and the US-China trade war progressing towards a possible partial trade deal. As a result, the SNB is likely to keep further monetary policy easing in consideration instead of acting now. Finally, as it has only just adjusted its tiering system, the central bank is unlikely to push into more easing territory immediately. 

EUR/CHF is likely to remain little changed on the SNB's monetary policy decision on Thursday as a result. But as the outcome of the UK's general elections is expected to be announced on Friday morning, traders will be more focused on that instead. If the Conservative party regains its majority, expect the euro to fall in the short term, possibly pushing EUR/CHF towards 1.0946's level.

Scenario - Effect on Euro and USD