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US – China tensions spike, relations hit a new low

-->US – China tensions spike, relations hit a new low    
  • CNY: China’s NPC introduces a new security law for HK. Local reports suggest the proposal does not trigger the controversial Article 23, but would put a new security law into Annex 3 of the Basic Law.  Meanwhile, WSJ reports US senators are introducing a bipartisan bill to sanction Chinese party officials and entities who enforce the new national-security laws in HK and to penalize banks that do business with such entities. Meanwhile, Bloomberg reports the US Department of Commerce’s Bureau of Industry and Security is adding PBoC’s Ministry of Public Security’s Institute of Forensic Science and 8 Chinese companies to its entity list, meaning new restrictions on access to US technology. US Senate also passes Holding Foreign Companies Accountable Act to give greater oversight of Chinese companies listed in  US.                             
  • USD: Trump hawkish tweets Says "spokesman speaks on behalf of China, trying desperately to deflect the pain and carnage that their country spread throughout the world. Its disinformation and propaganda attack on the US and Europe is a disgrace.... It all comes from the top. They could have easily stopped the plague, but they didn’t! " COMMENT: So far, President Trump has talked of maintaining a strong relationship with President Xi, however, comments here, for perhaps the first time look to attribute the blame for Covid-9 on the Chinese leadership. 


Fed, RBA push back on negative rates, BoE to conduct review

  • USD: Fed Vice Chair Clarida - reiterates his opposition to negative rates. Says in the coming meetings, the Fed may return to balance sheet options (to possibly implement yield curve control) and that the dot plot is likely to return at the June FOMC meeting.  

    AUD: RBA Governor Lowe is slightly more upbeat and hints at opposition to negative rates – says measures introduced so far have been working as expected though monetary policy has limits (perhaps hinting at opposition to negative rates unlike the RBNZ) and fiscal measures have been crucial. Says possible fall in hours worked (jobs data) is less than earlier feared.   
  • GBP: BoE Governor Bailey confirms negative rates remain under review - speaking to the Treasury Select Committee, Bailey notes all policy tools, including negative rates, remain under review. Citi analysts think further cuts to Bank rate (and negative policy rates) are unlikely. However, negative rates on lending provided under specific liquidity programs are a possibility.    


EUR & GBP: Euro area Recovery Fund an important first step; Euro area PMIs likely bottomed, UK PMIs not quite yet                         

  • EUR: Europe’s Recovery Fund: An important first step but needs to be much larger: Citi analysts Franco-German proposal for a €540bn Recovery Fund could be the most effective EU level fiscal crisis tool and despite some resistance to the plan, is likely to be approved. Features point to demand stimulus because it brings forward future fiscal spending via the borrowing components and also transfers funds to parts of EU with large output gaps. Just as important is Germany’s support for the principle of fiscal transfers though investors are unlikely to be satisfied with the fund’s current size (EUR540bn). However, the proposal could include additional loans, making it potentially larger (details to be announced on May 27).  
  • EUR: Euro area May (flash) Composite PMI rises from +16.9 in April to 30.5 (Mkt. 27.0) with Manufacturing PMI up from +6.1 to 39.5 (Mkt. 38.0) and Services PMI up from +16.7 to 28.7 (Mkt. 25.0). This is the first rebound in three months and a little stronger than consensus.  
  • GBP: UK May PMIS suggest a further fall in activity – UK flash services PMI for May prints at 27.8 – roughly the same level as the final week in March (Consensus 24.0). This implies a faster rate of deterioration in May (from April) than at any time during the financial crisis. Meanwhile, the flash manufacturing PMI for May prints at 40.6 (Consensus 37.2).  


Week Ahead: EA recovery fund, German ifo and China manufacturing PMI     

  • USD: US Personal Income: Citi: 5.9%, median: -6.8%, prior: -2.0%; Personal Spending –Citi analysts’ expectations for incomes and spending in April implies a rise in the savings rate of around 20pp, sending the savings rate over 30%, expected to drop sharply once businesses reopen.
  • USD: Conference Board Consumer Confidence: Citi: 86.0, median: 87.3, prior: 86.9 - Overall, many consumer sentiment measures appear to have bottomed and should begin to increase in coming months as states and businesses undergo phased re-openings and rehiring.      
  • EUR: German Ifo Business Climate, May: Forecast: 73.0, Prior: 74.3; Ifo Expectations, May: Forecast: 73.0, Prior: 69.4; Ifo Current Expectations, May: Forecast: 75.0, Prior: 79.5 - With the economy gradually re-opening, business expectations for the next three months should improve though the current assessment may still drop further.
  • EUR: Recovery Fund (May 27) - EU Commission finalizing a €1 trillion package proposal on Wed 27 ? - EC VP Dombrovskis notes “our ambition is not to increase the financing capacity in the range of hundreds of billions, but rather by a figure exceeding a trillion euros". Frugal 4 + Visegrad bloc plan to make counter-proposal which could end up being additive to the Franco-German plan.
  • CNY: China May manufacturing PMI: Citi 51.5; Prior 50.8 – Citi analysts expect manufacturing PMI to edge up to around 51.5 in May. Production continues to recover but new export orders might remain low amid the global lockdown, weighing on the PMI reading.   


This is is an extract from the Daily Currency Update, dated May 25, 2020. Please approach a Citigold Relationship Manager if you would like more information.

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