Quarterly Global Outlook Q3 2019 Navigating Trade Cross-Currents CONTENT
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Quarterly Global Outlook Q3 2019 Navigating trade cross-currents CONTENT 04 EXECUTIVE SUMMARY CHINA � 32 Navigating Trade Cross-Currents HONG KONG � 33 10 INDIA � 34 FX, INTEREST RATE & COMMODITIES FORECASTS INDONESIA � 35 11 JAPAN � 36 ASEAN FOCUS I Signs Of Rising FDI Into ASEAN MALAYSIA � 37 With Vietnam The Top Beneficiary MYANMAR � 38 14 PHILIPPINES � 39 ASEAN FOCUS II Demographic Dividends SINGAPORE � 40 For A Growing Population SOUTH KOREA � 41 19 TAIWAN � 42 INDONESIA FOCUS Breathing Life Into Indonesia’s Manufacturing Exports THAILAND � 43 VIETNAM � 44 21 FX STRATEGY AUSTRALIA � 45 Tug Of War Between Dovish FED And Rising Global Trade Tensions EUROZONE � 46 NEW ZEALAND � 47 25 RATES STRATEGY UNITED KINGDOM � 48 The Broader Rates Environment During A FED Easing Cycle UNITED STATES OF AMERICA � 49 28 FX TECHNICALS � 50 COMMODITIES STRATEGY Gold Outperforms In A Difficult COMMODITIES TECHNICALS � 55 Macro Environment For Commodities Information as of 21 June 2019 [email protected] www.uob.com.sg/research Bloomberg: UOBR Scan the QR Code for a list of all our reports EXECUTIVE SUMMARY Navigating Trade Cross-Currents U.S. Recession Probability - Is The Recession Finally Upon US? Source: Bloomberg, UOB Global Economics & Markets Research Possible Scenarios For The Trade Tensions Implication On FX and China’s Monetary Scenarios Probability Policy BEST CASE Trade Truce post-G20 10% USD/CNY pulls back to 6.70 Negotiations result in eventual removal of most One or no further RRR cut for the rest of additional tariffs imposed by both countries the year BASE CASE Trade Truce post-G20 60% USD/CNY drifts higher to 7.10 Uncertainties remain and a breakdown in talks may Maintain our call for two more broad- still occur during the negotiations. Any agreement based RRR cuts this year. may not remove most existing additional tariffs WORST No agreement on trade truce at G20 30% USD/CNY threatens to trade above 7.30 CASE US makes good on its threat to impose tariff of Two more broad-based RRR cuts this 25% on additional US$325bn of Chinese exports year and at least one time cut to the to the US which are currently not subject to benchmark 1-year lending rate additional tariff. This brings all China’s exports to US (US$540bn in 2018) under additional tariff. Retaliations may involve restrictions on technology transfer and other measures Source: UOB Global Economics & Markets Research Taking stock of 2019 so far, growth numbers softened. June’s US recession probability global trade & investment outlook while while weaker for some economies, did (as measured by New York Fed) has now the calls for more central bank action have not turn out as bad as initially feared. touched 30%, implying the likelihood of a grown louder. WTO downgraded global For developed economies like the US US recession by May 2020. International merchandise trade growth lower to 2.6% in and Japan, 1Q growth beat expectations organizations like IMF and World Bank 2019, the slowest since the global financial although the growth drivers were of the have been downgrading global growth crisis. In short, the outlook is gloomier and “unhealthy” type (import decline and forecasts due to growing trade policy the world needs central banks to come to inventory buildup) and consumer spending uncertainties which have weakened the the rescue. Quarterly Global Outlook 3Q2019 04 UOB Global Economics & Markets Research EXECUTIVE SUMMARY US-led trade policies against China But if talks break down, then the risk of an Rates Strategy and its major trading partners/allies all-out trade war will look imminent. We The Rates Tide Is continue to be the focus of the markets see that probability at 30%, a significant Slowly Turning Lower and are singled out as the key factor risk. Given the escalating global trade tensions responsible for exacerbating the global and resultant growth and inflation growth slowdown. US President Donald Central banks to the rescue again? slowdown, we now expect the US Federal Trump has found his calling or his weapon Needless to say, normalization of easy Reserve to cut twice in Sep and Dec, of choice: trade tariffs. It can be used for monetary policy among the major central bringing Federal Funds Rate down from any occasion and almost any reason: from banks is nearly (or already) out of the the current level of 2.5% to 2.0% by the the US-China trade conflict to stemming window, and there is growing expectations end of this year. As such, the 3 month USD illegal immigration on the US southern that everyone will re-join the easing Libor rate will also drop from about 2.40% border. (We remain wary of the risk that bandwagon soon. The US Federal now to 1.95% by the end of this year. US may still slap auto tariffs against Reserve in its latest June FOMC signaled major car producing countries before the clearly that it will cut rates soon, possibly However, in Singapore, local rates may end of 2019.) But trade is only the tip of in Sep or earlier in July. In the face of prove to be sticky and not drop by the the “iceberg” of issues between US and rising global risks, we think the BOJ will same magnitude as the US rate cuts. This China. It is also about rivalry in technology, ease monetary policy further via buying is simply because the weaker external intellectual property rights, industrial more JGBs to push its bond buying closer environment and export contraction may practices, the CNY policies, geopolitics, to the JPY80trn annual pace. A defiantly trigger further Singapore Dollar weakness and more. So is it all doom and gloom dovish ECB President Draghi could in the months ahead, thereby giving local between US and China? Perhaps not, signal another big boy joining the easing rates some support. Overall, we expect especially now with the confirmation that bandwagon, possibly his final act before both 3 month SOR and 3 month Sibor President Trump will have an “extended” exiting ECB in Oct. Several major Asia- to drift lower from their current levels of meeting with Chinese President Xi Jinping Pacific central banks have already cut around 2% to 1.95% by end of this year. at the G20 Leaders’ summit in Japan policy interest rates and could do more in In the back end, the 10 year US Treasury (28/29 Jun). 2H while PBOC will also implement more yield will drop to 1.9% by 4Q19, pulling 10 easing measures if the trade conflict with year SGS lower to 1.8%. Consequently, We are not expecting US-China trade the US continue to takes its toll on growth. as renewed monetary policy easing take relations to suddenly become hunky- shape, yield curves may steepen anew dory, but we do see the prospect of Beyond the already well-telegraphed trade and SG yields will continue to converge another ceasefire outcome following conflict, another risk is the re-emerging with US yields. the G20 meeting in Osaka, much like geopolitical tensions in the Middle East last December’s G20 in Argentina. But following the oil tanker attacks in the Gulf _________________________________ the stakes are much higher now, as the of Oman in early June. While we do not prospect of all Chinese goods to US being expect a full-blown war to erupt in Middle FX Strategy put on tariffs should the trade tensions East in 2H 2019, any miscalculation Tug Of War Between Dovish FED escalate further post-G20. Our base leading to even a limited conflict could still And Rising Global Trade Tensions case (at 60% probability) is that the trade have an outsized spike in crude oil prices. Picking the top in the USD simply because negotiation will be long-drawn, well into And in the UK, the Conservative Party the US Federal Reserve is about to cut 2H 2019 before some resolution. A trade is close to choosing a new leader and rates has been a hazardous affair. In deal between the world’s two biggest Prime Minister. Boris Johnson remains the Majors FX space, irrespective of the economies if concluded will certainly be the frontrunner and could be the one to upcoming FED rate cuts that are well cheered by the global economy but we lead UK out of EU without a deal, as the priced in, the USD maintained its strength. believe a comprehensive agreement 31 Oct deadline looms. Back in the US, This is mainly because other leading (covering trade, technology, FX and lawmakers will scrabble to resolve the central banks like the European Central everything US is asking for) is unlikely Budget appropriations and the US debt Bank (ECB) and Reserve Bank of Australia to be reached this year. We anticipate ceiling limit to avoid another government (RBA) have made it very clear that they a partial agreement on trade with shutdown and an unprecedented US are on renewed aggressive monetary enforcement measures could be feasible default. But brinkmanship is now the policy easing path. As such, both the EUR while the rest of the most difficult structural norm in US politics and we may have and AUD remain depressed over the near issues including intellectual property to brace for fireworks in Sep/Oct. But term. protection, technology transfer and other lest one gets overly pessimistic about issues, could take years to resolve to trade developments; ASEAN is seeing Elsewhere in Asia FX, intensifying growth the satisfaction of both sides. Trump has signs of rising FDI inflows as businesses slowdown and export contraction have started his 2020 re-election campaign manage trade uncertainties by diversifying kept the RMB and most Asian currencies and while he does not necessarily need a production bases and expanding market on the defensive.