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How the Yuan Could Create Havoc

How the Yuan, the World’s Most Important Gauge, Could Create Havoc

(Bloomberg) --

Another hit. It seems every day carries some news destined to make U.S.-China trade negotiations more difficult, with the ban against Huawei the latest example. The effects of the spat have started to show on currency markets and could deliver collateral damage, and European exporters could be big losers.

The escalation of tensions has pushed China’s yuan to year-lows against the dollar, near the 7.0 level seen as critical by several strategists at JPMorgan and Nordea. Further weakness could hurt Chinese asset prices and risk appetite globally, making it “the most important gauge worldwide currently,” Nordea says, and something that European equity investors can’t ignore.

How the Yuan Could Create Havoc

The trade confrontation could drag on, according to Sebastien Galy, a senior macro strategist at Nordea Investment Funds. The next G20 meeting (June 28-29) could be decisive, and if no deal is in sight, the market will likely speculate on a devaluation of the renminbi and higher tariffs, providing a shock to the equity market, Galy writes.

Indeed, the U.S.-China dispute is the most significant hit to the early 2019 consensus of a cyclical global recovery, JPMorgan strategists write, adding that the Chinese Central Bank has been willing to act to prevent further weakness in the yuan.

“While it seems unlikely that China will let the yuan trend lower too durably beyond the 7 threshold, it appears equally unlikely to us that they will not be tempted to do so, just for a while, to test some nerves a bit,” Makor strategist Stephane Barbier De La Serre writes. The strategist has a 7.15 target for the currency, which would have a material impact on global equities, particularly on cyclicals and tech stocks.

How the Yuan Could Create Havoc

The yuan has also lost ground against the euro, which is bad news for European firms selling goods overseas. JPMorgan strategists closed their overweight recommendation on European exporters this week, arguing the euro could be bottoming out. Should the world avoid a full-blown trade war, that might help the region’s banks, a sector JPMorgan recommends rotating toward, alongside value stocks.

How the Yuan Could Create Havoc

In the meantime, after a mixed session in Asia, Euro Stoxx 50 futures are trading up 0.6% ahead of the open.

  • Watch trade-sensitive equities as China vowed to respond to recent “bullying” by the U.S. There are no details yet on what counter-measures China may take in response to the U.S. action against Huawei Technologies, with a Foreign Ministry spokesman telling journalists to "wait and see."
  • Watch oil companies after oil rose for a second day on signs OPEC and its allies will extend production cuts beyond June. Separately, it was reported Iran has accelerated the rate at which it’s enriching low-grade uranium.

COMMENT:

  • “The trend in earnings growth is not encouraging, despite the usual fillip from the reporting season,” Societe Generale quantitative strategists write in a note. “Consensus is looking for low single digit EPS growth in 2019 for the U.S., Japan, U.K. and Australia, and if historical over-optimism in forward forecasts is any guide then a decline in profit growth is on the cards for 2019; indeed, it is the downward pull of weaker earnings that is limiting the upside in equities.”

COMPANY NEWS AND M&A:

  • SocGen Plans to Pull Back From Trading in Brazil, Latin America
  • Telecom Italia Posts Surprise Debt Decline in Boost for CEO
  • Top Deutsche Bank Investors Focus Their Discontent on Chairman
  • Deutsche Bank Says NYT Story Contains Misleading Statements
  • Four Banks Win Dismissal From U.S. Forex Antitrust Case
  • Daimler Eyes 20% Lower Administrative Costs: Handelsblatt
  • Sonova Full Year Sales of CHF2.76b Match Estimates (1)
  • Temenos Sees Non-IFRS Total Rev. Growth of at Least 10-15% CAGR
  • BHP Sees a Faster Switch to Electric Cars That’ll Boost Copper
  • DIA Names Karl-Heinz Holland CEO; Stephan DuCharme as Chairman
  • Norway Royal Salmon 1Q Operating Ebit Misses Est.

NOTES FROM THE SELL SIDE:

  • Telecom Italia’s 1Q results indicate co. is on track to meet expectations for 2019 but analysts think there remains work to be done to drive medium-term growth.
  • Morgan Stanley initiates Warehouses De Pauw at overweight, saying it is well run and currently exposed to an attractive structural tailwind and should sustain development profits for several more years.
  • Six European capital goods firms get new ratings in an RBC note; broker went through 16 end markets, differing most from consensus on automotive and semiconductor capex. SKF gets “anti-consensus” outperform rating driven by its contract portfolio with BEV OEMs, and Atlas Copco is rated outperform with broker bullish on the business with battery pack assembly lines and on new BEV assembly lines.
  • Vicat is unlikely to fully benefit from a favorable overall backdrop for the cement sector due to challenging conditions in its emerging market operations, Citi says in a note starting co. at neutral with EU45 PT.

TECHNICAL OUTLOOK for Stoxx 600 index:

  • Resistance at 383 (50-DMA); 385.7 (76.4% Fibo)
  • Support at 374.5 (61.8% Fibo); 369 (200-DMA)
  • RSI: 41.7

TECHNICAL OUTLOOK for Euro Stoxx 50 index:

  • Resistance at 3,407 (50-DMA); 3,516 (76.4% Fibo)
  • Support at 3,309 (50% Fibo); 3,273 (200-DMA)
  • RSI: 43.4

MAIN RESEARCH AND RATING CHANGES:
UPGRADES:

  • Burberry Upgraded to Market Perform at Bernstein
  • Maersk upgraded to accumulate at Fearnley; PT 8,100 Kroner
  • Nokian Renkaat upgraded to buy at ABG; Price Target 32 Euros
  • Nordex upgraded to buy at Nord/LB; PT 16 Euros
  • Norsk Hydro upgraded to overweight at JPMorgan; PT 45 Kroner
  • Swiss Re upgraded to neutral at Mediobanca SpA; PT 95 Francs

DOWNGRADES:

  • Cewe Stiftung cut to hold at GSC Research; Price Target 90 Euros
  • ElringKlinger cut to underperform at MainFirst; PT 4.40 Euros
  • Hypoport downgraded to hold at Pareto Securities; PT 200 Euros
  • Leoni downgraded to sell at Bankhaus Lampe
  • Orkla downgraded to neutral at SpareBank; Price Target 80 Kroner
  • Ryanair downgraded to neutral at JPMorgan; PT 11.30 Euros
  • Wendel downgraded to hold at HSBC; PT 139 Euros

INITIATIONS:

  • Moncler rated new outperform at Macquarie; PT 42 Euros
  • NETW LN rated new equal-weight at Morgan Stanley
  • Network International Holdings rated new buy at Citi
  • Network International Holdings rated new buy at Goldman
  • Network International Holdings rated new neutral at JPMorgan
  • Network International Holdings rated new overweight at Barclays
  • Sesa rated new outperform at Mediobanca SpA; PT 40 Euros
  • Vicat rated new neutral at Citi; PT 45 Euros
  • WDP rated new overweight at Morgan Stanley; PT 175 Euros

MARKETS:

  • MSCI Asia Pacific up 0.2%, Nikkei 225 down 0.2%
  • S&P 500 down 0.7%, Dow down 0.3%, Nasdaq down 1.5%
  • Euro down 0.11% at $1.1154
  • Dollar Index up 0.11% at 98.04
  • Yen down 0.1% at 110.17
  • Brent up 0.4% at $72.2/bbl, WTI up 0.5% to $63.4/bbl
  • LME 3m Copper up 0.5% at $6058.5/MT
  • Gold spot down 0.2% at $1275.9/oz
  • US 10Yr yield little changed at 2.41%

MAIN MACRO DATA (all times CET):

  • 8am: (DE) May Consumer Confidence Indicator, prior 3.7
  • 10am: (SP) March Trade Balance, prior -2.63b
  • 11am: (EC) OECD Publishes Economic Outlook
  • 12pm: (UK) May CBI Trends Total Orders, est. -5, prior -5
  • 12pm: (UK) May CBI Trends Selling Prices, est. 0, prior 1
  • 4pm: (EC) May Consumer Confidence, est. -7.7, prior -7.9

To contact the reporter on this story: Michael Msika in London at mmsika4@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, Jon Menon

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