Overview: Global capital markets are relatively calm as investors gird for drama. The Bank of England reports its assessment of the impact of Brexit and the stress tests a little before Fed Chair Powell speaks at midday in NY. The G20 meeting begins Friday, and several bilateral meetings are taking the spotlight from the larger gathering. Asian equities advanced for a second consecutive session, with Greater China markets (China, Hong Kong, and Taiwan) and Japan's Nikkei were up more than 1%. European shares are struggling to maintain the early upside momentum, and US shares are little changed. Benchmark 10-year yields are mostly 1-2 basis points lower, while oil and industrial metals are firmer. The dollar is in narrow ranges but mostly holding on to yesterday's gains against most of the major currencies. The Australian and New Zealand dollars continue to outperform.
Presidents Trump and Xi will have dinner Saturday night. China's Vice Premier Liu reiterated the pledge that China will open its markets. Most observers seem to agree that China is, in fact, doing this, but the issue is really the speed, not the direction. US economic adviser Kudlow says that Trump wants to make a deal but that China is not offering enough. It begs the question: Could China offer enough? The US criticism of China extends well beyond trade and commerce. The US appears to be demanding the end of Made in China 2025, which does not seem that different than the US import substitution strategy that is partly dressed up in America First. The US also objects to China's One Belt One Road initiative.
There has been structured bilateral talks between the US and China under the past two US presidents, which were ended by the Trump Administration. A resumption of regular talks with China will likely be greeted as a success if agreed this weekend, but it simply returns the situation to the status quo ante. The real question after the G20 meeting is whether the US will go ahead with raising the 10% tariff on $200 bln of Chinese goods to 25% at the beginning of 2019 and if it signals the start of the process to levy a new tariff on the remaining roughly $265 bln of Chinese imports.
The dollar reached two-week highs against the yen (~JPY113.90) and Chinese yuan (~CNY6.9580). The greenback has been confined to less than a quarter of yen range through the European morning. There are chunky options set to expire today. These include $1.9 bln at JPY114.00, $777 mln at JPY113.70-80, and $2.33 bln at JPY113.50-55. The options market the yuan shows the biggest discount for one-week dollar calls over puts (25-delta risk reversal). Meanwhile, the Australian and New Zealand dollars are firm but within yesterday's ranges...MORE