Capital Markets: "Trade, Brexit, and Disappointing Flash PMIs Weigh on Global Markets "

From Marc to Market:

Overview: The deterioration of the investment climate is spurring the sales of stocks and the buying of bonds. The dollar is firm. China and the US appear to be digging as if the trade tensions will remain for some time and the breech is beginning to look too big for Trump and Xi to pull another rabbit out of the hat like they did at the end of last year when the tariff truce was struck. The move against Huawei and possible a number of companies involved in surveillance equipment represents a new front. India and Indonesia were notable exceptions to the sell-off in Asian Pacific shares, which saw the Shanghai Composite fell almost 1.4%. Modi looks to have secured a majority. European bourses are lower with the Dow Jones Stoxx 600 off almost 1% following the disappointing flash PMI, and a poor IFO survey added to the pressure. The 10-year German Bund yield is back on its lows as yields slip through negative 11 bp. Benchmark 10-year yields are off 1-2 basis points, with the 10-year Gilt off a bit more and now is below 1%. The 10-year Australian yield is off five basis points to a new record low of below 1.6% and just above the overnight cash rate target of 1.5%. Note that the US 10-year yield at 2.36% is below the effective average fed funds rate and one basis point more than the interest the Fed pays on reserves. The dollar is firm against most major and emerging market currencies. The yen and Swiss franc are benefitting from the risk-off mood.

Asia Pacific
References to the "Long March" and "self-reliance" in Chinese state media and rhetoric are important signals that like the US, China is preparing the people for a potentially sustained confrontation with the US. The hardliners in China have long argued that the US main strategy was containment. Graham Allison's Thucydides Trap hypothesis offers a consistent framework along these lines, while President Trump's comments seem to confirm it. Chinese officials do not seem to be taking Trump's bait that the Democrats would be easier negotiating partner. Despite the lack of agreement on almost everything else, the Democrat leadership (Pelosi and Schumer) have encouraged Trump shortly after he ended the tariff truce through tweets.

The long arm of the US is seen in several carriers in Japan and Taiwan that have stopped taking orders for Huawei smartphones. BT in the UK has shelved plans to offer Huawei phones for the 5G it is rolling out next week for fear that they will be not able to access updated in the Android operating system or have access to the app store. Five countries are rolling out 5G: the US, where Huawei is now banned, China, where Huawei dominates, South Korea that is dominated by Samsung, Switzerland, which is using another Chinese manufacturer (Oppo) and finally the UK, which is the current battleground. BT won't use Huawei for the smartphones, but Huawei (alongside Nokia) provides much of the infrastructure....

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