From Marc to Market:
Overview: The spreading virus that is shutting down large parts of Europe, while the US is reluctant to return to lockdowns and refuses to have a nationwide requirement for masks in public hit risk assets yesterday. The S&P posted its largest decline in four-months yesterday (~3.5%), and the selling carried into the Asia Pacific region. Most bourses fell, led by the 1.6% slide in Australia and Taiwan's 1% fall. Chinese markets were more resilient and posted modest gains. Around 970 Chinese companies reported earnings today, and most appear to be reporting sequential improvement. The Dow Jones Stoxx 600 dropped almost 3% yesterday, but today is trying to snap a three-day 5.7% slide that brought it to five-month lows. It rose by about 0.5% in early dealing. The S&P 500 gapped lower yesterday and settled on its lows. US shares are trading firmer, and yesterday's gap (~3342.5-33888.7) is important from a technical perspective. Bond yields are slightly lower in Europe today. Italy sold a 10-year bond at a record low rate today (~0.23% and oversubscribed) The US 10-year Treasury yield is about 0.78%, having settled last week near 0.84%. The greenback is mostly firmer, though the yen and British pound are firm. Most European currencies are softer, ahead of the ECB meeting outcome. Emerging market currencies are heavier, and the Turkish lira remains offered near the record lows seen yesterday. The JP Morgan Emerging Market Currency Index struggles to sustain even modest upticks after falling in the first three sessions this week. Gold became nearly $31 an ounce less precious yesterday as it fell to new lows for the month (~$1869.5) and has steadied today, but uninspiringly so and has struggled to rise above $1885. December WTI fell within a few cents of its month low, a little below $37 a barrel yesterday, and is pushing near $36 now, a new four-month low. Rising US inventories and amid demand worries spurred by the virus are weighing on prices, and the next target is near $35.
Asia Pacific
Japan is in the spotlight today. First, the BOJ meeting concluded, and as widely expected, there was no change in rates or asset purchases. It did tweak its economic forecasts. Growth in the current fiscal year was downgraded to -5.5% from -4.7%, which is closer to the market and the IMF's new projections. However, growth in the next fiscal year was adjusted to 3.6% from 3.3%. According to the Bloomberg survey, that still is a bit optimistic, which sees a 2.5% expansion and the IMF at 2.3%. The BOJ shaved its core CPI forecast to -0.6% from -0.5% this fiscal year and shifted it into the next fiscal year (0.4% vs0.3%).
The surprise from Japan today was not the BOJ, but the September retail sales report. Although retail sales jumped 4.6% in August, economists had forecast a 1% gain in September (median forecast in the Bloomberg survey). Instead, they unexpectedly slipped by 0.1%. Adversely impacted by last October's sales tax increase, retail sales had been weak prior to the pandemic. The government's cash payments and pent-up consumer demand appeared to have been exhausted. Rather than fresh monetary moves to support the economy, the onus is on the Suga government, and a third supplemental budget is expected to be announced next month. Prime Minister Suga is opposed to unwinding the controversial sales tax increase.
Market participants are still digesting the implication of the PBOC's decision to drop the counter-cyclical component of the reference rate. The other two components are the official close of the onshore market and the other major currencies' subsequent price action. The counter-cyclical component was a proverbial black-box, but the net impact was to smooth out the yuan's movement. With it gone, there is a risk that the currency becomes more volatile, which may a policy objective as a way to encourage Chinese businesses to develop, in many cases, more sophisticated hedging capabilities. It may alter the calculus in choosing to hedge either in forward or the options market. Three-month implied volatility rose above 6.5% for the first time this year today. It began the year a little below 4.5%....
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