From Marc to Market:
Overview: European bourses are playing catch-up as they reopen after the long holiday weekend. The Dow Jones Stoxx 600 gapped higher and is trading at record levels, led by materials and financials. Asia Pacific markets were mixed after US indices rallied yesterday. A sharp fall in household spending may have weighed on Japanese shares. US futures are softer too. The US 10-year yield is flat neat 1.70%, while European benchmark yields are 2-4 bp higher. The dollar is paring yesterday's losses. The Antipodean currencies and sterling are leading the way, with around 0.5%-0.6% losses in late morning turnover in Europe. The euro is hovering around $1.18, and despite the brief slippage yesterday, the greenback is holding above JPY110.00. Emerging market currencies are mixed, with Asia mostly higher and Europe mostly lower, leaving the JP Morgan Emerging Market Currency Index little changed. Gold is firmer, reaching its best level in almost two weeks, a little under $1739. Oil is recovering from its biggest drop in two weeks. The market seemed to overreact to the talks today in Vienna as an international effort tries to get both the US and Iran back into compliance with the arms/embargo agreement. However, it does not mean that Iranian oil will hit the markets any time soon. Still, May WTI has so far been unable to regain the $60-handle and remains within yesterday's range.
Asia Pacific
Japanese data underscore the pressure on the world's third-largest economy. Household spending fell a sharp 6.6% in February, a larger drop than expected. It has been falling since the sale tax was hiked in October 2019. There were two exceptions, last October and November. While data was distorted by the leap year, consumption fell from a year ago even without it. Part of what weighs on consumption is weak income. Cash earnings fell 0.2% year-over-year in February. This was a bit better than expected but was largely offset by the downward revision in the January series to show a 1.3% decline from a 0.8% fall initially reported.
The press reports that China has requested domestic and foreign lenders limit loan growth going forward after a 16% surge in the January-February period. The idea is to stay within last year's levels. The stimulative efforts have boosted the property market and new home sales. Small banks are thought to be particularly vulnerable. The move further underscores the shift in Chinese policy from boosting growth to controlling credit risks. Separately, note that S&P Dow Jones reports that its indices that had dropped from its benchmarks due to the US stance will be reinstated starting in July.
As widely expected, the Reserve Bank of Australia left policy unchanged. It reiterated that it does not intend to lift rates until CPI is back into the 2%-3% target, which it does not anticipate for a couple of years. Growth is expected to be above trend this year and next. The pressures are building, and house prices are one release. Officials also expressed concern for house prices, which have risen by the most in 30 years.
Sometimes it is hard to distinguish between cause and effect, but the net result is that tensions over Taiwan seem to be rising. On the one hand, China appears to have become more assertive in general. There have been clashes with India, a new 25-year agreement with Iran, retaliatory sanctions against US, Canadian, UK, and EU officials for initiating sanctions over the treatment of Uighurs, and maritime shows of force in disputed waters. Beijing has continually harassed Taiwan by sending fighter planes and other aircraft into Taiwanese territory. Eight fighter planes were sent yesterday alongside two other military aircraft. In late March, Beijing sent 20 warplanes in a single day. It could have looked like an invasion.
The narrative in the financial press often does not see the provocative role of America itself. Consider the case of the missing semiconductor chips. The shortage of semiconductors has been exacerbated by US sanctions against the largest consumer of chips in China (Huawei), forcing it to scramble to re-source and China's largest producer of semiconductor chips (SMIC), but one is rarely presented with the linkages. Similarly, it is not coincidental that China's show of force happened a day after the US and Taiwan agreed to boost cooperation between their coast guards. Right from the start, with the planned call with Taiwan shortly after the 2016 election, the Trump administration moved to weaken the taboos governing the formal US-Taiwan relationship. In its waning days, many of the curbs that had been in place were rescinded, and the Biden administration is extending the departure from the traditional approach. According to press reports, Secretary of State Blinken has referred to Taiwan as a country. Beijing seems just as worried about the US and its allies trying to alter the status quo as American officials are concerned that Xi will move. The high degree of mistrust makes the situation particularly tense. Meanwhile, China has sent dozen of "fishing boats" to the Whitsun Reef, claimed by the Philippines, and have kept them there were a few days now, seemingly testing and probing US resolve....
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