Overview:
First, reports suggested that if China refused to make any trade concessions, the Trump-Xi meeting on the sidelines of the G20 meeting next month would not take the issue up. Fair enough. Then, new reports indicated that the White was prepared to take additional trade measures if there was no agreement between Trump and Xi. The news hit a weak market. The NASDAQ was also in negative territory, and the S&P 500 had seen its early gains pared, but the escalation of US trade pressure sent shares reeling. The 103 point range for the S&P 500 was the largest since February. Asia followed suit initially but reversed higher and the MSCI Asia Pacific Index snapped a five-day slide. Most markets in the region but Hong Kong, India and Singapore participated in the advance. Still, judging from Korea, where foreign investors were net sellers of shares today for the 16th consecutive session, show sentiment remains fragile. Some linked the recovery, especially in China to Trump's claim that "I think we will make a great deal with China, and it has to be great because they've drained our country." European bourses enjoying modest gains in the morning session ahead of the US open. It is the second consecutive advancing session for the Dow Jones Stoxx 600, something it could not do last week. The more stable equity tone is sapping the bid from bond and yields are higher across the board, with Italy being the notable exception. It sold 5.5 bln euros of bonds today to complete a little more than 90% of this year's funding interest. Often lost on observers, Italy's experience makes it a good manager of debt with the depth in secondary markets. There are 10 bln euro of maturing Italian bonds this week and 5 bln euros in coupon payments and the premium over German Bunds is back below 3%. In the foreign exchange market, the dollar-bloc currencies are edging higher, while the funding currencies (aka safe havens) like the Swiss franc and Japanese yen on softer. Among emerging market currencies, the Turkish lira and South African rand are firmer, while most are little changed.
Asia-Pacific:
The US has imposed tariffs on $250 of Chinese goods. Of that, the 10% tariff on $200 bln of goods will be hiked to 25% on January 1. Yesterday, Trump renewed this threat to put a tariff on the remaining roughly $255 bln of goods the US imports from China. Given the process, these could be implemented as early as February. Economists and investors need to give more thought to the possibility that the US puts a 25% tariff on nearly all Chinese goods. Without a policy response, economists project that is could slow the world's second-largest economy by 1%-2% next year. Of course, China would have a policy response. Over the past few days, Chinese officials have brandished another domestic policy card to play. Tax cuts. Not only will the government cut income taxes, but it may also cut the sales tax on autos to help spur demand. China is already securing new markets and supply sources to replace America, though of course, this takes time, which means some disruption is likely. The prospect of protracted Sino-American trade confrontation will create new opportunities and may impact investment decisions, encouraged too by rising costs in China. The yuan slipped to its lowest level in a decade before recovering somewhat. The CNY7.0 level has taken on special significance, but we suspect it is not inviolable. The yuan has weakened about 6.5% against the dollar since the start of the year. Because of the import intensity of China's exports, with yuan incurred production costs relatively modest, the depreciation of the yuan, therefore, barely blunts the impact of the rising tariffs.
Japan's labor market tightened. The unemployment rate unexpectedly slipped to 2.3% in September from 2.4%. The jobs to applicant ratio ticked up to 1.64. The natural disasters in the month may have skewed the data, but as the Bank of Japan meets, the takeaway message is the labor market remains strong even if wage growth, especially among full-time workers remain modest. The natural disasters may also have weighed on September industrial production figures, which will be released tomorrow before the conclusion of the BOJ meeting. The Nikkei posted an upside reversal today and a gap from last week extends to 21911 may attract prices. We had been concerned that the dollar was going to hold below the JPY112.50 area but it has pushed through there to test last week's highs just shy of JPY112.90. A move above there would target the JPY113.40 area.
EMU
There were two data streams from the EMU today. Growth and prices. The Bundesbank warned last week that the German economy may have stagnated in Q3. France didn't. It may be of little help to President Macron who has slumped in the opinion polls, but the economy grew 0.4% in Q3, twice the pace in Q2. Still, the year-over-year pace slowed to 1.5% from 1.7%. Italy disappointed as well. The economy did not grow in Q3 after expanding 0.2% in Q2. The year-over-year pace eased to 0.8% from 1.2%. We suspect the Italian government's fiscal proposals would go over much easier if investors and others could be confident that the efforts would boost growth on a sustained (structural) basis. But, alas, judging by the government's even optimistic forecasts, they don't believe it either. The initial estimate for Q3 GDP for the euro area as a whole was 0.%, down from 0.4% in Q1 and Q2 and 0.7% every quarter last year....
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