Capital Markets: "Stock Slump Pushes Yields Lower and Buoys Yen"

From Marc to Market:

Overview:  There is one main story today, and that is the resumption of the slide in equities.  It is having a ripple effect through the capital markets.   Bond yields are tumbling.  Gold is firm.  The dollar is narrowly mixed, though the yen stands out with almost a 0.5% gain.  Most of the large equity markets in Asia, including Japan, China, Hong Kong, Korea, and Taiwan were off mostly 2%-3%.  India and some smaller bourses, like Thailand and Indonesia were of closer to 1%.  In Europe, the Dow Jones Stoxx 600 gapped lower to return to levels not seen since December 2016.   It has lost roughly 4% in the five-day slide, which is the longest since January-February.  The S&P 500, which finished yesterday below the 200-day moving average, is also poised to gap lower.  Earlier this month, the S&P 500 tested 2700, and it appears poised to retest this area.  

China:  After rallying 6.6% in the past two sessions, the Shanghai Composite fell 2.25% today.  It remained, though, in yesterday's ranges.  The losses come despite (or because?) officials continue to unveil efforts to support the market.  The State Council  (similar to the cabinet in other governments) promised support for bond financing of price sector firms.  Although the PBOC is to provide funding, there were no details in terms of size, timing, or rules of accessibility.  The central bank continued to provide liquidity and boosted the re-lending and re-discounting quota.  Equities are one of the lynchpins in the Chinese financial system as there has been extensive use as collateral for loans.  Meanwhile, as the equities have become more volatile, the yuan remains confined to narrow ranges straddling CNY6.94.  

Italy:  One might not know it by looking at the four basis point decline the yield of Italy's 10-year benchmark bond, the most in Europe today, that the EC poised to take the unprecedented step of returning the budget proposals to Italy and formally ask the government to try again to color within the lines, so to speak.   It is another step in what we expect to be a protracted struggle between Italy and the EC in the coming months.  Italy would have three weeks to respond to the EC.   It is really not clear that both sides are seeking a compromise.  Ultimately, the problem is not that the Italian government wants to increase its budget deficit.  It is that it has no plan to reduce the debt.  The idea floated that if Italy's bonds come under too much pressure, the ECB could buy them is fantasy.  First, QE is winding down, and Draghi will reiterate that at his press conference in a couple of days.  Second, for the ECB to support Italian bonds, Italy has to enter into a program which would likely force it to reduce its deficit and debt levels, which would entail a larger primary budget surplus....MORE