Markets Calm on May Day
Overview: The US S&P 500 failed to sustain the early upside momentum, but global equities are moving higher today, and there is some optimism on the trade front. Emerging market equities and currencies are also doing well today. Canada granted Meng Wanzhou bail shortly after a former Canadian diplomat was arresting China threatening to escalate the delicate situation. Some US companies have been fined for embargo violations in the past without any corporate officers being arrested. In any case, the fact that US-China trade talks have continued also aided sentiment. All the equity markets in Asia rallied more than 1% with the exception of a few smaller bourses and China. European markets are following suit. The Dow Jones Stoxx 600 is up (~0.6% near midday) for the second consecutive session. It has not posted back-to-back gains in a little more than a month. JGBs, Bunds, Gilts, and Treasuries are seeing slightly higher yields while peripheral European bonds and French bond yields are easing (one-three basis points). UK's May faces a vote of confidence among the Tory MPs today. Apparently, 48 letters were signed to trigger the challenge, but 158 is needed to win. Sterling is the strongest of the major currencies, but it is consolidating at the lower end of yesterday's ranges, stalling near $1.2550. The Swedish krona is the weakest of the majors, losing above 0.4%. Although it is closer to putting together a government three months after the election, the softer than expected inflation will frustrate the Riksbank desire to normalize monetary policy.
Asia Pacific
There is still no sign that the arrest of the Huawei CFO or other steps the US is taking to crack down on Chinese hackers and intellectual property theft is going to stall the still ill-defined G20 US-China trade talks. China is expected to soon if not already begun to purchase US soy. Reports suggest the process there is already underway to unwind the retaliatory tariff it imposed on US autos. For more than 16 years, the US and China had structured regular trade talks that were canceled by the Trump Administration. The resumption of discussions and the bringing the Chinese tariff back to 15% (from 40%) is a return to the status quo ante. Trump has also shown some willingness to keep the talks going. He indicated that if necessary he to interfere with the Huawei incident threatened (which it apparently is not).
The Japanese economic contracted at a 2.5% annual rate in Q3, twice the initial estimate, but the economy is bouncing back. The contraction was a function of earthquakes and other natural disasters. October industrial production jumped 2.9% on a preliminary basis, and the final estimate is due ahead of the weekend. Today, Japan reported core machinery orders rose 7.6% in October after an 18.3% plunge in September. Japan's December Tankan survey is out tomorrow and sentiment is not expected not to have changed very much.
The Nikkei gapped higher, and this follows the gap lower on Monday, leaving a potentially bullish two-day island in its wake. The dollar is at seven-day highs against the yen near JPY113.50. There is an option for about $360 mln at JPY113.40 that expire today. This month's high is about JPY113.85, and the trend line connecting the September, October, and November highs comes in near JPY114.00 today. A close below JPY113.00 would be disappointing. The Australian dollar is flattish around $0.7200. For the fifth consecutive session, it has slipped below there but has closed below it only once (Monday). A move above $0.7250, and ideally the 20-day moving average (~$0.7265) would lift the tone and confirm the base.
Europe
Prime Minister May's decision to pull the meaningful vote in Parliament on the Withdrawal Bill which has been months in the making because it was going to be decisively defeated was the last straw for many Tory MPs. Enough letters from Tory MPs have been turned in, after weeks of threats and feints, that a confidence vote with the Conservative Party will be held later today. The results will be likely be known late in the US trading session. If May survives, she cannot face another such challenge for a year. If she loses, she cannot run in the next contest. Her defeat is seen as more likely to produce a more hardline Brexit Prime Minister. A new Tory Prime Minister may have limited room to move, as May found. The EC is in no mood to re-open negotiations and time is running out in any event. Article 50 could be revoked but would have to be part of a larger plan, and it is not clear the legitimacy of a second referendum. Rather than the uncertainty being lifted, it appears to be intensifying....
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