Tuesday, February 26, 2019

Capital Markets Generally Mournful and Reflective, Equities Fall Like Cherry Blossoms In Gentle Spring Rain

From Marc to Market:

Brexit Dilution Lifts Sterling, while Yesterday's Equity Rally Fades, Powell Awaited
Overview: The increased likelihood that Brexit is delayed and the possibility of a second referendum is helping lift sterling. As has been the case for most of the time since the June 2016 referendum, the prospects of a softer and/or later Brexit is understood as sterling positive. The other key focus is US-Chinese trade. The delay of the tariff escalation and the prospects for a deal helped lift equity markets yesterday, but profit-taking is cutting those gains today. The MSCI Asia Pacific Index ended a six-day advance today with nearly all the regional markets lower. The Dow Jones Stoxx 600 in Europe is giving back all of yesterday's gains. US shares are trading lower in Europe, and the early call looks like a 0.25% lower for the S&P 500. Asia Pacific bonds reacted to higher rates in the US yesterday, but European bond yields are softer with the exception of UK Gilts. Outside of sterling, the yen and Swiss franc are firm as the use of funding is unwound on the margins. The dollar-bloc currencies and Scandis are lower. Oil prices are consolidating yesterday's losses, which appear to have been sparked by a presidential tweet.

Asia Pacific
The euphoric response to the extension of the tariff-freeze between the US and China was not sustained. Yesterday's rally was exaggerated. The CSI 300, which was up 6% yesterday fell 1.2% today. The dramatic rise spooked officials. Today they warned an increase in unregulated margin debt. There are two other considerations. First, China's Banking and Insurance Regulatory Commission (CBIRC) has called for 30% of new lending to be targeted to the private sector. Second, a Politburo meeting at the end of the week will reportedly focus on financial market reforms.

Economic reports from the region are mixed. Industrial output rose in Singapore by 0.9% in January, though the year-over-year pace slumped to -3.1% from +1.7% in December. In Taiwan, industrial production was 1.86% lower than a year ago, a bit worse than expected. The market had expected Hong Kong's January exports to have fallen by 2.8% after December's -5.8% year-over-year decline. Instead, they slipped 0.4%, the smallest decline in three months. Consumer confidence in South Korea rose for the fourth consecutive month in February. The takeaway is that weakness from the end of last year has carried over into 2019, but the stage appears to be being set for better economic traction in the coming months.

The dollar firmed to a marginal new high for the year against the yen yesterday near JPY111.25. It stopped a little shy of the high from December 26 and the 100-day moving average, both found near JPY111.40-JPY111.45. The dollar has found support on the pullback near JPY110.75 and yesterday's low was around JPY110.60. There are three sets of expiring options to note today. The first is a $420 mln option at JPY110.70. The second is for $1.2 bln at JPY111.00. The third is JPY111.30 and JPY111.50 options for a total notional amount of $1.54 bln. The Australian dollar is pushing back after reaching about $0.7185 yesterday. We anticipated the recovery from the China embargo story that saw the Aussie drop hard last Thursday. We suggested selling into the corrective upticks that could run toward $0.7200. Expiring options are struck at $0.7200 and $0.7175 today (A$516 mln and A$782 mln, respectively). Initial support is seen near $0.7140 and then $0.7125. We note that India's airstrike on a reported terrorist camp in Pakistan is weighing on the rupee. Note that these are two nuclear-armed powers using conventional weapons.

There is one story in Europe today and that is Brexit....


Credit The Onion and the innocence of February 2008 for the headline. 
Mr. Chandler and Brown Brothers Harriman & Co are not to blame.