Thursday, March 28, 2019

Capital Markets: "Brexit Uncertainty Deepens as Parliament is Divided, while Turkey's Short Squeeze Falters"

From Marc to Market:
Overview: The lurch lower in global interest rates continue. The US 10-year yield is at new 15-month lows, five basis points through the average effective Fed funds rate. Late yesterday, it appeared that 10-year German Bund yields slipped below similar Japanese government bond yields for the first time since Q4 16, but when the JGB market opened, it the 10-year JGB yield fell a couple more basis points to minus 10, the most negative since August 2016, The 10-year Bund yield is steady near minus eight basis points. Peripheral European yields are firmer as they are tarred with the risk-off brush that is keeping equities on the defensive. The large bourses in Asia-Japan, China, Korea, Taiwan, and Australia weakened, but some smaller markets and India were more resilient. Barring a sharp sell-off tomorrow, Indian shares are poised to extend their advance for a sixth consecutive week. European shares are mixed to higher, with the Dow Jones Stoxx 600 trying to extend its gains for third sessions. US shares are trading with a slightly heavier bias. Most of the major currencies are a little lower, with the yen and Antipodean currencies the exceptions. Emerging market currencies are nearly all weaker, with short-squeeze in Turkey have faltered, pushing the lira down nearly 5% at pixel time despite the overnight swap rate soaring above 1000%. The risk is that the short squeeze will deter international investors who will be asked to refinance some $177 bln of foreign currency debt coming due over the next year.

Asia Pacific
Japan's Ministry of Finance reported portfolio flows on a weekly basis.
The large moves in stocks and bonds and the approaching fiscal year end has seen sharp moves by Japanese and foreign investors. Last week, Japanese investors bought JPY1.1 trillion of foreign bonds. It is the second largest buying spree this year. They were small sellers of foreign shares. Offshore investors were larger sellers of Japanese bonds and stocks. They sold JPY1.5 trillion of Japanese bonds, the most this week, while they sold JPY1.1 trillion of Japanese stocks. Over the past three-weeks, foreign investors sold JPY3.7 trillion of Japanese stocks, which appears to be a record. They have only bought Japanese shares one week here in Q1.

The economic calendar will pick up now. Tomorrow Japan reports employment, industrial output, and retail sales. While jobs reports should be little changed, the February factory output and retail sales are expected to have bounced back from a poor January. Early Monday in Tokyo, the March Tankan Survey will be released, and sentiment is expected to have weakened in most categories, though large non-manufacturers may have fared best. Capital expenditure plans were likely slashed. China reports its official PMI over the weekend. South Korea will report industrial output figures tomorrow and trade figures early Monday in Seoul. Trade seemed to improve as the month, so the year-over-year contraction appears to have eased compared with January and February.

The dollar has traded between JPY110.00 and JPY110.50 today. It found a good bid in early Europe just above JPY110, where a $965 mln option will be cut today. There is an option that expires tomorrow there for $1.2 bln. There is another $840 mln option at JPY110.50 that will also expire today. The Australian dollar is trading near the lower end of the two-week range, which extends to almost $0.7050. There is an A$1 bln option struck at $0.7100 that is expiring. The week's high was set near $0.7150, where a six-week downtrend is found.

The UK House of Commons failed to find a majority for any of eight different options
to Prime Minister May's Withdrawal Bill. It intends to narrow the range of options to see if a consensus can be forged. Two proposals did a little better than the Withdrawal Bill's second attempt: staying in the customs union and a second referendum. May capitulated to demands and offered to resign once Brexit is approved, but understood to be resigning in the coming months in any case. This seemed to have been enough to entice some like Boris Johnson and Duncan Smith, but DUP continued to oppose the Withdrawal Bill on principle, and this seems to have doomed it....