Capital Markets: "The Dollar and Stocks Catch a Bid"

From Marc to Market:

Overview: Amid light news, global equities are moving higher In Asia, the Nikkei rose to a new high since early December, while the Shanghai Composite rose 2.3% and posted its highest close since March 2018. European equities are solid, with the Dow Jones Stoxx 600 moving higher for the fifth consecutive session. US shares are trading higher and the S&P 500 is edging closer to the record high set last September near 2941. Benchmark 10-year yields are mostly firmer. In Europe, Italy is an exception, as it bonds trade like risk assets, and Antipodean bond yields also slipped. The 10-year Germany Bund yield bottomed last month near minus 10 bp and is near seven basis points now. The 10 bp yield mark is an important threshold. The dollar is mostly a little firmer against the major currencies. The dollar-bloc currencies and sterling are the heaviest, while yen is firmer with the help of cross-rate demand. Narrow ranges prevail.

Asia Pacific
The minutes from the Reserve Bank of Australia's recent meeting showed that scenarios under which the central bank could cut rates were discussed, but officials indicated that the bar to a cut was still high. There was not, they concluded, a compelling case of a near-term adjustment. The minutes are part of the gradual shift toward a more dovish posture. Falling house prices are crimping consumption, but the labor market remains strong, with the unemployment rate at eight-year lows. In the scenario of a rate cut, the RBA identified a reversal of the labor market's strength. Australia publishes March employment data first this Thursday in Sydney. Given the minutes, the market is more likely to sell the Australian dollar on disappointment than buy on a strong report. Australia lost 7.3k full-time positions in February.

China will report March industrial output, retail sales, and fixed asset investment figures tomorrow in Beijing, alongside Q1 GDP. Economists expected sequential improvement in the March series, but GDP may slow a touch from the 6.4% year-over-year pace since in Q4 18. The OECD revised down its growth forecast for the world's second-largest economy to 6.2% this year and 6.0% next year.

Reports indicate that the US wants China to shift some of its retaliatory tariffs away from agriculture so the Trump Administration can claim a victory for American farmers ahead of the 2020 campaign. Some suggest China could shift some of the tariffs to make it easier to fulfill its pledge to boost its agricultural purchases to $30 bln more on top of the pre-trade war levels. Reports also indicate China is reviewing non-tariff barriers to agriculture trade and specifically is reviewing its anti-dumping and anti-subsidy measures against distillers' dried grains (used for animal feed).

US-Japan trade talks began in Washington yesterday. If the US would have remained in the Trans-Pacific Partnership both NAFTA and US-Japanese trade ties would have been modernized and no need for these talks. At the same time, it is important to recognize that the TPP and what the US called USMCA is treaties and require Congressional approval. The talks with China, Japan, and the EU are executive agreements. No Congressional approval is necessary. Yet just like Trump has reversed many of Obama's executive decisions, these trade agreements may not survive Trump's successor.

The Australian dollar approached $0.7200 but has backed off. It has not closed above there for a little more than two months. There is an option stuck there for about A$555 mln that expires today and reinforces this resistance area. We have been looking for it to top out near there. Support is seen in the $0.7100-$0.7120 area. Meanwhile, the dollar continues to probe the JPY112 area. It finished the North American session above there for the past two sessions, but barely. There are no significant nearby expiring options today, but there is a $1.1 bln strike at JPY112 that will be cut tomorrow. Outside of the March 20-21 around the ECB and FOMC meetings, yuan has been flat in narrow ranges since the beginning of last month. The dollar has rarely traded below CNY6.70 or above CNY6.74.

Europe
Although we continue to suspect that the worst is behind the German economy, its recovery remains painfully slow. The ZEW investor survey does not appear to be helped much by the strong performance of German equities. The DAX is up 3.65% over the past month, making it one of the strongest among the major markets. The current assessment was halved to 5.5 from 11.1. The median forecast in the Bloomberg survey called for a gain (to 8.5). It is the seventh consecutive decline. Last April it stood at 87.9. On the other hand, the expectations component rose to 3.1 from 0.5. It is the sixth consecutive month of improvement. It stood at -24.7 last October and has steadily risen since. The flash PMI is due Thursday. The manufacturing PMI is expected to have edged up but most likely will remain below the 50 boom/bust level. The service PMI may slip, leaving the composite with a possible minor uptick.... 

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