Wednesday, April 24, 2019

Capital Markets: "Dollar Bloc in Focus, while Germany's IFO Disappoints"

From Marc to Market:
Overview: The record high close for the S&P 500 failed to lift global equities. Far East trading was mixed. The Nikkei opened strong and closed weaker, while the Shanghai Composite began softer and closed firmly. Australian shares and bonds rallied on the back of mild inflation, while the Australian dollar tumbled. Oil in easing for the first time in four-sessions and this is weighing on benchmark 10-year yields were are one-two basis points lower. Europe's Dow Jones Stoxx 600 has an eight-day rally on the line. It has only retreated in three sessions this month. It is slightly lower today past the midway point in today's local session. The US dollar is firm against most of the majors and nearly all the emerging market currencies but the Chinese yuan. The dollar is near the highs for the year against the Turkish lira (~TRY5.88) and is near the highs for the month against the South African rand (~ZAR14.35). The Australian dollar is the weakest of the majors, off around 0.8%, while the yen and Swiss franc are steady to slightly higher. Disappointment with the German IFO survey kept the euro on the defensive, while sterling is near two-month lows.

Asia Pacific
Soft Australian inflation data boosted the likelihood of a rate cut and sent the Australian dollar below $0.7030 to its lowest level since mid-March. Consumer prices were unchanged in Q1. The median forecast in the Bloomberg survey was 0.2% after a 0.5% gain in Q4 18. This translate to a 1.3% year-over-year pace, down from 1.8%. The underlying measures softened as well. Australia's two-year yield tumbled 15 basis points to 1.30%. The cash rate sits at 1.5%. The pendulum of market expectations has swung from around a 1 in 9 chance of cut next month at the end of last week to better than even money now.

The market is trying to decipher the policy signal of the injection of liquidity by the People's Bank of China via the targeted medium-term lending facility. Many see this as a sign of restraint and reluctance to ease policy broadly. We are hesitant to read much into this operation. Officials surprised at the start of the week by announcing the May 1 holiday would be extended for three days. Western press accounts play up official wariness of unrest and report some types of censorship have risen (e.g., some music removed from streaming platforms and controls on academics have tightened). The May Fourth Movement's 100-year anniversary is the ostensible catalyst. Although the May Fourth Movement gave rise to modern China and the Communist Party claims to be the heir, the vision of universal and individual freedoms has withered and left a gap between the CCP and the people, which Chinese leaders seem well aware of, even if it is an example of affirmation through negation. Then in June (June 4) is the 50th anniversary of the violent suppression of the Tiananmen Square demonstration....