Overview: The S&P 500 closed higher yesterday for the ninth session in the past ten, but the coattails are short and global equities are trading with a heavier bias today. A firm CPI reading in China took a toll local shares with the Shanghai Composite, shedding 1.6%, the most in more than two weeks. European bourses are mostly in the red. After rising about 2.4% last week, the Dow Jones Stoxx 600 is off about 0.7% this week. It has closed on old gap on the daily bar charts (from April 3) and looks set to test the 20-day moving average, another percentage point lower. US shares are little changed. Bond markets are subdued. The US 10-year yield has fallen five basis points over the past two sessions and pressured Australian, and New Zealand yields lower. The benchmark JGB was little changed with a yield of minus 6 bp. The German benchmark is also little changed at minus 2 bp. The yield of the US 10-year note is a basis point higher but still below 2.5%. Sterling has shown little reaction to the extension of Brexit until the end of October. It has been confined to less than a third of a cent range today, which is the twice the range of the euro (15 ticks through the European morning). The dollar has been confined to less than a quarter of a yen range, while the Australian dollar is in a fifth of a cent range.
Asia Pacific
If the Chinese economy is to find traction, it needs to show that deflationary pressures are ebbing. Earlier today it reported a jump in CPI to 2.3% from 1.5% in February. However, the composition is wrong, and that means that the cut in reserve requirements that we expect later in Q2 is still on the table. The rise in Chinese CPI was due primarily to food. The core rate was unchanged at 1.8%. Vegetable price pressures appeared to be weather-related, while the 5.1% rise in pork prices, the first increase in two years, was a function of the swine disease and herd culling. Producer prices ended higher to 0.4% year-over-year from 0.1.% in February, which also illustrates the deflationary pressures remain even if moderating slightly. It was the first increase since last June when the PPI was 4.7% above year-ago levels.
The Australian dollar barely reacted to Prime Minister Morrison's snap election call (May 18). The Liberal-Nationals are seeking a third term, but party-infighting and policy paralysis have seen Labor run ahead in the polls for the last couple of years. Labor leader Shorten is ahead in the latest poll by about four percentage points. Neither the election call nor the date is surprising. Speculators have been anticipating a more dovish central bank and a weaker Australian dollar. They have built a large gross short position in the futures market in recent weeks. It has risen from 54.5k contracts (A$100k each) at the end of February to 82.3k contracts as of April 2.
The weekly portfolio report from Japan's Ministry of Finance is interesting. Japanese investors sold JPY1.7 trillion of foreign bonds last week. It was the most since August and unwinds more than half of its purchases in the last two weeks of March. We suspect that this is still part of the fiscal-year end window-dressing flows. On the other hand, foreign investors, who sold around JPY4.5 trillion of Japanese shares in March, returned to the buy side in a big way. They bought roughly JPY1.45 trillion of Japanese equities last week, the most since last October....
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