Wednesday, May 29, 2019

Capital Markets: "Equity Slump Deepens while Yields Plunge"

From Marc to Market:
Overview: The slump in equities continues after the poor showing in the US yesterday. Nearly all bourses in Asia Pacific and Europe are lower. Indonesia is the notable exception as domestic operators re-position after the election. Foreign investors have been notable sellers of Korean and Taiwanese shares this month (in excess of $6.2 bln). Europe's Dow Jones Stoxx 600 is testing its lowest levels since March, and the S&P 500 is poised to gap lower through the 2800-level that has offered support in recent weeks. The technical target we suggested is in the 2700-2720 area. Meanwhile, bond yields continue to plunge. The US 10-year yield is near 2.22%, while 10-year German Bunds yield minus 16 bp and the 10-year JGB offers minus 10 bp. Spain and Portugal's benchmark yields are off 4-5 bp. Italian yields are slightly lower. Australia's 10-year yield is trading through the 1.50% cash rate. The dollar is firmer against most currencies, though the Swiss franc and Japanese yen are resisting also benefitting from the risk-over environment. The South African rand is leading the emerging market currencies lower. Concerns President Ramaphosa's reform agenda will be compromised as the new cabinet appointments are awaited. The dollar's move above ZAR14.75 is an inflection point. The high from last October near ZAR15.05 is the next important area.

Asia Pacific
There continues to be much discussion about Chinese using its rare earths dominance to retaliate against the US. The National Development and Reform Commission (NDRC) suggested China was not on the verge of weaponizing these strategic minerals, indicating it would continue to meet world demand. Ominously, it noted that the Chinese people would not be happy if the rare earths are used to curb its development. The US has been careful not to put a new levy on the imported earths from China, which amount to about 4k tonnes last year at the cost of around $175 mln. China has put a 25% tariff on the one producer of rare earths that are exported to China for processing. Far and away, the most rare earths the US imports are embedded in a wide range of products. Owing to this, we have argued that it will be difficult for China to weaponize the rare earths without causing wider collateral damage. Meanwhile, China's rhetoric is escalated. News wires are reporting the using an important Chinese phrase to the effect of "don't say you weren't warned."

We had suggested that his public support, the stronger than expected Q1 GDP, and the fact that opposition in disarray, the Japanese Prime Minister Abe may be tempted to dissolve the lower chamber of the Diet and hold elections alongside the upper house elections slated for July. The election for the lower house is not required until October 2021. There is more discussion of this possibility in the press and among LDP officials. Time is not on Abe's side. Whenever the retail sales tax increases, it has hit the economy. Although the government has taken some counter-measures, the risk is that tax hike in October weighs on weakens the economy again. In recent years, the lack of clear rivals in the LDP made Abe more secure. However, gradually Koizumi, the son of the former prime minister is beginning to draw attention as a potential candidate.

The dollar slipped to new two-and-a-half-week lows against the Japanese yen near JPY109.15. There is a $425 mln option at JPY109 and a $370 mln option at JPY108.75 that will be cut today. The JPY108.65 area is a (50%) retracement of the dollar's recovery from the January 3 flash crash that saw the greenback drop below JPY105, while the low from late January was near JPY108.50. Looking ahead, there is a $1.3 bln option at JPY109 that expires tomorrow and a $1.4 bln at JPY108.50 on Friday. While the Australian dollar appears to have carved out a shelf near $0.6865, it now has failed for the fourth session to push above $0.6940. The Chinese yuan was virtually unchanged, though the off-shore yuan (CNH) weakened slightly for the second consecutive session.

The jockeying for position after the European Parliament election is nothing new, and the rhetoric around it and the differences should not be exaggerated. The European leaders agreed to have a six-person committee, two from each of the top three party groupings (center-right, center-left, and the Liberals) to begin the negotiating process with hopes of some preliminary agreements over the next month.

The strength of the German labor market has been a major prop for sentiment and hope of a recovery in H2. Today's surprising jump in unemployment, the first in nearly two years raises new questions....