Capital Markets: "Markets Take Another Small Step Away from the Edge"

From Marc to Market:

Overview: The recovery in equities continues today in light news day. Nearly all the bourses in the Asia Pacific region rose, led by a 2.6% gain of the Shanghai Composite. The MSCI Asia Pacific Index rose for a third session. European equity benchmarks are rising for the sixth time in the past seven sessions. The Dow Jones Stoxx 600 peaked a week before the S&P 500 (April 24 vs. May1) but has not retraced (61.8%) of its decline, though the S&P has surpassed a similar retracement objective. Benchmark 10-year yields are little changed, though Australia's two basis point decline was enough to push it to new record lows of 1.45%. Most European bonds yields are softer, while the US 10-year yield is steady near 2.15%. The US dollar is narrowly mixed. The Chinese yuan firmed by about 0.25%, snapping a four-day slide with its largest gain in nearly two months.

Asia Pacific
Trump accused China of devaluing the yuan, but few believe this to be the case. The fact of the matter is that since Trump tweeted the end of the tariff truce, Chinese markets are among the worst performing. The Shanghai Composite was off 3% before today, and the 10-year bond yield had eased three basis points. The S&P 500 is virtually flat, while the 10-year yield had fallen 25 bp. The combination of underperforming asset markets, fears that the US tariffs will slow the already weakening economy and that officials will respond by easing policy, weigh on the yuan. In addition, the offshore market (CNH) suggests some asset managers may be hedging the risk that the dollar rises through CNY7.0, making it a bit of a self-fulfilling prophecy, or an example of Soros's reflexivity principle. At most, China has been accepting a weaker yuan and moderating its decline.

The PBOC took two steps today to lean against the downside pressure on the yuan. First, it set the reference rate (fixing) stronger than expected, and second, the PBOC announced it will sell CNH-denominated bills in Hong Kong later this month. The timing appears a bit unusual and could be an attempt to mop up liquidity in the offshore market to relieve some pressure on the yuan (CNY)....

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