Capital Markets: "Ready. Set. Wait"

From Marc to Market:

Overview: The approaching month/quarter-end and the G20 meeting dominate considerations. Although the S&P 500 closed on its lows for the third consecutive session yesterday, Asia Pacific equities liked the apparent increase in the prospect of a tariff freeze between the US and China and the pullback in the Japanese yen. Equity benchmarks in Japan, China, Hong Kong, and Taiwan all gained over 1%. European shares are posting more minor gains but could end the four-day slide if they are maintained. US shares are also trading firmer. Australia and New Zealand bonds played catch-up after the backing up of US yields yesterday. Today European 10-year benchmarks and the similar US Treasury yields are 1-2 bp higher. The dollar is little changed against the majors and has a slightly softer bias against the emerging market currencies. Gold is sitting on the week's low just above $1400, where it broke above at the end of last week. Oil is paring yesterday's strong gains, helped by a significant drawdown of US inventories (~12.8 mln barrels according to the EIA).

Asia Pacific
Japanese businesses, alongside economists, are looking for signs that consumers are stepping up their purchases ahead of the sales tax hike planned for October 1. It is not to be found in May retail sales, which rose 0.3% compared with a 0.6% median forecast in the Bloomberg survey, and the April series was revised to -0.1 from flat. Year-over-year retail sales have risen 1.2%, the highest of the year, but the June 2018 monthly increase of 0.9% makes for difficult comparison and warns the year-over-year pace will likely ease. Tomorrow Japan reports May employment and industrial production figures. Unemployment is expected to remain at 2.4%, while industrial output, which has been alternating monthly between increases and declines since last August, may have strong back-to-back advances. May's industrial production is expected to match April's 0.6% increase.


India was the subject of US criticism with Trump calling the recent increase in Indian tariffs "unacceptable." After a few delays, India hiked tariffs many US goods in retaliation for US actions, including taking away India's favorable access. The US has several non-trade asks of India--not purchasing a missile-defense system from Russia and not buying Iranian oil. The US also appears to be counting on India to help check the regional rise of China. Separately, Trump was critical of the US defense agreement with Japan, calling it "lopsided." In some ways, this criticism may work in Abe's favor. The Prime Minister has been a champion of strengthening Japan's capabilities and nationalism.

We suspect that the pressure that drove the dollar to around JPY106.80 earlier this week was fueled by Japanese investors raising hedge ratios on US-exposure ahead of the end of the month and quarter....

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