From Marc to Market:
Overview: The weekend failed to break the grip of investor worries that is driving stocks and yields lower. The US Administration's penchant for tariffs is not simply aimed at China, where there is some sympathy, but the move against Mexico, dropping special privileges for India, and apparently, had considered tariffs on Australia. At the same time, the threat of 25% tariff on auto imports. Meanwhile, the recent data, including today's PMI readings, show a world economy struggling even before the escalation. Equities have continued to surrender gains seen in the January to April period. The Nikkei gapped lower to levels not seen mid-January. Taiwan, India, and South Korean markets advanced. Foreign investors bought South Korean shares for the second consecutive session. Previously there were two other sessions since the end of the tariff truce between the US and China that foreigners bought Korean shares. Europe's Dow Jones Stoxx 600 is around 0.7% lower in the morning to return to levels seen in mid-February. US shares are trading lower in Europe, and the S&P 500 is set to gap lower again, and our 2700-2720 target is coming into view. Bond yields in Asia-Pacific rose, but European yields on falling, led by a six basis point decline in Italy, but it not doing much for Italian banks shares, which are holding just above the year's low set before the weekend. The US 10-year yield is off four basis points to2.08%. The dollar is sporting a slightly heavier profile against most of the major currencies, led by the Swiss franc and the New Zealand dollar. Among emerging markets, the greenback is mixed. Asian currencies are mostly firmer. The Turkish lira is off 0.5% and is set to end a seven-day advance. The Mexican peso is softer but above the pre-weekend low. The Chinese yuan slipped less than 0.1% for the second consecutive session.
Asia Pacific
Investors continue to anticipate more retaliation by China. Its investigation into FedEx for mis-delivering two packages to Huawei seems like low-hanging fruit but typical of China's modus operandi. Many participants continue to hold on to hope that a meeting between Trump and Xi at the end of June on the sidelines of the G20 meeting could do repeat what happened in December and re-start negotiations. However, our sense that this is unlikely to happen continues to be underpinned by the fact that there has been no date set to resume negotiations and the escalation of rhetoric.
Over the weekend, South Korea reported an unexpectedly large drop in exports. The 9.4% decline compares with a median estimate in a Reuters survey for a 5.6% decline after a 2.0% decline in April. It is the sixth consecutive contraction. It illustrates the ongoing challenge for the region. It is partly the slowdown in China, where exports fell by a fifth year-over-year, and something industry-specific with memory chips and semiconductors. South Korea's memory chip exports fell by a little more than 30% year-over-year. The May PMI manufacturing PMI eased to 48.4 from 50.2. The central bank shaved its growth forecast last week (2.5% vs. 2.6%), but a deeper cut is likely next month. The split decision to keep rates will also be re-evaluated, and a rate cut in Q3 looks likely.
Other manufacturing PMI readings in Asia were mixed. Japan's May manufacturing PMI stands at 49.8, which is better than the 49.6 flash reading, but it is still off from moving back into expansion territory in April at 50.2. Taiwan's improved to 48.4 from 48.2 but has not been above 50 since last September. Malaysia's manufacturing PMI slipped to 48.4 from 49.4, though separately the government reported an unexpected increase in exports in April, the first increase since January. Australia's AiG manufacturing PMI eased to 52.7 from 54.8. China's Caixin manufacturing PMI was unchanged at 50.2, whereas official one had fallen to 49.4 from 50.1.
The dollar initially saw its recent losses extended against the yen, but buyers appeared ahead of JPY108. There are nearly a billion dollars in options struck between JPY108.00 and JPY108.15 that expire today and a $1.2 bln option at JPY108.50 that will also be cut. The Australian dollar is edging higher after closing above the 20-day moving average before the weekend for the first time since April 22. The Reserve Bank of Australia is widely expected to cut the cash rate tomorrow, but the market is pricing a very aggressive easing trajectory, and some shorts are content to lock in profits, especially given the fact that the downside momentum stalled. There is an A$500 mln option that expires today, struck at $0.6955 that is very much in play.
Europe...
....MUCH MORE
