Wednesday, June 19, 2019

Capital Markets—Fed Day: "Still Patient?"

From Marc to Market:
Overview: Risk-taking was bolstered by the dramatic shift in Draghi's rhetoric less than two weeks after the ECB meeting and a Trump's tweet announcing that there was going to be an "extended" meeting between him and Xi at the G20 meeting and that the respective staff would begin coordinating. It was later confirmed by the Chinese media. Today's focus is on the FOMC. Barring a rate cut that would surprise, the focus is the extent to which the statement and Powell manage market expectations. The one-two punch of Draghi and Trump lit a fire to equities in Europe and the US. Asia followed suit, with the MSCI Asia Pacific Index up the most in five months. European equities are consolidating yesterday's gains, and US shares also are little changed. The same meme is evident in the bond markets, where Asia Pacific played catch-up, while European and US bond yields edge higher after yesterday's sharp decline. The dollar is little changed against the majors with the Antipodeans trading a little softer. Most emerging market currencies are firmer. The Turkish lira is the notable exception, as both the US and Europe are considering sanctions. The US is contemplating action to express its disapproval of Turkey, a NATO member, for buying a Russian missile system, while Europe disapproves its drilling activity in the Southeast part of the Mediterranean. South Korea and Taiwan currencies led the emerging market currencies with 0.8% and 0.6% gains respectively.

Asia Pacific
US-Japanese trade talks are underway, and today's data illustrates the challenge. Simply put, the days of Japan's large trade surplus driving the current account surplus are history. Japan reported that after a three-month surplus, the trade balance returned to deficit. In the first five months of the year, Japan has recorded an average monthly shortfall of almost JPY300 mln. In the same period last year, the average deficit was near JPY30 mln. The current account, like Switzerland's, for example, is driven by the investment income balance (profits, interest, dividends, licensing fees, royalties, etc.). Japan reported its sixth consecutive year-over-year decline in exports. The 7.8% decline is the largest since January. Last May, exports rose by 8.1% year-over-year. Chips and auto parts were important export drags (-30% and -12% respectively). In terms of destination, exports to China were off 9.7% year-over-year in May and down 6.3% in April. Exports to the rest of Asia fell 13.4% after a 1.6% decline in April. Exports to the EU were down by 7.1%, but exports to the US rose by 3.3%Imports unexpectedly fell by 1.5%. The median forecast in the Bloomberg survey was for a 1.0% gain. The weakness is seen as a reflection of the soft domestic economy. The BOJ meeting concludes tomorrow, and no change is expected, though pressure may be building for some technical adjustments given that it owns around 80% of the 7-10 year bonds and there is concern that it is disrupting activity.

For the eighth consecutive session, the US dollar sits on a JPY108-handle. Over this run, the dollar has finished the North American session roughly within 10 ticks of JPY108.45. There are nearly $1.2 bln in options struck between JPY108.30-JPY108.40 that expires today. There is a hefty $3 bln option struck at JPY108 that will also be cut. While volatility around the FOMC announcement may challenge the range, sizeable option expiries tomorrow may reinforce the range. Tomorrow sees $1.6 bln options at JPY108 and $1.2 bln at JPY109 roll-off. The Australian dollar initially made a marginal new high for the week before turning lower. The Aussie had approached $0.6900, where an A$512 mln option that expires today has been struck. Initial support is now pegged near $0.6860. The US dollar briefly traded below CNY6.90 for the first time in two weeks, but eventually edged slightly higher on the day.
There can be little doubt Draghi's comments were impromptu....