From Marc to Market:
Overview: A new tariff truce between the US and China, coupled with the North Korean diplomacy and Russia-Saudi tentative agreement boosted investor confidence and sharp equity rallies. Japanese and Chinese equities rallied 2-3%. Most markets rallied in Asia-Pacific except for South Korea's Kospi and Hong Kong markets were closed as the handover was commemorated. Europe's Dow Jones Stoxx 600 was nearly 1% higher and at its best level in almost two months. The US S&P 500 is poised to gap higher to a new record high. Benchmark 10-year bond yields are mostly firmer, as Asia Pacific bonds were dragged higher by pre-weekend upticks in US rates. European core bonds yields edged slightly higher despite disappointing manufacturing PMI readings, though the periphery, led by Italy has yields move lower. The dollar is firmer against all the majors and many emerging market currencies, though regional Asian currencies fared well. The Turkish lira was bolstered by Trump's comments, claiming that Obama mistreated the Erdogan and may reconsider sanctions if Turkey goes forward to take delivery of Russian anti-aircraft system, which is due over the next week or two. Gold prices slid (~1.5%)on new trade hopes, while oil is rallying on OPEC+ restraint and hopes that the trade thaw may bolster demand. Separately, fewer shipments from Australia and strong steel output in China is lifting iron ore prices after the biggest quarterly rise in three years.....MUCH MORE
Asia Pacific
The weekend optimism over the resumption of US-Chinese trade talks and Trump's meeting with Kim in the DMZ has been checked by poor economic data. Japan's Tankan survey and PMI manufacturing readings across the area, including Japan, China (Caixin), South Korea, and Australia (Australia Industry Group) fell. Separately South Korea reported its seventh consecutive decline in exports (June -13.5% after May's -9.5%). Exports are one of the channels of contagion, and there appears no let up in sight. Japan's export orders fell for the sixth month, while China's official manufacturing PMI was unchanged 49.4 in June, new export orders slipped to 46.3 from 46.5, a fresh four-month low. China's weakness is spilling over to impact employment. The official manufacturing PMI showed employment easing to 46.9 from 47.0, a ten-year low, while employment in non-manufacturing recorded a new three-year low (48.2 vs. 48.3).
More stimulus from China is likely. Moreover, President Xi made more promises about market-opening measures and greater foreign access in a range of industries were announced, including oil, mining, and urban gas pipelines. A Japanese official noted that a supplemental budget could be forthcoming if to blunt the sales tax increase, which is still planned for October 1. Separately, tensions between South Korea and Japan are flaring up, and Japan will impose export restrictions on South Korea.
The dollar gapped higher against the Japanese yen. The bottom of the gap is the pre-weekend high near JPY107.95. The dollar found offers in both Tokyo and the European morning near JPY108.50, where a $933 mln option expires later today. We anticipate that the gap to be filled over the next day or two. The Tankan survey found a median expectation for the dollar to average JPY109.35 rather than JPY108.87 in the last survey. The dollar has averaged just around JPY107.70 in 2019 and just below JPY108 in Japan's current fiscal year. The Australian dollar is posting a potential key reversal. It initially pushed higher in early turnover on the weekend news, but the disappointing (AiG) PMI and the broad weakness in the region PMIs took a toll despite higher iron ore prices. The Aussie is now trading below the pre-weekend low, and a close below there (~$0.7000) would confirm the single-day reversal pattern ahead of the RBA meeting on Tuesday which is widely expected to result in a rate cut. The initial retracement objective of the two-week rally is around $0.6960.
The Chinese yuan strengthened for the third session. The dollar tested the recent low near CNY6.8350 after gapping lower. Nearby resistance is seen near CNY6.86, and support may extend to CNY6.80. The price action will strengthen the technical significance of the CNY7.0 cap.Europe...