Capital Markets: "Bonds and the Dollar Remain Heavy Ahead of the Weekend"

From Marc to Market:

Overview: The markets are digesting ECB's actions and an easing in US-Chinese rhetoric. Next week features the FOMC meeting and three other major central banks (Japan, Switzerland, and Norway). The US equity rally that saw the S&P 500 edge closer to the record high set in late July spilled over to lift Asian markets. Chinese and Korean markets were closed for a mid-autumn holiday. The Nikkei rose 1% to bring the week's gain to 3.7% on top of last week's 2.4% rally. It is at five-month highs. European shares are edging higher, but the Dow Jones Stoxx 600 is below yesterday's high. It is up nearly 1% on the week, which is the fourth consecutive weekly advance, and over the streak, it has gained about 5.5%. The S&P 500 is up about 1% this week coming into today. It is posied to close higher for the third week, during which time it has risen a little more than 4.5%. This month's sharp reversal of yields continues with benchmark 10-year rates up mostly three-to-four basis points today. The immediate drivers that are widely cited include Draghi's push for fiscal support in Europe, the acceleration in US core inflation (2.4% year-over-year, an 11-year high), a soft reception to the US 30-year auction, and speculation that the US and China could strike an interim deal. The US 10-year yield has risen 20 bp this week to test the 1.80% level. It finished last month a little below 1.50%. The US dollar is softer against most of the major and emerging market currencies today. The New Zealand and Canadian dollars are the exceptions among the majors and are a touch softer. Among the emerging market currencies is the notable exception. It is paring the gains recorded yesterday after the larger than expected rate cut. The Dollar Index looks to be headed for its second consecutive weekly decline. It would be the first back-to-back loss here in Q3.

Asia Pacific
The US and China have had two tariff truces this year. Each ended with the US slapping fresh tariffs on its rival. Over the past 24-hours, talk of an interim deal has emerged. Ostensibly, the basis would be China taking steps to improve the protection of intellectual property rights and return to the market to buy US agriculture products. It is less clear what the US gives, accept to delay, and possibly rollback some tariffs. Meanwhile, reports suggest that China may have taken 15 cargoes of soy from the US yesterday and may buy as much as 600k metric tons of soy in Q4.

Part of the challenge in trying to sort out motivations and winners/losers is the extent of the "goodwill" really being expressed and the more base national interest. For example, China may have been counting on Brazilian soy (and corn), but dry weather makes this less certain. At the same time, despite the official rhetoric that China pays the tariffs, many US businesses and households cite the tariffs as a major concern. The pattern is quite clear in the markets. Escalating tensions weigh on stocks and fans speculation of more aggressive Fed easing and curve flattening or inversion. President Trump puts much emphasis on the stock market, and the weakening of the economy is thought to diminish his chances for re-election. In our analysis, we would de-emphasize the "goodwill" that many are emphasizing, and focus more on national interest. We are still of the mind that says the end goal is a disengagement between the two largest economies, not completely and not without some back and forth.

Another weekend means more demonstrations in Hong Kong. However, even here there seems to be some optimism, though a US Chamber of Commerce survey found that a quarter of the US firms in HK are thinking about leaving. Many are considering Singapore. That said, the Hang Seng market rallied for the second week is up 6.2% over the period. It is the first back-to-back gain since June. The Hong Kong dollar, which had been testing its lower band last month, is finishing the week at its best level in more than a month....

....MUCH MORE