Friday, September 27, 2019

Capital Markets: Limping into the Weekend with the Euro Languishing at New Lows and Sterling under Pressure

From Marc to Market:

Markets Limp into the Weekend with the Euro Languishing at New Lows and Sterling under Pressure 
Overview: Equities remain under pressures. The MSCI Asia Pacific Index lower today, though Chinese and Australian shares were firmer. It is the second consecutive week the benchmark has fallen. European equities are firmer, but not enough to offset the losses earlier this week and are set to snap a five-week advance. US shares are firmer, and the S&P 500 needs to gain about 0.5% today or record a back-to-back weekly decline. Core bond yields are a little firmer today paring this week's decline. Dovish comments by a member of the Bank of England's Monetary Policy Committee who is often seen as a hawk, helping to drive down UK yields. The dollar is firm but little changed against most of the major currencies. Sterling is extended its decline for a third session while the euro came close to $1.09 before steadying. Among emerging markets currencies, the large liquid and accessible currencies (e.g., South Africa, Turkey, Hungary) are weaker, while China, India, and Mexico (which delivered a rate cut yesterday) are firmer.

Asia Pacific
Japan reports soft Tokyo September inflation
, which ostensibly offers insight into the national performance. The headline rate slipped to 0.4% from 0.6% and was lower than expected. The core, which excludes fresh food, fell to 0.5% from 0.7%. With the sales tax hike coming into effect on October 1, pressure may build for the Bank of Japan to take fresh action when it meets at the end of October. A rate cut rather than QE is seen as the most likely course.

Foreigners were larger sellers of Japanese assets in the week ending September 20. They dumped what appears to be a record amount of Japanese bonds (JPY3.15 trillion). Some observers highlight the large maturities that took place. However, at the same time, foreigners sold (JPY1.18 trillion) Japanese equities, the most in six months. Some link it to the end of Japan's fiscal half-year, but it is not clear why it would be such as a strong driver for foreign investors. Another hypothesis some are floating is it is more about the funding market and the cost of cross-currency swaps.

FTSE Russell declined to include Chinese bonds in its World Government Bond Index yesterday, bucking the trend of others, like the Bloomberg Barclay's and JP Morgan's emerging market bond indices. The decision was linked to feedback from investors seeking better bond liquidity and more flexibility in foreign exchange transactions and settlement. China will remain on FTSE Russell's watch-list, and it seems like the question is when not if. There did not seem to be much of a market reaction....