Capital Markets: "Market Sentiment Still Constructive"

From Marc to Market:

Overview: The improvement of investor sentiment seen last week is carrying over into the start of the new weeks. Global equities are firm as are benchmark yields. Asia Pacific equities advanced, except in Hong Kong, where Chief Executive Lam's promise to formally withdraw the controversial extradition bill failed to deter protests. European markets extended their three-week advance at the open, but are struggling to sustain the upside momentum. US shares are trading with a firmer bias. Benchmark 10-year yields are rising three-four basis points in Europe, with US Treasury yield pushing up toward 1.60%. Yields were softer in the Asia Pacific region. The dollar is in lower though narrow ranges against the major currencies, but the Japanese yen and Swiss franc. The euro and sterling are firmer but little changed. Among emerging market currencies, the Turkish lira, the Chinese yuan, and Mexican peso laggards, with most of the others gaining against the US dollar. Crude oil prices are firmer, but the market showed little reaction to news that Saudi Arabia replaced its long-time oil minister with a son of the King. With an OPEC+ meeting on the sidelines of the World Energy Congress later this week, investors will be particularly sensitive to any indication that the change in personnel reflects a change in policy.

Asia Pacific
China's trade surplus fell sharply in August as exports unexpectedly fell. The trade surplus of $34.8 bln compares with $44.6 bln in July. Overall exports fell 1% year-over-year after rising 3.3% in July. Exports have been in a sawtooth pattern since late last year, alternating monthly between gains and declines. Of note, exports to the US were off 16% year-over-year. Remember the US tariffs are applied to particular goods, say steel pipes, not to a dollar value as is often used in shorthand, like $250 bln of goods. China's trade surplus with the US stood at $26.95 bln, according to the Chinese figures, meaning that it accounted for more than three-quarters of the PRC's trade surplus. Imports fell by 5.6%, year-over-year. They have been declining on a year-over-year basis since last December, with the lone exception of April. Yet oil imports rose 3% in August and are up almost 10% year-over-year and nearly 10 mln barrels a day. China has been the third-largest buyer of US crude oil this year, and its new oil tariffs may reduce its demand from the US. Meanwhile, refinery margins are reportedly recovering, and this may lead to new marketing drives. Lastly, note that as a goodwill gesture ahead of the face-to-face sometime next month, apparently after the US 25% tariffs are lifted to 30% on October 1, China reportedly agreed to make some grain purchases. We suspect this points to where China has not been able to fully replace US inputs. China's soy imports rose to the highest in three years, while iron ore imports were the most since January 2018.

Japan revised Q2 GDP to 1.3% from the 1.8% initial estimate. The main culprit seems to be business investment. It rose only 0.2%, not 1.5% as had been previously estimated. It follows a 0.2% decline in Q1. Separately, Japan reported a JPY2 trillion July current account surplus. The current account surplus conceals the deterioration of Japan's trade balance. On a balance of payments basis, Japan reported a trade deficit of JPY74.5 bln in July. To put this in perspective, consider that last year's trade surplus averaged JPY254 bln a month in the first seven months. This year's average is less than 1/10 at JPY21.4 bln. Separately, the balance of payments data showed Japanese investors bought JPY2.47 trillion (~$23 bln) of US Treasuries in July, the most in three years.....

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