Capital Markets: "Calm before the Storm"

From Marc to Market:

Overview: The more prominent events this week still lie ahead, and the capital markets are trading accordingly. The rally that lifted the S&P 500 to new record highs yesterday carried over into Asia, where most equity markets rose, though China, Hong Kong, and South Korea were notable exceptions. European shares are struggling in the early going after the Dow Jones Stoxx 600 set new highs for the year yesterday. US equities are trading with a slightly softer bias in Europe. Benchmark 10-year bond yields are consolidating after Asia Pacific bonds played catch-up with the continued backing up in the US benchmark. Still, marginally weaker yields in Europe and the US, suggest consolidation may be in order ahead of the outcome of the FOMC meeting tomorrow. The dollar is firmer against most of the major currencies, and it is back below JPY109, and the euro is back below $1.11, levels that frayed yesterday. Central and Eastern European currencies are the drag among emerging markets, while South Korea and Taiwan are leading the advancers, which include South Africa, China, and Mexico higher. Gold is a little firmer after shedding $12 an ounce yesterday, and oil prices reversed lower yesterday and are experiencing follow-through selling today.

Asia Pacific
US-China trade talks continue to be a focus, and both sides are playing up the progress. The real test is a few weeks away. Can an agreement prompt the US to end the threat to slap a new tariff on around $160 bln of consumer goods imports due to take effect in the middle of December? The US canceled the increase in the tariffs on roughly $250 bln of goods from 25% to 30%, but those tariffs remain in place. Many of the concessions China appears to have offered are things that it has already done, such as set-up new courts for prosecution of intellectual property rights violations and commitment not to manipulate the yuan (which it has agreed at the G20), and lifting foreign-ownership caps in the financial sector.

China has sent conflicting signals, and this is seen in the volatility of the equity market. President Xi's comments about the opportunities offered by the blockchain technology for China sent equities in the space higher, but today officials cautioned against speculation. Separately, China announced it will launch a ~$29 bln state fund to invest in the semiconductor chip industry (from design to manufacturing). This is not surprising and is consistent with the import substitution strategy and the reduction of dependence on the US.

Today's Tokyo CPI figures, which are often seen as a lead indicator for national figures, disappointed, and the timing, ahead of the BOJ meeting, could not be worse....

....MUCH MORE