Capital Markets: "Hong Kong Stocks Rally as Stand-Off Continues"

From Marc to Market, November 19:

Overview: The run-up in equities continues to be the dominant development in the capital markets. Although the Japanese and South Korean bourses fell, the rise in Australia, China, Hong Kong, and Taiwan underpin the MSCI Asia Pacific Index. The Hang Seng's gains (1.5% on top of yesterday's 1.3% rise) are notable as the situation on the ground remains intense and unresolved. European markets are higher, and the Dow Jones Stoxx 600 is at new four-year highs, while US shares are firmer in Europe, pointing to new record highs for the S&P 500. Debt markets are quiet. Asia Pacific yields slipped, while European rates are a little firmer, and the US 10-year is hovering around 1.82% yield. The foreign exchange market is subdued, and the dollar is largely confined to a +/- 0.15% band against the major currencies, while most of the freely accessible and liquid emerging market currencies are trading with an upside bias. Oil prices are little changed, and the January WTI contract is near the middle of its $56-$58 range. Gold has surrendered yesterday's gains after running into offers near last week's high (~$1475).

Asia Pacific
The Hong Kong political crisis is intense. The stand-off at the university continues. The situation remains ominous. The escalation of violence and disruption cannot continue. The US has endorsed the call of the protesters for an independent inquiry into the unrest and has expressed concern about the use of unnecessary force, though it is largely silent about the violence in other countries that face social unrest such as Bolivia. The US Senate is seeking new export controls to ensure that goods that the Hong Kong policy or China could use to clamp down are blocked. Beijing is also critical of the Hong Kong High Court that nullified the face mask ban.

The minutes from the recent meeting of the Reserve Bank of Australia seemed to show it closer to a rate cut than may have been appreciated. It recognized that a case for a rate cut exists but chose to wait for more evidence that additional action is necessary. It has cut rates three times since June. Previously, the RBA seemed to emphasize the labor market's performance but now appears to be placing more weight on consumption. It recognized that the ongoing drought is depressing farm income. Although the RBA meets in early December, the derivatives market sees a cut in Q1 20 more likely. The Australian dollar was sold on the news but has recovered to little changed levels in the European morning.

Bank of Japan Governor Kuroda also held out the possibility of lower rates if necessary, but the signal is that fiscal policy may be the key lever going forward. We are concerned that between weak exports and the sales tax hike, the world's third-largest economy risks contraction and that the BOJ would be under some pressure to respond. Meanwhile, the lower chamber of the Diet approved the trade agreement with the US. The upper chamber is expected to ratify the deal by December 9 when the current session ends.

For more than a month now, the dollar has been confined to a JPY108-JPY109.50 range. After slipping to JPY108.45, the greenback has recovered toward JPY108.80 in uneventful turnover. There are options for $1 bln struck between JPY108.90 and JPY109.00 that expire today and another of expiring options for nearly $1.5 bln between JPY108.35 and JPY108.50. Before the weekend, the Australian dollar traded between $0.6785 and $0.6825, and it remains within that range so far this week. It was pushed lower on the RBA minutes initially but climbed steadily back to reach $0.6815 in the European morning. The recovery stretched the intraday technical readings suggesting the range will likely hold. The dollar rose to CNY7.03, its best level since November 5 and the 20-day moving average, but has drifted back toward CNY7.0225. Our bias is for additional yuan weakness....

....MORE