Markets Catch Collective Breath as Dollar Consolidates Yesterday's Advance
Overview: Investors seem to be catching their collective breath today, and the global capital markets are consolidating recent moves. A notable exception is the Chinese yuan, which has continued to strengthen, and the dollar has slipped back below CNY7.0. Asia Pacific equities were mixed, and the four-day advance in the regional benchmark stalled today. That said, India has rallied to new highs. In Europe's Dow Jones Stoxx 600 is firm but struggling to maintain the upside momentum that has lifted it for the past three sessions. US shares are little changed. Benchmark 10-year yields played catch-up in Asia after the US surge yesterday. European yields are narrowly mixed, and the US 10-year yield is hovering around 1.85%. The dollar is consolidating yesterday's gains against the major currencies. Outside of the yuan, which is the strongest of the emerging market complex, most of the liquid and accessible emerging market currencies are nursing small losses, though eastern and central European currencies are resisting the pull. Oil prices are a little heavier after reaching six-week highs yesterday, and gold has steadied after posting its biggest loss in over a month yesterday.....MUCH MORE
Asia Pacific
It is becoming clearer that mission accomplished claims about what has been dubbed phase one of the US-China trade agreement is anything but. Indeed, the whole focus on where the pact should be signed given Santiago canceled the APEC meeting due to social unrest is a distraction. China appears to have gotten the upper hand. It is not accepting the suspension of the threatened mid-December tariff. This was a chit Trump created in a pique that would hurt US consumers. It is insisting on rolling back some earlier tariffs. So far, the US has not formally responded.
China issued sold its first euro-denominated bond since 2004. It sold 4 bln euros of 7, 12, and 20- year debentures. In all, the offering was over-subscribed five-fold, and the pricing (e.g., the 7-year bond was 30 bp above mid-swaps) was tighter than expected.
There is much discussion about the possible coordination of monetary and fiscal policy. A push back has been a defense of central bank independence. However, in Japan, where the central bank often is perceived to be among the least independent of major central banks, enhanced coordination is possible. This was precisely BOJ Governor Kuroda's point that seems to have somewhat wide application. Kuroda argued that the ultra-low rates that have been engineered by the BOJ make government spending even more powerful.
The dollar closed above its 200-day moving average against the yen yesterday (~JPY109.05), for the first time in six months. It was unable to take out the recent high (~JPY109.30) and has backed off a little today. Initial support is pegged in the JPY108.50-JPY108.70 area. There are two expiring option strikes to note: $485 mln at JPY109.20 and $780 mln at JPY108.75. The Australian dollar is trading quietly well within yesterday's ranges. The 200-day moving average, which has capped rallies this year, is found near $0.6950. Support is seen near $0.6875. For the second consecutive session, the PBOC set the dollar's reference rate a little weaker than expected, and this emboldened the market to take the greenback through CNY7.0, which surprises many observers. The offshore market recognizes the risk of a trap and was reluctant to extend yesterday's dollar losses much through CNH6.99. The dollar edged higher against the Thai baht after the central bank delivered the as expected 25 bp rate cut (benchmark is now 1.25%). It is the second cut here in H2.
Europe
The emerging meme that Europe may be past the worst of its slowdown was supported by today's data. Specifically, Germany's final PMI reading showed improvement from the flash estimates for services and the composite. Separately, Germany reported that factory orders surged in September. The 1.3% increase contrasts with the median forecast in the Bloomberg survey of 0.1%, and to August series was revised to -0.4% from -0.6%.
The final French services and composite PMI was in line with the flash estimates and showed sequential improvement. Italian services rebounded to 52.2 from 51.4 in September, but the poor manufacturing news (47.7 from 47.8, reported last week) limited the composite gain to 50.8 (from 50.6). Spain, which has been one of the bright spots, disappointed with (services PMI 52.7 from 54.3, and the composite fell to 51.2 from 51.7). Note that Spain goes back to the polls, unable to form a government with the existing configuration of parliament....
