Capital Markets: "Investors Temper Euphoria"

From Marc to Market:

Overview: The recent rise in equity markets and backing up in yields spurred many observers to upgrade their macroeconomic outlooks rather than the other way around. Yet we continue to see may worrisome signs. It is not just trade, though, of course, that is part of it. Sentiment itself is fragile and will likely follow prices. Led by Hong Kong, where the confrontation is intensifying, and the Hang Seng's 1.8% drop, regional markets tumbled. The MSCI Asia Pacific Index fell for the third time in four sessions. In Europe, shares are also moving lower. The Dow Jones Stoxx 600 is off by around 0.6% in the morning session, which, if sustained, would be the largest loss in a month.

Financials and energy are the largest drags. US shares are trading lower, and a decline today by the S&P 500 would be the second in three sessions. Bond yields are easing 2-4 basis points, though New Zealand, where the central bank kept rates steady, saw a big jump in rates (11 bp in the 10-year yield). The New Zealand dollar is also the strongest of the major currencies, rallying a little more than 1%. The US dollar is mixed, and those currencies usually sensitive to risk and growth sentiment, like the other dollar-bloc currencies, Scandis, and emerging market currencies are trading heavily. The euro briefly dipped below $1.10 for the first time since mid-October has recovered slightly. Gold is around 0.5% higher, which is the most in nearly two weeks, and oil is off for the third consecutive session.

Asia Pacific
The New Zealand dollar fell every day last week amid speculation the central bank was going to cut rates this week. We thought the Kiwi's decline was partly a correction to the previous week when it rose in every session. It also seemed as if sentiment shifted a bit at the start of the week. Still, the dramatic response to the Reserve Bank of New Zealand's decision to stand pat earlier today shows the extent of the entrenched expectations. Even as it left rates unchanged (1.0% cash rate), it lowered its GDP forecast for the year through March to 2.2% from 2.7%. However, it also judged that the economic slowdown may be ending, and inflation will likely pick up. Monetary policy is already stimulative after the 75 bp rate cuts this year, including the unexpected 50 bp move in August. The 1% gain today looks to be the largest in at least five months. The two-year yield jumped 16 bp, and as we noted, the 10-year yield is up 11 bp.

Japan's producer prices fell 0.4% in October year-over-year. It is the fifth consecutive month of deflation. Traded goods are leading the way. Import prices are off 10.5% year-over-year and export prices down 6.3%. The appreciation of the yen may be an under-appreciated factor. Over the past year (12-months), the yen is the only major currency to appreciate against the US dollar (~5.2%).

The dollar remains in a narrow range against the yen but testing four-day lows in the European morning below JPY108.90. There is an option for about $405 mln at JPY108.75 and another set for around $875 mln at JPY108.50-JPY108.60 that expires today. Bearish divergences with some technical indicators that did not confirm the recent new highs appear to leave the market vulnerable to a setback. That said, a convincing break of the JPY108.65 area is needed to signal anything of importance. The Australian dollar is extending its slide. The day-to-day decline is minor, but it is the fourth consecutive losing session, and the Aussie is at levels not seen more than 2 1/2 weeks. It is pushing through the (38.2%) retracement objective near $0.6830 of the rally from the start of last month. The next retracement target (50%) is $0.6800. The Chinese yuan is breaking its five-week advance that took the dollar back below CNY7.0. Today the dollar is a little above CNY7.02, its highest level since August 4.

Europe
The eurozone offered a rare pleasant economic surprise today. Weighed down by disappointing German data, EMU industrial output was expected to have declined by 0.2% in September. Instead, it eked out a 0.1% gain. It does not sound like much, but it is the first back-to-back increase in EMU industrial output since July-August 2017. Separately, tomorrow, Germany is expected to confirm that the world's fourth-largest economy contracted in Q3 for the second quarter in a row. Although this is widely tipped and apparently reflected in prices already, it does not change the fact that negative interest rates are no prophylactic against recession....

....MUCH MORE