Capital Markets: "US Brandishes Tariff Weapon and Weakens Animal Spirits"

From Marc to Market:

Overview: Asia Pacific equities mostly declined in sympathy with yesterday's large sell-off in the US and Europe. China and Taiwan were the notable exceptions, while Australia's 2.2% decline, following the central bank meeting that resulted in what many are seeing as a hawkish hold, led the move lower. Europe's Dow Jones Stoxx 600 fell 1.6% yesterday, the largest loss in two months, and is extending the losses for a third session today. US shares are trading with a lower and a gap lower opening is possible. Benchmark 10-year yields are narrowly mixed, accept in Australia and New Zealand, where they jumped 10 bp and 8 bp, respectively. The dollar sold-off yesterday and is trading with a mixed tone today in narrow ranges against all the major currencies. JP Morgan's Emerging Market Currency Index is a little weaker, threatening to end its two-day bounce to resume its downtrend. Gold is firm and is moving above its 20-day moving average ($1464.6), which it has not traded above in a month. Oil continues consolidating its pre-weekend loss that saw WTI for January delivery fall from above $58 to $55.

Asia Pacific
One Chinese media outlet reports China is drawing up a list of "unreliable entities," ostensibly a list of US companies it will sanction. Beijing has been threatening to do this for around six months. While it could be in retaliation for the recently signed HK bills in the US, it could also be in anticipation of the passage another bill working its way through the Senate that would sanction officials and companies involved with China's campaign against the Uighur Muslims. Yesterday, Trump renewed his threat to raise tariffs on China if there is no agreement. The market had expected the mid-December tariffs the US threatened to be suspended like the October's. However, there appears to be some second-guessing now.

The Reserve Bank of Australia kept rates steady, as widely expected. However, the statement and press conference took on a less than dovish cast. The three rate cuts since June appear to be helping the property market, which can lift consumption through the wealth effect. The central bank is seen with 50 bp of easing before it must resort to unconventional methods (asset purchases) and has signaled it is in no hurry presently to exhaust its remaining monetary ammunition. The next meeting is not until February, and the market is split about a rate cut then. The labor market and consumption are the most important elements going forward. Separately, Australia's swing into a current account surplus position extended in Q3 to A$7.9 bln from Q2 A$4.7 bln. In the same quarters in 2018, Australia reported a combined deficit of A$22.5 bln....

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