Capital Markets: "Markets Tread Water, Looking for New Focus"
From Marc to Market:
Overview: Investors seem to be in want of new drivers, leaving the capital markets with little fresh direction. While Japanese and China equities were little changed, several markets in the region, including Australia, Hong Kong, Taiwan, and India, were off more than 1%. European bourses are mostly higher after the Dow Jones Stoxx 600 slipped 0.4% yesterday. US shares are trading with a softer bias. Bond markets are subdued. The US 10-year yield is hovering around 70 bp ahead of the second leg of the record refunding.
Core European bond yields are firm, while peripheral yields are a little softer, allowing the premiums to narrow. The dollar initially advanced in Asia, but ahead of the start of the North American session, it has given back its earlier gains, though sterling has not recovered fully. Emerging market currencies are mixed, with the Turkish lira apparently being lifted by reports that the sovereign wealth fund will inject the equivalent of about $3 bln into three large state banks.
The JP Morgan Emerging Market Currency Index is recouping about half of yesterday's 0.5% decline. Gold is hovering in around a $7 band on either side of $1700. Oil is firmer, but remains about 2% lower on the week, despite the announcement that OPEC will "voluntarily and unilaterally" cut output next month by more than what was just agreed. Saudi Arabia said it will reduce production by another million barrels per day to 7.5 mln. The UAE quickly followed that announcement with its declaration to cut an additional 100k bpd and Kuwait by 80k.
Asia Pacific
Sometimes even the current US Administration finds multilateralism helpful. The US has persuaded several other countries, including the UK, Germany, France, Australia, and New Zealand, to formally press for Taiwan to be granted observer status at the upcoming meeting of the World Health Organization (May 18-19). The Wall Street Journal framed as a "test of America's leverage in its broader political struggle with China." While Beijing pushes back, its own lack of transparency helped create this justifiable space for Taiwan, whose successful record in combatting Covid-19 should be studied and replicated. In addition to the handling of Hong Kong's protests and unnecessarily provoking a trade war with the US with signature programs like Made in China 2025 and the Belt Road Initiative, which are in disrepair, the reversal of Taiwan's fortunes the result of another strategic error of President Xi. Conventional wisdom is about Beijing's strength, but it is China's weakness that may be more important and challenging in the period ahead.
Separately, the US and China are using trade and investment as punitive measures. In what seems like how it expressed its dissatisfaction with Canada's actions in the Huawei case and blocked some grain shipments (canola), China has raised tariffs on Australia's barley and now bans meat from four Australian producers. Yesterday, the Trump Administration made good on its threat to block federal government retirement funds from being allowed to invest in international indices that include China. Reports suggest as much as $50 bln was to be invested in such funds shortly.
China's economy may be gradually re-opening, but deflationary forces have strengthened. April CPI fell to 3.3% from 4.3. It was a larger drop than many economists expected. Pork prices eased to 96.9% from a year ago, down from 116.4% in March. Food prices, in general, rose 14.8% year-over-year. The core measure eased to 1.1% from 1.2%. Producer prices are more problematic. They fell 1.3% on the month to bring the year-over-year decline to 3.1%, double the March decline. The decline in producer prices was not just a drop in energy prices. The manufacturing industries saw a 2.2% year-over-year decline after a 1.2% decline in March. The PBOC is expected to take new easing measures in the coming weeks....
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