Capital Markets: "Monday Blues"

From Marc to Market:

Overview: The constructive mood among investors in April has given way to new concerns as May gets underway. Japan and China are still on holiday, but most of the other markets in Asia fell, led by 4.5%-5.5% declines in Hong Kong and India, and more than 2% in most other local markets.

Australia bucked the trend and gained 1.4% after shedding 5% before the weekend. Europe's Dow Jones Stoxx 600 is off almost 2.5% in late morning turnover, while US shares are pointing to another gap lower opening in the S&P 500.

Outside of Sweden and the UK, European benchmark 10-year yields are firmer, with the peripheral yields 4-6 bp higher. The US 10-year yield softer at 60 bp. The dollar is stronger against nearly all the currencies, with the Japanese yen is the sole major exception. At the same time, the JP Morgan Emerging Market Currency Index is lower for the third consecutive session. Gold is straddling $1700 an ounce, while oil is snapping a three-day advance as is back near $18 after flirting with $20 a barrel at the end of last week.

Asia Pacific
The US has gone on an offensive against China. The Washington Post reported last week that several options are under consideration, though Kudlow denied that reneging on its debt is not one of them. Ahead of the weekend, explicitly did not rule out new tariffs over the coronavirus, which the US intelligence community, according to the Office of the Director of National Intelligence, concurs with numerous scientists who conclude that Covid-19 was not man-made or genetically-altered. Exactly how people were first exposed to it remains unknown. Meanwhile, Mitt Romney had written a broad critique of China in a recent op-ed piece, and Pete Buttigieg penned a piece claiming Beijing prefers Trump over Biden as a counter to Trump's claims. There hardening of the US position toward China is bipartisan. Ahead of the weekend, in another exercise of diplomacy via twitter, the US Mission to the UN tweeted that barring Taiwan "from setting foot on the UN grounds is an affront not just to the proud Taiwanese people but to UN principles." It was re-tweeted by the US Ambassador Craft. The tweet does not necessarily contradict the US one-China policy that has been affirmed several times, but it brought a quick and sharp rebuttal by China's mission to the UN.

South Korea's manufacturing PMI fell to 41.6 in April from 44.2 in March. The re-opening of China did not do it much good yet. Separately, it reported its headline CPI fell to 0.1% in April from 1.0% in March, illustrating the powerful deflationary forces that have been unleashed. Taiwan's manufacturing PMI fell to 42.2 from 50.4.

The Reserve Bank of Australia meets tomorrow, and the cash rate is already near the zero-bound. As markets stabilized, the RBA has scaled back its bond purchases. The RBA has bought about A$50 bln of federal and state government bonds. It is also the first country outside of Japan that has adopted a yield-curve-control strategy and targets the 3-year yield at 0.25 bp, the same as the cash rate. At the end of the week, the central bank will update its economic forecasts.... 

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