Tuesday, July 21, 2020

Capital Markets: "Europe and Tech Lift Risk Appetites"

From Marc to Market:
Overview: The continued domination of the tech sector and Europe's tentative agreement is lifting equities and risk assets more generally today. Australia and Hong Kong's 2.3%-2.5% rally led Asia Pacific markets. The Dow Jones Stoxx 600 is higher for a third session and above its 200-day moving average for the first time since February. The Dax is turning positive on the year. The S&P 500 did so yesterday, though nearly 2/3 (320 companies) remain lower on the year. The S&P 500 is set to gap higher and is likely to move into the old gap (February) between roughly 3260 and 3328.5. The European peripheral yields are falling by a couple of basis points, and Italy's two-year yield is below zero for the first time in five months. Core yields are little changed, as is the US 10-year benchmark (~61 bp). The dollar is mostly lower, led by the Australian and Canadian dollar and the Scandis. The euro, yen, and Swiss franc are hovering around little changed levels. Most emerging market currencies are stronger, led by the liquid and accessible currencies, like Russia, South Africa, and Mexico. The Chinese yuan, alongside the Singapore dollar, slipped lower. Gold has made a new multiyear high near $1825, and crude oil is firm, with the September WTI contract near recent highs around $41.50. A gap we have targeted extends toward $42.50.

Asia Pacific
Japan's June CPI readings were largely in line with expectations.
Headline inflation was steady, rising by 0.1% over the past year. However, the core rate, which excludes fresh food, ticked up to zero from minus 0.2%. This is a touch stronger than expected. It is the first time in three months, the core rate is not below zero. When fresh food and energy are excluded, June prices rose by 0.4%, the same as in May. Phone services and durable goods prices rose. It is not a gamechanger. Last week, the BOJ forecast inflation would fall by an average of 0.5% this fiscal year. Energy prices stabilized. Gasoline, for example, fell 12.2% year-over-year after falling nearly 16.5% in May.

South Korea's trade figures for the first 20-days June were weaker than expected, and are seen as a cautionary bellwether for the region. Exports fell by 12.8% year-over-year, after falling 10.9% in May. It was partly distorted by the number of business days, and when adjusted accordingly, exports fell 7.1%. Imports fell 13.7% after falling 11.2% in May. Semiconductor chip exports were off 1.7%. In June, they were flat. The exports of computer peripherals rose by almost 57%. On the other hand, the import of semiconductor fabrication equipment rose more than 131% from a year ago after a 140% rise in June and a 168% increase in May as new investment takes place. Of note, shipments to China fell by 0.8% year-over-year after increasing 9.5% in June. Exports to the US, Europe, and Japan are still falling on a year-over-year basis, but the pace has slowed.....
.... Europe
Initially, Merkel and Macron proposed 500 bln euros in grants as the core of the Recovery Plan, and that apparently has been negotiated down to 390 bln and 360 bln in low-interest loans.
The rhetoric got brutal as Dutch Prime Minister Rutte, whose party has only half the seats in Parliament and hence in a vulnerable political position, was accused of blackmail. European Council President Michel may have found a compromise with a handful of creditors, in part by granting nearly 53 bln euros in rebates (to Denmark, Germany, Netherlands, Austria, and Sweden). Hungary appears to have secured a dilution of the "rule of law" conditionality, and the Article 7 procedures against it will be closed by the end of the year, according to reports. This may prove to be controversial for the European Parliament that also must approve the agreement. Michel's compromise also includes some conditionality and a mechanism for qualified majority voting that dilutes the veto of the unanimity requirement. The newest proposal will be cast as more friendly for the creditor countries, it also injects more Europe into the Recovery Plan as well. Separately, EC is proposing to put a level on imports of goods from countries that have lower carbon emission standards than it does....