Thursday, August 27, 2020

Capital Markets: "After much Build-Up, Could Powell be Anti-Climactic?"

From Marc to Market:
Overview: The strong rally in US equities yesterday, with the fifth consecutive gain in the S&P 500 and a big outside up day in gold, failed to spur follow-through buying today. Asia Pacific equities were mixed. China, Australia, and India rose while most of the rest of the regional markets fell. Europe's Dow Jones Stoxx 600 is around 0.30% lower near midday, and it continues to flirt with the 200-day moving average.
US shares point to a lower opening, though Fed Chair Powell presents to the Jackson Hole Symposium just as the local markets open. Benchmark yields are 2-4 bp lower, putting the US 10-year near 68 bp. Of note, China's 10-year bond yield rose and, at 3.05%, is at the highest in seven weeks. The dollar mixed.
Among the majors, Australia and New Zealand dollar lead the move, and among the emerging markets, the Turkish lira and Indian rupee are the best performing. The JP Morgan Emerging Market Currency Index is moving higher for the third session this week. Gold's constructive price action yesterday failed to shake off the corrective forces and has come back lower today and may test the $1930 area. Hurricane Laura made landfall, sapping some of its power, but some 80% of Gulf oil production and 3 mln barrels of refining capacity has been shuttered. October WTI is hovering near five-month highs above $43 a barrel.

Asia Pacific
Within 24 hours or so that some press reports were playing up optimism about the US-China trade agreement, the dispute over the South China Sea escalated.
The US imposed new trade and visa restrictions on 24 entities and people that helped "reclaim and militarize the outposts" in the South China Sea. Calling them islands grants certain rights, which the US does not recognize for China. Earlier in the day, as part of ongoing exercises, China fired as many as missiles in undisputed waters in the South China Sea. On Tuesday, Beijing objected to flyovers by a US spy plane. While a more aggressive stance against China is part of the US political cycle, China's response is more thunder than rain, more symbolic than substantive. Vietnam called on China to cancel its drills as it violated its sovereignty over the Paracel Islands.

China's industrial profits jumped 19.6% in July after an 11.5% gain in June. Still, through the first seven months of the year, profits are off 8.1% year-over-year. Reduced deflation in producer prices and stronger exports appeared to help. The August PMI is due over the weekend and will likely confirm a modest recovery remains intact.

There were a few other regional developments to note. First, South Korea's central bank held rates steady (0.5%) as widely expected. It did revise its GDP forecast lower to -1.3% from its May forecast of a 0.2% decline. The central bank faces pressure to do more. Second, Australia reported a further slide in private sector investment. Capex fell 5.9% in Q2 after a 2.1% decline in Q1. Third, Japan's All-Industry Activity Index jumped 6.3% in June after a revised 4.1% decline (from -3.5%) in May. The Japanese economy contracted for three consecutive quarters and is expected to be returning to growth in the current quarter....