Monday, August 31, 2020

Capital Markets: "Month-End Gyrations and the Fed's Ad Hocery"

 From Marc To Market:
Overview: Markets are searching for direction at month-end. Asia Pacific shares outside of Japan lower. Berkshire Hathaway confirmed taking a $6 bln stake in Japanese trading companies over the past year, and the pullback in the yen helped lift shares. The MSCI Asia Pacific Index rose 2% last week. European bourses are higher, and the Dow Jones Stoxx 600 is up around 0.4% near midday, while the S&P 500 is poised to gap higher, as it did last Monday. Debt markets are also mixed. European yields are 1-2 bp higher, while the US 10-year benchmark is about two basis points higher at 74 bp. The dollar is mostly higher, though the Norwegian krone and Canadian dollar are resisting the tug. Most of the liquid accessible emerging market currencies, led by the South African rand and the Mexican peso, are weaker. The JP Morgan Emerging Market Currency Index, which had rallied 1.2% before the weekend, is about 0.25% lower today. Gold is consolidating after rising 1.2% last week. The shuttered US Gulf oil and refinery capacity is offsetting news of two new oil and gas field finds in Saudi Arabia, and October WTI is firm near $43.50.

Asia Pacific
Deputy Prime Minister Aso will not replace resigning Prime Minister Abe.
Instead, Abe will remain in office until the LDP chooses a successor around the middle of September. LDP parliament members and local LDP chapters will select the next party head, who, by virtue of its parliamentary majority, would become the next PM. Before Abe, the office appeared to have a revolving door for several years. The current parliament term ends next October. It is possible that an interim compromise candidate completes Abe's term and allows the factions within the LDP to jostle and prepare for the post-Abe era. BOJ Governor Kuroda's term extends to April 2023. He may step down earlier, and a new Prime Minister would ostensibly give him he opportunity, though, without the extensive international travel schedule, Kuroda may feel more energetic to deal with the challenges of recovery. The fall in Tokyo's August inflation back below zero reminds us that the victory against deflation has not been secured.

It seemed kind of naive just to assume that Beijing was simply going to roll-over and allow Washington to arrange (and demand a fee!) for Tik-Tok to be sold (or banned from the US). Chinese officials waited until the end of last week to announce new export restrictions that would seem to cover some of the underlying technology used by Tik-Tok. The restrictions require an additional level of government approval. The list had not been altered since 2018. Changes have reportedly been discussed before, but it is clear that the current circumstances influenced its move that looks is designed to hamper Tik-Tok's sale. Beijing is willing to sacrifice Tik-Tok's US presence rather than capitulate to Washington's demand.

China's August PMI showed the recovery remains intact.
The manufacturing PMI slipped to 51.0 from 51.0. New orders rose to 52, while the contraction in export orders slowed. The service PMI rose to 55.2 from 54.2. These combined to lift the composite to 54.5 from 54.1.... 

Although Mr. Chandler doesn't mention it, today's most interesting action is in the U.S. treasury futures with both the 30-year and the 10-year resuming their downtrends.