Friday, August 28, 2020

Capital Markets: "Powell and Abe Drive Markets"

From Marc to Market:
Overview: After a confused and volatile reaction to the Federal Reserve's formal adoption of an average inflation target, it took Asian and European traders to embrace the signal and take the dollar lower.
It is falling against nearly all the currencies and has slumped to new lows for the year against sterling and the Australian dollar. Compounding the volatility, Japan's Prime Minister Abe has signaled his intention to resign over health issues as soon as the LDP picks a successor.
 The yen strengthened, in line with the other major currencies, but the Nikkei fell. Asia Pacific equities were mostly lower, with Chinese, Korean, and Indian shares posting independent gains. Note that New Zealand's exchange has been a victim of a cyberattack for the fourth session.
European stocks are also a bit heavy and are paring this week's gains. US shares are trading higher. The S&P 500 has a six-day advancing streak in tow coming into today. Benchmark 10-year yields are higher. Asia Pacific yields were pulled higher by the jump in US yields yesterday, and Australia's 10-year yield jumped 10 bp, and European yields are 2-3 bp higher today. The US 10-year yield is extended yesterday's rise and is now around 76 bp after reaching 78 bp, the highest since early June. Gold is trading firmly, but well within yesterday's broad range. Oil prices have drifted lower, and the October WTI contract is within yesterday's range, and slipping below the 200-day moving average (~$43.15).

Asia Pacific
Speculation that Abe's health issues were going to force his resignation had circulated in recent days.
We had thought it was more likely that today's announcement was going to be about the pandemic. However, Abe did, in fact, submit his resignation, effective after the LDP picks his successor. We recognized that there were alternatives to Abe, but less convinced about alternatives to Abenomics, which seemed like traditional LDP policy choices (loose monetary and fiscal policy and tax consumption). While some potential successors have been critical of low interest rates, it is difficult to see a different strategy.

Consider today's economic news from Tokyo.
Headline August CPI was unexpectedly halved to 0.3% year-over-year. The core rate, which excludes fresh food, fell back into deflationary territory (-0.3% from +0.4%). Excluding fresh food and energy, Tokyo prices are 0.1% below year-over-year levels after being +0.6% in July. That said, the report may exaggerate the downside pressure on prices as there was a one-off drop in accommodation prices (Tokyo was excluded from the national campaign to promote travel, but the calculation uses national indices).

The dollar initially extended its gains to almost JPY107 in early Asia Pacific turnover, but Abe's resignation spurred a sharp sell-off that took the greenback below yesterday's low around to JPY105.50 in the European morning.
A weak close today would set up a possible test on JPY105, the August low next week, and possibly a test on the July low (~JPY104.00). The Australian dollar extended yesterday's gains and is at new highs for the year above $0.7300. It has reached nearly $0.7325. The next important technical target is near $0.7500. The PBOC set the dollar's reference rate at CNY6.8891, a little above the median bank model in the Bloomberg survey. It is the fifth week, the yuan has risen against the dollar, and the fourth week it has risen against its CFETS basket. The dollar is at new seven-month lows against the yuan. The 10-year Chinese bond yield rose to 3.08%, its highest since mid-January.