Tuesday, September 29, 2020

Capital Markets: "Consolidation Still Featured"

From Marc to Market:
Overview: A consolidative tone continues across the capital markets. Equities have lost their momentum. The MSCI Asia Pacific Index was mixed, while Europe's Dow Jones Stoxx 600 is paring yesterday's sharp 2.2% gain. US shares are little changed but mostly softer. Benchmark 10-year yields are 1-2 basis points lower in Europe, and the US 10-year is steady around 65 bp. The dollar is narrow ranges, mostly a bit softer, led by the Antipodeans and British pound, which has been resilient in recent days. The yen is nursing small losses. The liquid accessible emerging market currencies, like the Russian rouble, Turkish lira, South African rand, and Mexican peso are heavy, and the JP Morgan Emerging Market Currency Index is off for the third consecutive session and for the seventh session in the past eight. Gold is holding near a four-day high a little below $1890. November WTI is consolidating after reaching a five-day high near $40.80. It is the first session in seven that it has not traded below $40, but this may not stand today's North American session.

Asia Pacific
Tokyo's September CPI shows deflation lingers. The headline rate eased from 0.3% year-over-year to 0.2%. However, the core rate, which excludes fresh food, improved to -0.2% from -0.3%. The measure that excludes energy alongside fresh food was flat after a 0.1% decline in August. Tomorrow Japan reports August industrial production and retail sales. The former is expected to slow from the 8.7% gain in July, while the latter is expected to have risen around 2% after a 3.3% decline previously. Separately, NTT has announced it will buy its wireless unit, making it a wholly-owned subsidiary (cost ~JPY4.25 trillion or ~$40 bln), at around a 40% premium. It is not clear the implication for Prime Minister Suga's drive to lower mobile charges.

For a third session, the US dollar is in a roughly JPY105.20-JPY105.70 range. Expiring options are lower than spot and could reinforce the dollar's floor. There are $1.7 bln in option at JPY105.30-JPY105.35 that will be cut and around $3 bln in expiring options in the JPY105.00-JPY105.10 area. However, the upside looks blocked in front of JPY106, leaving range-trading as the most likely scenario today. The Australian dollar has formed a shelf ahead of $0.7000 and is probing higher today. It has tested the $0.7120-level today, a four-day high. It is a little shy of the (38.2%) retracement of last week's erosion. If the momentum stalls, as the intraday technicals suggest is possible, support is near $0.7080. The PBOC set the dollar's reference rate at CNY6.8171, which is slightly higher than many banks expected. Note that while there are calls for further appreciation of the yuan, its 3.6% gain this quarter appears to be the most in a decade.

Several of the major business press have run articles over the past 48 hours or so playing up the difference of opinion on the ECB. That likely means one thing: the hawks are again pressing their case hard. Two issues have surfaced. The first is that some hawks want to slow down the PEPP buying as amid relatively stable and have the flexibility to increase in the future. The other issue is that the staff's forecasts are too pessimistic. These two issues share a common element, and that is a pushback against efforts from the moderates and doves support. The new surge of virus cases in cases and the introduction of measures to contain the spread will serve as a coolant just as the PMIs show that the pace of recovery is stalling. ECB President Lagarde is seen as more of a consensus-builder than Draghi, but it seems clearer than the problem for the hawks is about substance, not really procedures and management styles. The ECB is in a similar position as the Federal Reserve. The pandemic has knocked their respective economies further off-course, but both are reluctant to take new action. That said, the ECB is expected its bond-buying in December, while the Fed's current commitment is open-ended....