Capital Markets: "Markets Look for Direction, while Nord Stream II and SMIC are in the Cross-Hairs"

From Marc to Market:

Overview: The capital markets are looking for fresh directional cues after last week's equity declines and seeming reversal in the US dollar. The MSCI Asia Pacific Index fell 1.6% last week, its largest drop since April. Markets in the region were mixed, with Japan, Taiwan, and especially China and Hong Kong moving lower. European shares are doing better, and the Dow Jones Stoxx 600 is recouping most of its pre-weekend losses. US shares are little changed. Bond markets are quiet. Asia Pacific bonds seemed to play some catch-up after the rise in US yields after the jobs report before the weekend, but today the US 10-year yield is flat around 72 bp, and European benchmark yields are slightly higher. The dollar is mostly firmer, with Brexit developments weighing on sterling. The pullback in the Canadian and New Zealand dollars and Norwegian krone give a sense of diminished risk appetites. This is also the takeaway from the emerging markets currencies, where most of the liquid and accessible currencies, like the South African rand, Turkish lira, Mexican peso, are on the downside. Following a larger than expected trade surplus, the Chinese yuan is the strongest of the emerging markets currencies, gaining about 0.15% against the greenback. Gold is a little heavy, but within the pre-weekend range, but it looks like it wants to test the $1900 area. October WTI was near $43.50 a week ago. It continued last week's decline today to reach $38.55 before finding a bit. Demand concerns seem to be behind Saudi Arabia's decision to cut October prices.

Asia Pacific
China reported August trade figures. Exports were stronger than expected, rising 9.5% from a year ago, while imports were weaker than anticipated, dropping 2.1%. The median forecasts in the Bloomberg survey were for a 7.5% rise in exports and a 0.2% decline in imports. The result was a $58.9 bln surplus, about $9 bln larger than projected, but smaller sequentially from July's $62.3 bln surplus. The particularly politically sensitive bilateral surplus with the US rose to its highest since November 2018. Imports from the US increased by about 1.8% from a year ago. A couple of additional details are notable. First, China's exports of textiles, which include some masks, rose by a third. Electronic exports also rose. Second, the decline in imports seemed like a function of falling prices. In discussions of Chinese trade, rarely are the terms of trade or prices integrated into the analysis. Third, China's iron ore imports fell by 11%, and this, in part, reflects the sharp drop in imports from Australia (~-26.2%) amid growing tensions in the bilateral relationship.

The US effort to limit China's ability to secure and develop its semiconductor business may be on the verge of a new step. Reports suggest it is considering blacklisting SMIC (Semiconductor Manufacturing International Corporation), China's largest semiconductor foundry. Ostensibly, the argument is that it has ties to the Chinese military. It secures about 50% of its fabrication equipment from US producers. Its shares fell, as did the shares of other Chinese semiconductor companies. Such action would be seen as an escalation. It would likely encourage China to redouble its own efforts, expected to be in the next five-year plan, to become a world-class semiconductor producer and reinforce the drive to be self-sufficient (import substitution)....   

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