Friday, October 9, 2020

Capital Markets: "Animal Spirits Return"

We are keeping an eye on the 10-year yield. Although real interest rates are still negative they are less so than a couple months ago and assets that do well in the negative real rate environment (looking at you ZeroHedge gold) will catch on at some point.

Maybe after next week's PPI and CPI are released a short would start to look attractive.

 From Marc to Market:

Overview: The on-again-off-again fiscal stimulus in the US is back on as the White House now supports a broad stimulus program, but not as big as the Democrats $2.2 trillion package. It is the narrative being cited as the rebuilding of risk appetites is the wobble earlier in the week. Chinese markets re-opened with a bang. Shanghai led the Asia Pacific bourses higher with a 1.7% gain, and the onshore yuan rose 1.1%, a bit more than expected after a favorable fix by the PBOC. Europe's Dow Jones Stoxx 600 moved above the 200-day moving average yesterday and remains above it today. It is up modestly, for the sixth session of the past seven. The S&P 500 and NASDAQ gapped higher yesterday, closed near the highs, and look likely to gap higher again. Benchmark 10-year bond yields are 1-3 basis points lower in Europe, and Italy's 10-year yield is at a new record low. The 10-year US yield is around 0.77%, up about six basis points on the week that saw a new supply. The dollar is on its back foot, falling against nearly all the world's currencies today. The euro is knocking on $1.18, and even the yen is better bid. The JP Morgan Emerging Market Currency Index is edging higher and is up about 0.5% on the week. Gold has rallied more than 1% today to about $1916, putting it within striking distance of the week's high set on October 6 near $1921. The US Gulf storm has shuttered more than 90% of the oil capacity, driving WTI for November delivery higher. It is straddling the $41 a barrel level as it puts the finishing touches on its best week since May (~10.5%).

Asia Pacific
China's markets reopened after the holiday.
The Caixin PMI was a bit confusing. Recall that before the holiday, the manufacturing PMI slipped to 53.0 from 53.1. Today it reported the services PMI rose to 54.8 from 54.0, which was better than expected. However, the composite fell to 54.5 from 55.1. More attention was paid to the yuan's strength, which is now at levels last seen in April 2019. There appears to be a regime change under which, as we have suggested, Beijing sees it in its interest to accept an appreciating currency. It has been encouraging foreign portfolio investment. The apparent recovery, high yields, and inclusion in global benchmarks makes it more attractive for global asset managers.

Japanese labor earnings and spending for August improve sequentially but were not as strong as expected. Cash earnings were off 1.3% year-over-year after a revised 1.5% decline in July. It appears that the lion's share of the JPY100k emergency payments has been distributed. Household spending was off 6.9% from a year ago, better than the 7.6% contraction in July, but economists had forecast a 6.7% decline. The data is consistent with a modest recovery in Japan and yesterday's BOJ report showing eight of nine regions improving....