Thursday, October 22, 2020

Capital Markets: "Greenback Stabilizes"

From Marc to Market:

Overview: Two sets of talks have riveted attention, and both appeared to have made progress yesterday. After some words, the EC, recognizing the importance of UK sovereignty, UK Prime Minister Johnson signaled a resumption of trade talks. In the US, Pelosi and Mnuchin appear to be on the verge of a deal. The dollar is consolidating yesterday's losses. Equities are lower, and benchmark yields are little changed. Sterling, which jumped 1.8%, the most in seven months, stalled near $1.3180, is softer today, as are most of the majors, but the New Zealand and Canadian dollars are slightly firmer. Most bourses in the Asia Pacific region fell, though Hong Kong and Taiwan eked out small gains. Europe's Dow Jones Stoxx 600 is off for the fourth consecutive day and set new lows for the month. Germany, Greece, and Italy are reporting record virus cases, and Spain and France have surpassed one million cases. The S&P 500 is trading a little lower following yesterday's 0.2% decline. The US 10-year yield is a basis point or two lower and still holding above 0.80%. European bond yields edging higher. Core yields have risen by a couple of basis points over the past five sessions, while peripheral yields are 5-8 bp[ higher. Emerging market currencies are mostly lower, including the Chinese yuan. Turkey is being watched closely as the market expects the central bank to increase the one-week repo rate by 1.75%-2.0%, as it increases the funding costs for banks. Gold rose almost 1% yesterday, the most in a couple of weeks, on the back of the weaker dollar. Today is giving back about a third. WTI for December delivery slumped 4% yesterday and slipped below the $40-mark and straddled today.

Asia Pacific
The US continues to press China.
It added six more publications to the list of state-owned media that will be treated as an extension of the government (diplomatic missions) in the US. Two were named earlier this year. Meanwhile, a new $1.8 bln arm sale to Taiwan is being finalized. The media is fond of saying that China regards Taiwan as a breakaway province, but the often unspoken truth is that the US formally does too and for more than 40 years. It is part of an unorganized propaganda campaign that mentally and emotionally prepares the American psyche for sustained confrontation with China and allows for changing its position on Taiwan. Meanwhile, China appears to be retelling the Korean War to emphasize the US hostility. A new movie is coming out this week in China about how a small group of Chinese soldiers held larger US forces at bay at the end of the Korean War.

Following on the heels of its decision to reduce to zero the reserve requirement for currency forwards, Chinese officials have eased some capital outflow restrictions. Reports indicate that Beijing will lift the quota for foreign investment by Qualified Domestic Institutional Investors by $10 bln. It would appear to lift the quota to $117 bln. Like the reserve adjustment, many observers' knee-jerk reaction is that China is trying to cap the yuan's appreciation. It is also taking advantage of the strong yuan to take another step toward opening its markets carefully and deliberately. With a large current account surplus and foreign portfolio inflows, Chinese officials could face stronger upward pressure on the currency in the coming months, and softening the controls of portfolio outflows seems like an obvious move and consistent with Beijing's modus operandi.

Japanese officials have confirmed that a third supplemental budget will be delivered. It is likely to be delivered around the middle of December. Since there are reportedly several trillion yen of unspent funds from the previous extra budgets, investors will want to keep an eye for the "freshwater" figures of new funds. The Bank of Japan meets next week. While it is unlikely to take new steps, it may lower its assessment of the economy....