Monday, October 26, 2020

Capital Markets: "Troubling Start of the Important Week"

 From Marc to Market:

Overview: The surging virus ravaging large parts of Europe and the United States is fanning concerns over the economic implications as new social restrictions and curfews are announced in several countries. US additional fiscal support remains elusive as aid for states and local governments remains a bone of contention. Equities are under pressure. Most bourses in the Asia Pacific region fell, and a good part of last week's gains have been given back. In Europe, the Dow Jones Stoxx 600 is off a little over 1% in late morning turnover after falling for the past two weeks. US shares are lower, too, and the S&P is around 0.7% lower. Declining equities and growth concerns are pushing yields lower. The US 10-year benchmark yield is off about three basis points to 0.81%. European peripheral yields are off 2-6 basis points, while the core is off 1-2 bp. The dollar is bid against most currencies today. Even the yen is weaker despite the risk-off mood. The decline in emerging market currencies is led by the 1% decline in the Turkish lira, against which the US dollar is at a new record high around TRY8.05. Gold continues to act as a risk asset and is struggling to maintain a foothold above $1900. Both supply and demand concerns are seen as negative for oil prices, and the December WTI contract, which tumbled 3% last week, is off another 3% today (~$38.70).

Asia Pacific
As will likely be confirmed later this week, BOJ monetary policy will not change in the near-term, though officials will likely need to extend their emergency measures at some juncture in the coming months.
Meanwhile, Prime Minister Suga is expected to signal a third supplemental budget next month, perhaps after Q3 GDP is reported (November 16). Talk is of a JPY10 trillion (~$95 bln) effort. However, there is still an estimated JPY7 trillion of undistributed funds from the earlier budget. These can be bundled into part of the new supplemental budget.

Before the weekend, the Trump administration claimed that China had met 71% of the agriculture purchases it had committed to in the Phase 1 trade deal.
Many suspect a very generous view to tout success. It includes orders and shipments, which seems reasonable to the spirit of the agreement, if not the letter. Moreover, the government's estimate apparently flattered by a multiplier to adjust for the fact that export sales account for about 80% of agriculture good exports. Separately, Bejing announced new unspecified sanctions on Boeing, Lockheed Martin, and Raytheon in retaliation for new arms sales to Taiwan.

Since the middle of last week, the dollar has not been above JPY105, but it looks poised to in North America today. That said, there is an option for almost $920 mln struck there that expires today. A little higher, in the JPY105.32-JPY105.35 band, another set of options for closer to $1 bln also expire today. Reports of the bottler Coca-Cola Amatil's sale for A $ 9.23 bln may have blunted some of the pressure on the Australian dollar today, which is trading just inside the pre-weekend range. Support at $0.7100 held. There is an option for A$670 mln there that expires today. The dollar is rising against the Chinese yuan for the third session and briefly poked above CNY6.7 for the first time in a week. The PBOC set the dollar's reference rate at CNY6.6725, roughly 1/1000 of a yuan stronger than most of the bank models anticipated.

There is some optimism over the UK-EU trade negotiations.
The Irish Prime Minister and even the EU's chief negotiator Barnier sounded upbeat. Macron recognized that French fishers will have less access to UK waters. Even if a last-minute agreement is struck, British industry and truckers still woefully unprepared. The magnitude of the disruption may be correlated with the decibel of the mutual recriminations by business and the government....