From Marc to Market:
Overview: The fact that the UK and EU negotiators are still talking is seen as a constructive development and has spurred a sharp bounce in sterling. It traded below $1.3150 before the weekend and is pushing above $1.3400 in the European morning. It is part of the larger risk-on move lifting equities and weighing on the dollar more broadly. Equities in the Asia Pacific region were mixed, but Japan, China, India, and Australia rose. The Topix hit new two-year highs. European stocks are snapping a three-day decline by rising nearly 1% so far today. US shares are also trading with a firmer bias and the S&P 500 may gap higher. Recall that the S&P ended last week with a three-day downdraft, the longest in a couple of months. Peripheral European bond yields slipped to new lows, while core yields are a little firmer. The UK10-year Gilt yield is 6 bp higher to push back above 0.23%, while the US benchmark is firm at 0.92%. The dollar is lower against all the majors, and the Norwegian joins sterling with more than a 1% rise. The Canadian dollar and yen are laggards with 0.15%-0.25% gains. Most emerging market currencies are higher, with the Turkish lira and a few East Asian currencies notable exceptions. Gold is trapped in its recent trough that extends to around $1820 and the 200-day moving average near $1810. Oil is firm, with Brent trying to solidify its hold above $50 while January WTI is firm above $47 (last week's high was around $47.75).
Asia Pacific
Japan's quarterly Tankan survey showed more improvement than expected, but the pessimism has not been shaken, and the outlook remains poor. The large manufacturer sentiment reading rose to -10 from -27, which is better than expected, but the outlook (-8) shows the pessimists outnumber the optimists. Large non-manufacturer sentiment rose to -5 from -12, and the outlook is for -6. The same pattern is repeated for smaller companies. Also disappointing was the decline in capex plans for large businesses (-1.2% vs. +1.4%). The dollar forecast was lowered to JPY106.70 from JPY107.11 and warns that Japanese companies may not be positioned for the yen strength. The dollar has averaged about JPY104.65 over the past 50 days and JPY105.20 over the past 100 sessions. Separately, Japan revised up October industrial output increase to 4.0% (month-over-month) from 3.8% initially and 3.9% in September. The tertiary industry index rose 1.0% in October, a little less than anticipated, while the September series was revised to 2.3% from 1.8%. The BOJ meets later this week and is expected to extend its emergency lending facilities.
The record trade surplus China reported last week means that efforts to contain China on trade have been unsuccessful. Yet, trade is one dimension of the multi-dimensional strategic rivalry that has some parallels with the Cold War. Capital is another dimension. China capital controls and limits on foreign investment, even if they are relaxing on the margins. However, they are part of the status quo ante. What is new are the US measures. By sanctioning a number of Chinese companies for ties to the Chinese military, it put the index providers in a difficult position. FTSE Russell and S&P Dow Jones Indices have dropped 8-10 Chinese companies cited by the US Department of Defense from their benchmarks. These steps were across the different ways investors can invest in China (mainland A-shares, H-shares in Hong Kong, GDR/ADRs. S&P Dow Jones will also be removing the respective corporate bonds from its indices before the start of the New Year. At the same time, President Trump is expected to sign the bill that has now passed both chambers that seek to de-list Chinese companies who refuse to allow US authorities to review their audits.
The impact of these measures on slowing China's integration in the global capital market is marginal at best. It may redirect investments to other Chinese companies. It could prompt Chinese companies to seek listing elsewhere, perhaps, on less transparent and less investor-friendly exchanges, and/or boost the rise of other financial centers that compete with the American exchanges. Like the tariffs imposed by President Trump, these measures are unlikely to be overturned quickly by the Biden administration. As we have noted, these post-election actions by Trump do achieve two things. First, they limit Biden's options if not wanting to appear weak. Second, they give Biden additional chits that can be used in negotiations with Beijing....
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