Friday, December 18, 2020

Capital Markets: "Cautious Ahead of the Weekend"

 From Marc to Market:

Overview: Investors have turned cautious ahead of the weekend. The US dollar is firmer, stocks are struggling, bond yields are higher, and gold and oil are consolidating. Profit-taking was seen in Asia Pacific equities, and even New Zealand, which reported its trade deficit flipped to a surplus in November, was unable to resist the profit-taking. It and the Australian market fell by more than 1%. Still, the MSCI Asia Pacific Index extended its advance for the seventh consecutive week. European stocks are slightly higher, as it tries to extend the gains for a fifth session, during which time it has gained almost two percent. US shares are little changed. Coming into today, the Russell 2000 continues to lead the other benchmarks with around a 3.5% gain on the week. Profit-taking is seeing benchmark yields rise mostly 2-4 bp in Europe, though UK Gilts are a notable exception, with the yield 1-2 bp lower. The US 10-year is just below 0.94%. The dollar is paring this week's losses. Sterling is the heaviest of majors as UK-EU talks carry into the weekend. The JP Morgan Emerging Market Currency Index may snap a three-day rally today, but barring an unlikely dramatic move, it is closing in on its seventh consecutive weekly advance. Gold's recovery from the low near $1765 on November 30 reached almost $1900 yesterday but is stalling ahead of the weekend. It is consolidating around $1880. Crude oil is also consolidating, with the January WTI contract hovering a little above $48 a barrel. It, too, is up for the seventh week in a row.

Asia Pacific
There are two developments in Japan today to note
. First, deflationary pressures intensified. The November CPI was the weakest in a decade. The headline and core rates fell to minus 0.9%. Energy was an important drag (0.6%) as electricity prices fell by 7.3%. Excluding fresh food and energy, the CPI was minus 0.3%. Note that the government suspended its Go-To-Travel initiative that offered discounts for domestic tourism, which had weighed on prices, due to the pick-up of the virus. Second, and despite the deflation reading, the Bank of Japan left policy unchanged while extended its emergency lending program from March 2021 until September. The facility offers loans for zero interest rates with no collateral. The BOJ said it will review its easing policy to make it more sustainable. We do not see the BOJ's purchases of $6 bln from the MOF by the end of March as being untoward. It seems prudent to have more dollars to lend to its banks if needed, as was the case in April and May when it depended on swap lines with the Fed. It chose to buy the dollars from the MOF, which manages the more than $1 trillion in reserves. If the BOJ had gone to the market, it would have been seen as an intervention.

The US has signaled it will blacklist one of the most important Chinese semiconductor companies, SMIC. Its affiliates may also be added. Reports suggest that the Trump administration is considering adding as many as another 80 companies to its proscribed list. Beijing will respond to what it sees as a foreign attack with greater state-aid and commitment to developing and producing its own third-generation chips. Meanwhile, China and the EU have reportedly agreed in principle to a bilateral investment treaty that will complement last year's trade agreement....