From Marc to Market:
Overview: The S&P 500 and NASDAQ were unable to sustain the gap higher opening to new record levels and reversed lower and fell to new three-lows. The settlements were just inside Tuesday ranges, though the Dow Industrials set a record close. Yet, there was spillover to equity trading in the Asia Pacific region and Europe today. Most of the large Asia Pacific markets, including Japan, China, South Korea, and Taiwan, were closed. Europe's Dow Jones Stoxx 600 is up about 0.35% in late morning turnover, though momentum is absent. US shares are trading with a firmer bias. After seeing strong demand at the 10-year note auction yesterday, the US benchmark is yielding about 1.14% today. European yields are off 1-3 bp, with the Italian yield at a new record low below 50 bp. The dollar is narrowly mixed against the major currencies. The dollar bloc and the euro are slightly higher, while the Scandis, yen, and sterling are somewhat heavy. Emerging market currencies are mostly higher, and the JP Morgan Emerging Market Currency Index is extending its advance for a fifth consecutive session. On the other hand, oil is threatening to snap an eight-day rally, leaving the March WTI contract in a narrow range above $58. After being rebuffed near the 200-day moving average yesterday (~$1855.5), gold is trading in about a $5-range on either side of $1840.
Asia Pacific
If the US-China relationship is the most important in the world, as has often been claimed, one would not know it from the communication over the past few weeks. President Biden has indicated that there "has not been an occasion" to talk to China's leader Xi. He added that there "was no reason not to." The highest communication so far has been a telephone call between Secretary of State Blinken and the top Chinese diplomat Yang Jiechi at the end of last week. It was like two alpha dogs marking their territory and jousting over democracy and human rights. Biden found his occasion to talk to Xi for China's New Year holiday, and not coincidentally, the call followed the first formal meeting between Biden and Taiwan's de facto ambassador to the US (who, as we have noted, was invited to the inauguration for the first time since the one-China policy was adopted more than 40-years ago).
Biden and Xi apparently are engaging in subtle diplomatic messaging, like how partners in a bridge game may communicate. Biden promises a different kind of relationship with Beijing than the Trump administration, and of course, he has to say that. Some tactics may be different, perhaps it will be more multilateral, but it is not like a coalition of the willing just waiting for US leadership. Europe's willingness to block Huawei might have been somewhat less enthusiastic if it did not have homegrown alternatives. As the EU demonstrates with Russia, it can maintain trade ties while being critical of human rights violations. It also imposes sanctions to express its disapproval. Despite reports in the popular press about shifting supply chains out of China, German companies appear more likely to expand there than leave, according to recent surveys.
Perhaps, President Biden himself may have let the proverbial cat out of the bag about the lack of a call with Xi until now. Despite Biden being the most experienced President since Nixon, who was also the vice president, and his claim that he may have spent more time with Xi than any foreign leader, Biden has yet to formulate an operational policy as opposed to declaratory policy (rhetoric). Yesterday, Biden announced a new Pentagon task force to review US defense policy toward China. The mandate looks broad and will extend well beyond military strategy to include technology and US alliances and partnerships in Asia. Biden has also ordered another policy review of Trump's tariffs and efforts to block or force the sale of other Chinese companies (e.g., Tiktock and WeChat). However, efforts to force the sale of TikTok have reportedly slowed. We had argued that the US's bipartisan attitude toward Beijing changed when Xi suspended term limits and, in word and deed, pulled away from many of the liberalization efforts that had been evolving since the late 1970s. Until proven otherwise, the take away is that investors and businesses should expect greater continuity in the US stance toward China....
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