From Marc to Market:
Overview: The spreading virus, the disappointing Chinese data, and the news that the Taliban have captured Kabul has dampened risk appetites. Equities have moved lower. Nearly all the major markets in the Asia Pacific region fell, but India, perhaps encouraged by a large infrastructure initiative unveiling yesterday. Note that South Korea's markets were closed, and the Kospi will have a seven-day losing streak in tow when it reopens tomorrow. Taiwan's Taiex fell for the eighth consecutive session today. Europe's Dow Jones Stoxx 600 is snapping a 10-day advance, while US futures indices are sporting small losses. US bonds rallied after the shockingly poor consumer confidence reported before the weekend, and this helped ease Asia Pacific yields. European yields have firmed after a soft start, while the US 10-year yield that peaked near 1.38% last week is nearly flat, around 1.27% today near midday in Europe. The dollar is the fulcrum today, with the growth/risk-sensitive dollar bloc currencies and Scandis trading heavily and the funding/safe-haven currencies (Swiss franc and Japanese yen) firmer. Emerging market currencies are mixed, leaving the JP Morgan Emerging Market Currency Index slightly higher before Latam opens. Gold edged a little higher initially to almost $1783. Although it has not sustained its early momentum, it looks like it has not given up on a retest of the $1800 area. Oil has slipped lower, but September WTI bounced off the $66.80 in Europe to test $68. Key support is at $65. Copper gained 1% last week but has given it all back plus more today with a 1.6% loss through the European morning.
Asia Pacific
An unexpected pick-up in consumption helped lift the Japanese economy by 0.3% in Q2. Consumption was expected to have been flat but instead rose by 0.8%. As a result, the Q1 decline was revised to -1.0% from -1.5%. Strength, as expected, came from business spending. It rose by 1.7% on the quarter, better than expected, though the Q1 contraction was widened to -1.3% from -1.2%. Inventory liquidation shaved 0.2% off Q2 GDP, a bit more than expected after it contributed 0.4 % to Q1 GDP. Although exports rose, imports rose faster, and the net export function shaved 0.3% off GDP, more than the 0.2% compression in Q1. Separately, revision to June industrial output figures (6.5%, month-over-month rather than 6.2% initially reported) suggests some momentum as the quarter ended. Lastly, we note that the GDP deflator was -0.7% after -0.2% in Q1. It is the largest drop since Q1 13.
With the Olympics over, Japan's Prime Minister Suga's attention turns to politics as if it ever left. His term as the head of the LDP ends next month. For all practical purposes, Japan remains a one-party state, with the LDP dominating. There are other parties, but rarely have they acquired power. Suga is not very popular. A poll by Asashi last week showed his support may have fallen below 30%, the perceived threshold of winning the next election. Yet, the LDP rules favor the status quo and require any challenger to Suga to get the backing of 20 other members. The LDP leadership is trying to discourage other potential candidates. Yesterday, Suga avoided the controversial Yasukuni Shrine (but did send a religious offering) and marked the end of WWII with a somber address. He followed the new precedent of his predecessor Abe in not apologizing for its aggression. Japanese prime ministers issued apologies for a couple of decades, but still not to the satisfaction of South Korea and China. We have noted that Japan has recently seemingly elevated its commitment to defend Taiwan should it be attacked by China. Besides providing the latest excuse for the aerial harassment of Taiwan, given Beijing's modus operandi, some "punishment" of Japan seems likely.
China's July data disappointed, and the resurging virus warns of further weakness this month, which has seen a large port shut and regulatory pressures weighing on steel output. Retail sales, industrial production, investment in both fixed assets and property slowed. The "surveyed jobless rate" unexpectedly rose to 5.1% from 5.0%. Speculation of additional easing by the PBOC was already running high last week, and today's data will encourage it more. Meanwhile, there is much interest in China's National People's Congress session. It is expected to force the anti-sanctions law on Hong Kong. The enforcement could further the angst of foreign companies, especially banks, operating in HK....
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