From Marc to Market:
Overview: The markets remain unsettled. The surge in energy prices, the fears emanating from China's property market, and the unresolved US fiscal drama weigh on sentiment. Japan stocks continue to unwind earlier gains. The Nikkei fell for the seventh consecutive session. South Korea and New Zealand markets lost more than 1%. Hong Kong, Taiwan, and India posted modest gains. Europe's Dow Jones Stoxx 600 and US index futures are posting slight gains. The US 10-year yield is firm near 1.49%, while European yields are mostly 1-2 bp lower. The dollar is firm against most major and emerging market currencies. Sterling is holding its own, while the yen is on the defensive. Central European currencies are underperforming today, led by the Hungarian forint and Polish zloty. The JP Morgan EM FX index is flat after easing by 0.4% yesterday. Oil prices are consolidating in narrow ranges by yesterday's high after OPEC+ stuck to its plans to boost output by 400k barrels a day next month. Gold was turned back from $1770 to test $1755. Yesterday's low was a little below $1748. Among industrial metals, iron ore and copper are softer. The CRB Index closed at new highs yesterday, the ninth gain in the past 10 sessions.
Asia Pacific
Higher energy prices helped lift Tokyo's CPI above zero for the first time since July 2020. Energy and higher hotel prices offset the decline in mobile phone services. The price of accommodations in Toyko rose 43% year-over-year. Cellular phone charts fell by 45% and took almost a full percentage point off the headline. The headline CPI rose to 0.3% from -0.4%. The core rate, which excludes fresh food, rose by 0.1% year-over-year, ironically disappointing economists who looked for a 0.2% gain (Bloomberg median). Excluding both fresh food and energy, Tokyo's CPI fell by 0.1% year-over-year, the sixth month below zero.
There were three developments to note from Australia. First, the central bank stood pat, as anticipated. It accepts that the recovery from the pandemic and lockdowns will not be smooth. With a gradual re-opening of Sydney and Melbourne, officials seem confident of stronger economic activity. Second, although the September manufacturing PMI was revised lower last week from the preliminary estimate, the service PMI was revised higher to 45.5 from 44.9 initially and 42.9 in August. The 46.0 composite reading was unchanged from the flash estimate, which is the first gain since April. Third, Australia reported a record trade surplus of A$15.07 bln in August. Coal, natural gas, and gold exports were particularly strong, and overall exports rose 4% on the month. The median forecast in Bloomberg's survey anticipated a 3% decline. Imports fell by 1%, while economists forecast a 1% gain.
Some link the escalation of China's aerial harassment of Taiwan to Taipai's application to join the Comprehensive Progressive Agreement for Trans-Pacific Partnership (CPTPP). Taiwan is a member of the Asia-Pacific Economic Cooperation, Asian Development Bank. It has been a member of the World Trade Organization for nearly two decades. Beijing could have become more sensitive amid overtures to Taipai. The size, composition, and frequency of the sorties were already escalating, and perhaps the flight patterns may have become more aggressive. Moreover, this is the week that the mainland celebrates its National Day, and shows of such power play into the nationalistic moment. Still, it is not over. Double Ten Day, October 10, is Taiwan's National Day. There could well be another bolder and more frightful display of force. What has been dubbed as "gray zone warfare" is a lower rung in the larger escalation ladder. Since Beijing is dominating this rung, one can accept it, escalate, or gain leverage someplace else. Giving Australia the technology, so it has nuclear-powered submarines in a decade, if not longer, has little impact on this now but shows one's cards needlessly....
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