Capital Markets: Quiet

 From Marc to Market:

Biden-Xi "Summit" Leaves Markets Unmolested, While Bailey Continues to Blame Investors for Misunderstanding Him

Overview: The much-heralded Biden-Xi meeting left little impression on the capital markets. Equities in the region were mixed, and China's main markets fell, alongside Australia, South Korea, and India. European equities continue their upward market, with the Stoxx 600 gaining for a fifth consecutive session. US futures are softer. The bond market is quiet, with the US 10-year yield softer slightly below 1.60%. European benchmark yields are 1-2 bp lower and the periphery is outperforming the core. Encouraged by a strong employment report, sterling is the strongest of the majors, gaining about a third of one percent. Most major currencies are trading with a heavier bias, and the euro is pinned near 19-month lows. The dollar is gaining against most emerging market currencies. The Turkish lira is off more than 1.5% as the market prices in a 100 bp cut on Thursday. Hungary's disappointing Q3 GDP (0.7% vs. 1.0% forecasts) may limit the aggressiveness of the central bank today. A 30 bp hike after two 15 bp moves was expected. Gold is extending its rally and has taken out the downtrend drawn off the January and June highs (found ~$1872 today). The next target is around $1900. Oil is firm, and the January WTI contract is straddling the $80-level. European natural gas is rising as new supplies are low, and there is a further delay in the certification process of the Nord Stream 2 pipeline. Yesterday's 9% advance has been extended by another 8% today. Iron ore has steadied, while copper is struggling after falling 1% yesterday.

Asia Pacific
There is not much to say about the Xi-Biden "virtual summit." The call reportedly lasted three hours. The one concrete thing to emerge is that US business executives will have an easier/quicker time entering China. Separately, Hong Kong's Chief Executive used her regular briefing to justify the decision to allow JP Morgan's CEO to skip the city's 21-day hotel quarantine because of the size of the bank's operations. This speaks to the difference between the rule of law and the rule by law that some observers make. Returning to regular meetings between the senior officials from both countries seems to be the logical way forward, but both sides appear to draw domestic benefits from demonizing the other. In the US, the Biden administration uses the threat of China to justify building a 21st-century infrastructure. At the same time, Beijing plays the nationalistic chords to strengthen the loyalty to the Communist Party even as its delivery of improved living standards slows or stalls.

The minutes from the recent Reserve Bank of Australia meeting contained no surprises. The exit from the yield curve control policy seems clumsy, but the RBA seems adamant that a rate hike next year is unwarranted. The market remains convinced officials are wrong. The swaps market has about 75 bp discounted over the next 12 months, with the hikes and risks increasing beginning in late H1 22. In a speech after the minutes were released, Governor Lowe referred to a hike in 2024 as "still plausible," but this seemed like a slight climb down from it being the "central case." On the other hand, elevated price pressures and border controls have driven the unemployment rate to 3.4%, its lowest level since 2008, and lifted the participating rate to match record highs. The Reserve Bank of New Zealand will likely hike rates again next week. The swaps market is pricing in nearly 50 bp of tightening by the RBNZ over the next three months and almost 140 bp in the following nine months. It is difficult to see a more hawkish outlook....

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