Overview: Yesterday’s frenzy has burnt itself out for the moment. Equities began recovering in Asia after early losses. China, including Hong Kong, Singapore, and Thailand closed higher and European markets are recouping some of yesterday’s decline. The Dow Jones Stoxx is trying to snap a five-day decline and is up a little more than 0.5% near midday. Core bond markets have lost the safe haven bid, and yields are a couple basis points higher. Peripheral European bonds have been lifted not just by the better risk appetite today but also by a report (La Stampa) that suggests League leader and Deputy Prime Minister Salvini may be open to revision to the government’s spending proposals. Italian bonds and stocks are outperforming today, though the ongoing retail auction is struggling to raise a quarter the funds that it did back in May. The calmer capital markets are seeing yesterday’s dollar gains pared. It is heavier against the major currencies, save the yen, and most emerging market currencies. Oil prices are also recovering after yesterday’s dramatic fall.
Asia Pacific
US Trade Representative Lighthizer issued a report yesterday, less than two weeks before Presidents Trump and Xi are to meet at the sidelines of the G20 meeting, accusing China of not altering its practices and continuing to steal American intellectual property rights. Following Vice President Pence’s rhetoric last weekend, the report makes it difficult to see how a deal can be struck between the US and China. This means that the most likely scenario remains for the US to begin the process that could lead to another round of tariffs on around $265 bln of Chinese goods and no deviation from the plan to increase the 10% tariff on $200 bln of goods to 25% at the start of next year.
The Australian dollar tested support near $0.7200 (also the 20-day moving average) and bounced higher. It and the New Zealand dollar are again leading the other currencies higher. A move above $0.7250 would help repair the technical damage inflicted yesterday. The Chinese yuan traded on both sides of yesterday’s range and closed slightly stronger to break a two-day decline. The PBOC appears not to be so accommodative its money market operations, and this may be helping to stabilize the yuan. The dollar recovered against the yen yesterday and bounced off the JPY112.30 area, the lowest level seen in nearly a month and closed near session highs (~JPY112.85). It is knocking on JPY113.00 where a $1.1 bln option is struck that expires today. There is another $500 mln option at JPY112.75 and $1.74 bln at JPY112.50-JPY112.55 that are rolling off today. Gains back above the 20-day moving average (~JPY113.15) would lift the tone.
