Germany is desperate to keep Britain in the EU; PBOC tightens overnight rates massively to defend the RMB, and why you should not touch southeast Asian markets.

EU STATE OF THE UNION

Speaking at his annual state of the European Union address, EU President Jean-Claude Juncker says the EU is not at risk from Brexit. However, he warned the UK that "there can be no a la carte access to the single market." He said Brexit negotiations needed to start quickly and the UK could only have unlimited access to the single market if it accepted free movement of people and goods. Meanwhile, Sir James Dyson, the head of the engineering firm that bears his name, says that EU exit will liberate the UK economy.

In other parts of the state of the union speech Mr. Juncker called for a European military force to foster greater defence cooperation. He also championed the “invisible benefits” of the single currency, claiming that the European Central Bank’s low-interest rate policy had saved Eurozone members €50bn in interest payments.

1.  Brexit. 

 a.  The Germans are desperate to keep Britain “in”, regardless of conditionality. This suggests that the British will continue getting access to the EU market, but at a much cheaper cost to them by way of payments to the EU.

b.  Brexit worries were totally overblown. Little real effect on the EU’s economy.

2.  Coordinated defence force.

a.  Juncker should be worrying more about fortifying NATO: the Russian bear merely is hibernating, awaiting his chance to strike a European welfare museum mired in regulations that strangle growth.

b.  Quite why he wants to waste money on creating yet another pet project, aka justification for his highly-paid job, beats me: fortify NATO, instead!

3.  The Euro.

a.  He clearly has no grasp of the Euro, citing some concocted “savings” that have been made by way of lower interest rates….

b.  Typically for this blinkered bureaucrat, he misses the bigger picture: the Euro is NOT treating everyone correctly. The Greeks should have a depreciating Drachma and the Germans an appreciating Mark.

 No co-ordinated fiscal policy means no successful monetary policy: we see Draghi’s drumbeat going on to try to stimulate growth

CHINA

The cost of borrowing yuan overnight in Hong Kong has surged to a 7-month high. The overnight yuan Hong Kong interbank offered rate, or Hibor, which was 2.84% just last week, jumped to 8.16%, its highest level since February. The one-week borrowing rate also hit its highest level since January. Traders said yuan buying by Chinese state-owned banks on behalf of the People’s Bank of China, creating a shortage of yuan in HK, was behind the surge. The PBOC said “the stated information is not true.”

Other traders said that rising yuan interest rates were negative for Chinese A-shares, which have been one of the world’s worst performing markets so far this year.

1.  Currency squeeze. Sounds like a good old fashioned currency squeeze to keep the RMB from falling too much and thus irking the prickly, uninformed American population at large.

2.  Economic Time®. Of course, rising rates hurt share prices, so it is of little surprise that A-shares suffered. But worse is that China’s Economic Time® has been sickly for some time, and that is why authorities are seeking to improve it. That bodes better for A and thus H shares.

3.  Hong Kong. It also bodes better for HK shares: we are the water skier off the back of the Chinese speed boat, autonomy gibberish of Nathan Law’s notwithstanding…

SOUTHEAST ASIAN MARKETS

Global stocks stabilised on Wednesday following a sharp sell-off earlier in the week. However, some Asian markets which have been beneficiaries of heavy capital inflows over the summer have now given up some of their gains .The MSCI Southeast Asian index has fallen every day, bar three, over the last 4 weeks. Stocks in Indonesia are down over 4% since the middle of last week. In Thailand, equities are down over 6% this month.

Government bonds have sold off aggressively. Japan’s 30-year bond has lost 12% since its early-July peak. Yields on Australian government debt have hit 2-month highs.

Emerging market currencies have also fallen with the Malaysian ringgit hitting an 11-week low.

1.  MSCI Southeast Asian (SEA)  index. View SEA’s demise in the context of the overall gloom pervading global Emerging Markets!  Thailand’s market woes cannot be divorced from her political ones…

a.  La Nina. Watch SEA agricultural shares rebound once La Nina hits around Christmas!

2.  Government bonds have been sold off the back of valuation concerns AND possibly a subtle shift in monetary policy:

a.  Shift in Economic Time®?  IF the GOVERNMENTS have been selling bonds, they “give” bonds and “get” money.Assuming that they withdraw these funds from the system (è”sterilisation”), then there is less of an excess supply of money around.

                                         i.    è All of which suggests that Central Banks may be shifting SEA’s Economic Clock® away from such an excess supply of money to an excess demand for money. That would be bad for SEA markets in that the real Economic Time in SEA- characterised by an excess supply of goods – is not propitious for profitability. 

3.  SEA currencies. Their demise is the logical conclusion to the selloff in EM stocks in general: people wanted back to the G-3 currency havens.

a.  Remember that the private sector has been selling currencies whilst the public sector has been tightening by selling bonds and thus withdrawing money from the system.

b.  Weaker exchange rates suggest imported inflation, which means that Central Banks will be tightening even more in SEA: don’t touch these markets!