EC Animal Spirits Remain Animated

Overview: The prospects that the US-China deal could include some rolling back of existing US tariffs helped underpin risk appetites. After new record highs in the US S&P 500 and Nasdaq, Asia Pacific markets marched higher, and the MSCI Asia Pacific reached its highest level since August 2018. A small rate cut by China and catch-up by Tokyo, which was on holiday on Monday, helped extended the regional rally for the 14th session in the past 17. India, on the other hand, was an exception, and its minor loss snapped a seven-day advance. Europe's Dow Jones Stoxx 600 is little changed but made a marginal new three-year high. US shares are trading with a firmer bias in the European morning. Bond yields continue to back up, with most 2-5 bp higher. Of note, at minus 32 bp, the 10-year German Bund yield is at its highest level in more than three months, and the Italian benchmark is above 1%. China is the main exception. The 10-year bond yield eased five basis points, which reflects the entire magnitude of the 1-year rate cut today. In the foreign exchange market, the major currencies that tend to do better in risk-on environments, like the dollar-bloc and Scandis are leading the way higher today, while the so-called safe havens, such as the yen and Swiss franc are under modest pressure.  

Asia Pacific

China's Caixin services PMI was slipped to 51.1 from 51.3, a new eight-month low. The composite edged up to 52.0 from 51.9 due to the unexpected increase in the manufacturing PMI previously report. The PBOC announced a five basis point cut in 1-year MLF to 3.25%. It is the first cut in this facility in three years. Separately, despite setting the dollar's reference rate a little higher than the models suggested, the upside pressure on the currency remains. The dollar fell through CNY7.0 for the first time since early August.  

The Reserve Bank of Australia left rates on hold (cash rate at 75 bp) as widely expected. The RBA confirmed what the market already knew: rates would remain low for an extended period of time. It did underscore the importance of consumer spending, where labor income is the main fuel. Many still look for the RBA to cut rates next year.  

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Read more by Marc on his site Marc to Market.

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Bill Myers 1 year ago Member's comment

Great read.