Escalating Tensions, Calm Markets

 

Overview: The US Secretary of State's announcement that the autonomy of Hong Kong could no longer be affirmed did not derail the rally in US equities. However, the threat of an executive order against social media companies may be discouraging follow-through buying, leaving US equities little changed ahead of the open. In contrast, Asia Pacific and European equities are mostly higher. In the East, Hong Kong shares were heavy, and South Korea and Taiwan equities softened. However, the Nikkei rallied more than 2% (outstripping the Topix, whose ETFs the BOJ buys). Australia and India's stocks also rallied. Europe's Dow Jones Stoxx 600 edged higher to new highs since March 9. It has made higher highs each session this week. Benchmark 10-year yields are mostly 1-2 bp lower, leaving the US 10-year around 68 bp. The dollar is stronger against nearly the majors, with the Norwegian krone and the Canadian and Australian dollars bearing the brunt. Among emerging market currencies, the South Korean won, where stocks sold off despite the central bank halving the seven-day repo rate to 25 bp, is among the heaviest, alongside the Turkish lira. The Chinese yuan's roughly 0.15% uptick makes it among the strongest currencies today. Gold extended its rebound after slipping to a two-and-a-half-week low yesterday near $1695 to trade around $1720. Oil prices are trading lower following the unexpected rise in US inventory and signals from Russia that it may balk at proposals to extend OPEC+ sharpest output cuts.   

Asia Pacific

The PBOC set the dollar's reference rate at CNY7.1277, which was a bit weaker than the CNY7.1322, the median of several bank models. The market does not seem to recognize the fix as a strong protest against the yuan's weakness, and the dollar remained above CNY7.15. While the dollar traded within yesterday's range against the offshore yuan, it remained firmer, and in late European morning turnover, the dollar was near CNH7.18 compared with CNH7.1660 late yesterday. In an interview on CNBC-Asia before the mainland open today, I suggested that while Chinese intentions are not clear, it is difficult to see how there can be de-escalation in the near-term, especially given the US political cycle. This may weigh on the yuan, and trying to provide some sense of the magnitude, I suggested the dollar could rise toward CNY7.40 in the period ahead. 

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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