Even When She Speaks Softly, She's Yellen

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Overview: The animal spirits are on the march today.  Equities are mostly higher, peripheral European bonds are firm, and the dollar is mostly softer. After posting the first back-to-back decline this year, the MSCI Asia Pacific Index bounced back today, led by a 2.7% gain in Hong Kong (20-month high) and a 2.6% rise in South Korea's Kospi.  The Nikkei and Taiwan's Stock Exchange rose by more than 1%.  Europe's Dow Jones Stoxx 600 eked out a small gain yesterday and is a little higher today. 

The S&P 500 fell in the last two sessions for a loss of a little more than 1% and is trading about 0.6% better now.  The US 10-year is firm at 1.11%, while European bonds are little changed, and the periphery is doing better than the core.  Of note, France's 50-year bond sale was greeted with a record reception. The dollar is lower against all the major currencies, but the yen.  Most emerging market currencies are firmer as well. We see the dollar's pullback as part of the larger correction that began almost two weeks ago..  Gold recovered smartly from yesterday's test on $1800 to return to the 200-day moving average (~$1845).  February WTI reversed lower ahead of the long holiday weekend and made a marginal new low today (~$51.75) before recovering nearly a dollar.


Asia Pacific

According to the recent government data, China's rare earth exports fell by more than a quarter to what Reuters estimates are the lowest in five years.  China attributed it to weaker global demand, but there is something else going on.  Yesterday, China indicated that a new mechanism will be created to decide, coordinate, and regulate the rare earth supply chain (including mining, processes, and exporting).  Rather than exporting rare earths, China's industrial policy aims to export products containing rare earths.  Move up the value-added chain. The big push now apparently is for batteries for electric vehicles.  The PRC has become a net importer of rare earths that it processes. Its imports often come from mines it owns outright or has an important stake.  For example, the Democratic Republic of Congo is responsible for 60% of the world's cobalt. There are 12 mines, and reports suggest China has a stake in each, and more than 85% of the cobalt exports are headed to China.  In 2018, China provided around 80% of US rare earths, and at least one mine in the US sends the material to China to be processed.  

For the past several sessions, the dollar has forged a base in the JPY103.50-JPY103.60 area and is probing the JPY104.00 level.  The high from January 14 was about JPY104.20, and there is an option for roughly $360 mln at JPY104.35 that expires later today, just shy of last week's high near JPY104.40.  The Australian dollar closed below its 20-day moving average yesterday (~$0.7100) for the first time in a little more than two months.  It rebounded earlier today to $0.7725.  The session high may not be in place, and we suspect there is potential toward $0.7740.  The dollar's reference rate was set at CNY6.4883, practically spot-on median expectations in the Bloomberg survey of bank models.  The dollar's four-day advance was snapped today. It has risen from almost CNY6.45 and stalled in front of CNY6.50.   Faced with an increase in interbank borrowing costs for the ninth consecutive session, the PBOC injected CNY75 bln in seven-day cash via repo agreements.  It is the first injection after draining for the past six sessions, and it was the largest supply of funds this month.  Some liquidity appears to be going into equities, and Chinese traders reportedly bought a record $3.4 bln of HK shares today.

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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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