Fragile Calm Threatens To Break Out

Overview: Indications that US and Chinese trade talks are proceeding, coupled with a dramatic reversal in the S&P 500 yesterday is helping stabilize the capital markets today. Asian equities were mixed, but the Greater China (China, Hong Kong, and Taiwan markets) alongside India and Australia posted modest gains. European bourses have followed suit with the Dow Jones Stoxx 600 advancing around 0.8% in late morning turnover on the Continent.  Bond yields are mostly higher, with President Macron's reversal weighing on French bonds. Although the Indian rupee is rivaling the Turkish lira as the weakest of the emerging market currencies (losing about 0.8%) following the resignation of the governor of the central bank, Indian bonds and stocks are among the best performers today. More broadly, yesterday's US dollar gains are being pared, and the greenback has largely been confined to yesterday's range, though it has made marginal new highs against the Canadian dollar. 

Asia Pacific

The Governor of the Reserve Bank of India resigned yesterday ostensibly in protest for the erosion of his independence. The Modi government wants to take its reserves and soften its regulatory stance. The rupee rallied in November snapping a nine-month streak without a gain. The appreciation of the rupee in November (~5.4%) took place as 10-year yields fell by 40 bp, matching the October decline which had been cited as a drag on the currency. The countertrend move looked vulnerable at the end of last week, and Patel's resignation seemed to provide the spark to the kindling. While asset prices recouped the initial losses today, the political and policy challenges are set to increase. The early state election results suggest Modi's BJP losing two states to the Congress Party. National elections are due in May 2019.   

Central bank independence needs to be thought through more. Independent from what? In whose name in the power exercised? Since the Great Financial Crisis when many believe that monetary and fiscal policy became blurred, the seemingly resolved issue of central bank independence came under closer scrutiny while the rise of non-liberal governments has seen apparent encroachments of central bank independence. The Turkish lira was punished earlier this year, in part due to the seeming politicization of monetary policy. Although US President Trump has been more explicitly critical of the Federal Reserve than any president in half a century, the institutional strength leaves many believing the independence of the Fed is untarnished. Nevertheless, the market expects the FOMC to be less aggressive now than before Trump's criticism, which at one point warned that the Fed was a bigger threat than China.  

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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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