Markets Are Eerily Calm

Overview: There is an eerie calm over in the capital market through the European morning today despite some ostensibly worrisome developments. While many, like ourselves, expect UK Prime Minister May to survive a vote of confidence, it hardly clarifies the outlook. The US government shutdown continues unabated, except that some furloughed workers are being ordered back without pay, while the economic impact is seen increasing, taking a little more than 0.1% off GDP a week.  US Trade Representative Lighthizer saw little progress in recent talks with China, according to a Senator he spoke with, though was pleased with the soy purchases. The US and Europe are staking out positions for their trade talks, and a fight over agriculture has already been signaled. The dollar is little changed, mostly inside yesterday's ranges. Global equities are narrowly mixed. Peripheral European benchmark 10-year yields are softer, led by Italy after a successful syndicated bond sale yesterday. Core bond yields are slightly firmer.  

Asia Pacific

Chinese officials have been rolling out stimulative measures to arrest the economic slowdown, which seems partly a function of its own internal dynamics, but also a function of foreign demand. Some of the reduction in foreign demand is tied to the trade tensions with the US and some likely reflect weaker growth abroad. Today's record injection (CNY560 bln) is a record open market operation but is not part of the stimulus effort but appears motivated by technical considerations, such as today's tax date and preparations for the upcoming Lunar New Year holiday. Pressures have been building over the past week as the seven-day repo rate has risen by nearly 45 bp over the past week.

Mostly due to natural disasters, the Japanese economy contracted in Q3. It bounced back strongly in October, but the global headwinds seem to have cramped the recovery in November. Earlier today, Japan reported core machinery orders were flat in November. Economists had expected a small increase after a dramatic 7.6% rise in October. The preliminary estimate for the overall machine tool orders for December had been reported previously to have fallen 18.3% year-over-year after a 17.0% fall in November. The weak tertiary industry index slippage of 0.3% in November seems to reflect some payback after the 2.2% increase in October (initially 1.9%).Japan will report December CPI before the weekend, and the effect of decline in oil prices will likely be seen. The BOJ meets next week, and there is some speculation that it will shave its inflation forecasts due to the decline in oil (and rise in the yen?).

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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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