EC Markets Unsettled To Start The Week

Overview: The global capital markets are uneasy as the risks that have dominated investors' concerns--trade and Brexit--remain front and center today. Expectations are low that this week's talks between the US and China will lead to a breakthrough or will be sufficient to postpone further the next round of tariff increases set for next week. The UK government has indicated it will challenge Parliament's effort to block a no-deal exit to the Supreme Court. Equities in the Asia Pacific mostly higher, except for Japan and Indonesia. China and Hong Kong were closed. European shares initially advanced but by late morning were little changed, while US shares have a clear weaker bias, and the S&P 500 is trading nearly 0.5% lower. Bond yields are 1-2 bp softer, leaving the US 10-year a little above 1.50% and the 10-year German Bund around minus 60 bp. The risk-off mood is evident in the foreign exchange market, where the yen and Swiss franc are outperforming, and the dollar-bloc, Scandis, and sterling are underperforming. Emerging market currencies, led by the large accessible currencies, including the Turkish lira, South African rand, are under pressure. Gold and oil are little changed.  

Asia Pacific

Beijing has moved to lower expectations for the talks that will be held in Washington toward the end of the week. Vice-Premier He, who leads the Chinese delegation, has reportedly indicated that it will not agree to reform China's industrial policy or state subsidies, which appear to have grown or broadened under President Xi. In itself, it does not seem new but underscores the challenge to a broad agreement. One cannot count on any goodwill from either side. Only self-interest can be relied upon. Suffering from a protein shortage, China needs US meat and soy. With a nearly insatiable appetite for energy, it is willing to buy US  crude and some products. It can make some concessions on intellectual property rights with little cost as it has denied wholesale violations and state-sponsored theft from the get-go. It is not clear what China wants in exchange, besides a rollback of US tariffs. China's trade surplus has risen during the trade conflict with the US, while the US trade deficit has grown more than 10%. 

China's reserves slipped in September by $15 bln to $3.092 trillion. It does not reflect a material change. Instead, it likely is a result of valuation adjustments. Other reserve currencies, like the euro and yen, weakened against the dollar (-0.75% and -1.6%, respectively). Reserves are invested in bonds and bonds sold off in September. The US 10-year Treasury yield rose 17 bp, and the Germany Bund yield rose 13 bp.

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Read more by Marc on his site Marc to Market.

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Craig Richards 2 weeks ago Member's comment

There's always uncertainty...