E No More Snow

The US got hit with snow this weekend and markets got hit with more US/China trade hopes. Both are a nuisance for the bigger picture as we all know that there are just 17 days until Spring and maybe even less before Trump/Xi meet and sign something. Trading risk on the basis of a trade deal or acting like the present deluge of wet slush will not matter to traffic is foolhardy. Snow like trade hides a larger issue of policy. The most interesting comments last night came from BOJ Kuroda as he was pressed on the negative effects of negative-interest rates, QE and yield curve targeting. Better to pay attention to low volatility and the search for yield as drivers ahead. Note that JPY trades at 4 ½ year lows for option volatility and Greek bonds are back to 2006 highs. The friction in this comes from the USD, which continues to rally despite the wishes of the US President. There are some other headlines to consider for the risk-on continuation today: 

1) China plans to cut its VAT rate by 3% according to BloombergThis would be a $90bn relief to manufacturers and maybe announced after the annual National People’s Congress. Many expect a more proactive fiscal program with budget deficit rising to 2.8% of GDP from 2.6% in 2018 and special bond quota set at CNY2.15trn from CNY1.35trn in 2018. In contrast, the spending on the military was up 8.1% in 2018 but only 1.3% of GDP. The 2019 plans will be watched closely for a similar increase – potentially to 2% of GDP. 

2) Irish Border deal still key for UK May’s Brexit. The DUP wants “treaty-level change” before it supports her plan. The UK communities secretary noted negotiations are at a critical stage and that the backstop plan seeks legally binding changes. Notable that UK construction PMI fell for the first time in 11 months today. 

3) Korea Manufacturing PMI sinks to June 2015 lows. This follows a rough US/North Korea summit but more likely reflects the hit of the 25bps rate hike from the BOK in November adding to international woes over trade. 

For the day, the market is bid for equities regardless of FX or rates. This puts the EUR/USD move as the most interesting one to watch given its back towards the lower end of its ranges and the ECB meeting later this week.

 Question for the Day: If the world is so uncertain why is volatility so cheap? Tight real ranges in bonds and FX and bid equities make options cheap everywhere. FX is a case study - JPY 3M volatility trades at 4 ½ lows. The USD/JPY is at 10-week highs near 112. This contrasts with USD/CNY, which traded back to 6.6880 today near the 8-week lows of 6.67 but reversed with EUR in Europe. The USD index is up 0.1% on the day at 96.60 and holding its ranges despite the weekend Trump speech hitting Powell and the stronger USD.  Markets are sanguine and the JPY is the one currency that captures the correlation of risk-on in equities and USD bid today. Volatility in the JPY is not going to matter unless we see 105 or 115 break.

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