Setback For The Greenback

Overview: Conflicting headlines about US-China trade whipsawed the markets in Asia, but when things settled down, perhaps, like the partial deal that has been hinted, net-net little has changed. Asian equities were mixed, with the Nikkei, China's indices, and HK gaining, while most of the others slipped lower. The 0.9% gain in the S&P 500 yesterday failed to lift European stocks, and the Dow Jones Stoxx 600 is near the week's lows. US shares also are trading softer. Benchmark 10-year bond yields are edging higher, perhaps playing a little catch-up to the 5.5 bp increase in the US 10-year yields yesterday. The dollar is heavy. Among the majors, the Scandis are the strongest after firmer than expected CPI figures. The dollar is around the middle of the roughly JPY107.00-JPY107.75 range seen already today, while the euro is punched above the $1.10 level for the first time since September 25. The euro's gains have helped lift eastern and central European currencies. The Turkish lira is little changed ahead of the UN Security Council session later today. Oil is lower for the fourth session.  November crude has risen in three of the past 18 sessions and only once since September 24. Gold reached a five-day high today, rising for its third consecutive session.  

Asia Pacific

Conflicting headlines made for a volatile Asian session. At the heart of it is US-Chinese trade talks that formally start in Washington today. Talk that the Chinese delegation could leave a day earlier was reported in the South China Morning Post, and the market reacted to it even though it was out yesterday, and we cited in yesterday's note. There are reports that the US wants China's previous currency commitment (ultimately more transparent practices) in a possible interim agreement. This is low hanging fruit for China as it mostly seems to reiterate G20 statements. The yuan is off about 3.5% year-to-date and is, in fact, broadly stable. Consider that all the major currencies but the Canadian dollar, Japanese yen, and Swiss franc are down more that it. Metrics and enforcement of such an agreement are also vague.  

An interim agreement is mostly about appearances and not even returning to status quo ante.  China would buy US grains and meats, which given the shortage in China and the surge in food inflation, is necessary. The US would ostensibly suspend next week's tariff increase on around $250 of Chinese imports from 25% to 30%. We argue that such an increase is immaterial. Once a good is taxed sufficiently to make it uncompetitive, it does not matter so much if it becomes even less competitive. The NY Times reports that the US is ready to offer some licenses for US companies to sell non-sensitive products and services to Huawei is also not new. The US made this commitment in June but apparently has not carried through with it yet.  

Japan reported deepening producer deflation and new weakness in core machinery orders. PPI fell 1.1% year-over-year in September after a 0.9% decline in August. Core machine orders fell 14.5% in August year-over-year, after a 0.3% gain in September. On the month, orders fell 2.4%, more than twice the decline expected. Separately, the weekly MOF portfolio flow data shows foreigners bought more than JPY1 trillion of Japanese stocks last week and JPY900 bln in bonds. We do not read much into that the buying spree and would link it to the start of the new fiscal half-year, and the purchases re-establish positions liquidated in late September.  

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Read more by Marc on his site Marc to Market.

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