Sterling Sparkles In Dollar Setback

Overview: Investors have not let the surge of the virus or uncertainty over the UK-EU talks or US fiscal stimulus to stand in their way. Sterling is leading the major currencies higher, returning to the $1.30 area, while global equities are trading higher. In the Asia Pacific region, Chinese shares, and Thailand, where large-scale protests continue, bucked the move higher, led by more than 1% gain in Japan and Taiwan. Europe's Dow Jones Stoxx 600 is pushing higher (~0.5%) for the second consecutive session while the S&P 500 is trading near the pre-weekend high. Bond yields are mostly higher, with the US benchmark up two basis points to 0.76%. European peripheral yields are firmer than the core. Chinese bonds are an exception, and yields slipped a couple of basis points to about 3.18%. The dollar is falling against nearly all the world's currencies. In the emerging market space, the Thai baht is an exception, but the JP Morgan Emerging Market Currency Index is up for a second consecutive session. Gold (GLD) is near the pre-weekend high as it tries again to re-establish a base above $1900.December WTI is little changed, straddling $41 a barrel. 

Asia Pacific

China's economy expanded by 2.7% in Q3, a little below the Bloomberg survey median forecast of 3.3%, and Q2 growth was revised to 11.7% from 11.5%. It does not change the general view that China may be the only country in the G20 to expand this year. The September data was encouraging. The previous report showed retail sales rose only 0.5%, and Beijing was criticized by some observers for emphasizing supply-side issues over demand. In September, retail sales jumped more than twice the pace economists expected, 3.3% year-over-year. Industrial output also beat expectations, rising 6.9% year-over-year, more than one percentage point higher than expected. Fixed investment ironically was a touch below forecasts, rising 0.8% after a 0.3% decline in August.  

Japan reported September's trade surplus of JPY675 bln (~$6.4 bln), which was around three-quarters of what was expected. Exports recovered but not as much as expected and are still off 4.9% year-over-year. They had been expected to improve more after the 14.8% decline in August. The compression of imports was less than anticipated. There were off 17.2% year-over-year in September after a 20.8% contraction in August. The Bloomberg survey showed a median forecast for a 2nd deepening slide to 21.4%. 

A year ago, the fear was China was going to offset the US tariffs by depreciating the yuan. In the Phase 1 trade deal that was struck, China pledged not to do so and to maintain a stable exchange rate. Isn't this what it has delivered? The yuan has appreciated by almost 4% against the dollar this year, making it among the strongest currencies in the world. Precisely how the PBOC is able to achieve this is a bit of a mystery, owing in part to the lack of transparency of Chinese reporting. To be sure, the fact that the banks are state-owned also adds to the opaqueness of what is a commercial transaction and what is the state's activity. Some of the same people who cut their teeth on confronting Japan in the 1980s are leading the charge against 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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