The Difference Of A Day: Stocks And Bonds Tumbling Into The Weekend

Overview: The global capital markets are reversing hard into the weekend. Yesterday's rally lifted US benchmarks to a record high fizzled even though most Asia Pacific markets (with Hong Kong and India being large notable exceptions) rose. Europe's Dow Jones Stoxx 600 is ending a four-day advance. It is off around 0.4% near midday in Europe, while US futures indices are off after a three-day rally. The NASDAQ is particularly hard hit (-1.7%)After fairly smooth auctions this week, US Treasuries have been sold, and the 10-year yield is hovering around 1.60%. Eurozone benchmark yields more muted with the ECB apparently stepping up its efforts, and most are up 1-2 bp. A better than expected UK January GDP report weighs on Gilts, and the 10-year yield is up five basis points. The dollar is broadly higher. Against most of the major currencies, it is 0.5%-0.8% higher. The Canadian dollar is faring the best, off less than 0.2%. Emerging market currencies are heavy, though a handful of Asian currencies have managed to post minor gains. The liquid and accessible emerging market currencies, like the Turkish lira, Mexican peso, and South African rand, are around 1% lower. Gold, which flirted with $1740 yesterday, has been sold through $1700 but is straddling that area near midday in Europe. Oil prices remain firm, and April WTI is hovering around $66.  

Asia Pacific

The Australian dollar has appreciated by almost 10% since early November's pivot in terms of the US election and vaccine. However, the country seems to be struggling with the shifting sands of the global political economy. Its foreign policy antagonizes its largest trading partner. It took the lead in trying to make the transmission of the news part of the internet fairer. It is trying to negotiate a free-trade deal with the EU. The problem is that the EU is adopting more environmentally sustainable policies faster than Australia. This gives Australian producers a competitive advantage (they don't have to pay for the negative externality, free-rider problem). This week the EU Parliament moved closer to demanding a carbon levy on products from countries said to be lacking substantial efforts to reduce pollution. The legislation is still being worked out but could be ready by the end of Q2. While the tariff's size is important from a competitive point of view, the mere imposition is significant. It reflects the failure of a multilateral approach (e.g., OECD). It also illustrates how a global issue like the environment can strengthen nationalist/regional responses. 

There is a general concern about the US presence in Asia as there seems little chance that Trump's decision to pull out of the Trans-Pacific Partnership will be reversed anytime soon. As its share of trade in the region falls, the US will have to increasingly rely on other channels to project its power. The Biden Administration's first diplomatic thrust begins today. Biden will virtually attend the first Quad (for Quadrilateral Security Dialogue) meeting that includes India, Australia, and Japan. This will be followed in short order by Secretary of State Blinken and Defense Secretary Austin visiting South Korea and Japan. It is not coincidental that South Korea agreed earlier this week to a six-year agreement for funding of US troops stationed there, which the State Department had called an "unnecessary irritant." Reports indicate that South Korea's offer was a little sweeter than the one made to the previous administration.  

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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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