Tuesday, May 19, 2020

Capital Markets: "Optimism Burns Eternal"

Burned a few shorts as well.
From Marc to Market:
Overview: Hopes for a vaccine and a German-French proposal to break the logjam at the EU for a joint recovery effort helped propel equities higher yesterday. There was strong follow-through in the Asia Pacific region, where most markets advanced by more than 1% today. However, the bloom came off the rose, so to speak, in Europe. After a higher opening, markets reversed lower, and the Dow Jones Stoxx 600 is off about 0.75% in late morning turnover. All the major sectors are lower, led by utilities and industrials. The US 10-year yield closed yesterday at 72 bp, its highest in a month, and sent Asia Pacific yields higher. However, the German-French proposal and ideas that the ECB will likely increase its bond purchases saw peripheral yields fall more than core rates. The US 10-year yield is also a little softer. The risk appetites were expressed as a weaker US dollar, yen, and Swiss franc, while high-beta dollar-bloc currencies and Scandis jumped, and this has continued today. The JP Morgan Emerging Market Currency Index rose by nearly 1% and is up another 0.2% today and is at new highs for the month. Gold reached $1765.4 yesterday before stabilizing, and today it is consolidating around $1726-$1740. Oil is also consolidating after yesterday's surge. The July WTI contract reached $33 yesterday. It bottomed in late April a little above $17. It is trading today between $31 and $33 a barrel.


Asia Pacific
China is adding pressure on Australia.
Even though Beijing has not formally linked its actions against Australian barley and beef as retaliation for its calls for an investigation into Covid-19 and the wet markets, there is little doubt about the subtext. China is threatening to widen the trade dispute, and reports suggest it could extend to other products, such as wine, seafood, and oatmeal. On the other hand, Australia is the largest producer of iron ore, and Chinese demand has lifted prices to eight-month highs. Brazil, the second-largest producer, is being hobbled by a surge in virus cases and is now the world's third-largest hotspot. Still, China's apparent willingness to disrupt trade, as it has with Canada over Huawei, is unsettling.

The Bank of Japan's next scheduled meeting is on June 18, but officials signaled an emergency meeting at the end of this week
. The ostensible purpose is not to adjust monetary policy itself. Instead, it is expected to unveil a new program to support small businesses. The central bank left its bond-program unchanged today and stepping into the market to buy JPY1.2 bln of ETFs and REITs....
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.... Europe
It has been up to the individual European countries to respond to the virus.
The federal or joint effort has been limited largely to the ECB. However, that will change in the coming weeks as the EU prepares to respond. Yet, that is a point in itself, the level is not the monetary union but the larger group of 27. The vehicle is the EU's budget seven-year financial framework that has been a bone of contention even before the pandemic. Germany and France jointly proposed a 500 bln joint borrowing as part of the EU budget that will be used to help spur economic recovery. Germany and France envisioned grants, while several countries want loans. The funds would be raised by the EU and available based on need, while the repayment will be according to the share of the EU budget (tied to the size of an economy).....
.....MUCH MORE
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