Asian Stock Markets Missed the Risk-On Boat

Markets

Dip-buyers already emerged yesterday, encouraged by the US administration that kept the option for trade talks with China open over the weekend. Of the 3.4% stock slide in the US (Nasdaq) after Trump threatened a 100% levy on Chinese goods, some 2.2% was recovered. European equities rose about 0.7% (EuroStoxx50). The US dollar strengthened too, reversing most of Friday’s decline. EUR/USD revisited the recent lows around 1.157. The trade-weighted index bounced back to north of 99 and USD/JPY went from 151.2 on Friday’s close to 152.3. The Australian dollar outperformed due to strong links with major trading partner China. We should add though that moves happened against the backdrop of a partially closed US market. Bond markets were shut for Columbus Day. Net daily changes in European rates were limited to less than 2 bps across the curve. French bonds slightly underperformed European peers after Lecornu II was born over the weekend. Certain commodities were very well bid. Copper, platinum and palladium all rose. Gold and silver surged to new all-time highs amid ongoing talk of what is dubbed the debasement trade. It’s in essence investors shifting away from fiat currencies into hard & scarce assets for reasons varying from runaway budgets over inflation worries to speculation that central banks will one day (have to) start the money printers again.

Asian stock markets missed the risk-on boat, driven amongst others by China imposing sanctions on 5 US-related firms in response to US probes against Chinese maritime, logistics and shipbuilding industries. Chinese stocks slip but Japanese ones underperform due to a JPY rally. French politics take center stage later today. Lecornu will present a draft budget to his cabinet this morning with a speech scheduled this afternoon (3 PM) before parliament. It’s a critical moment that will decide over the fate of his freshly installed government. The far left and right have already vowed to topple the government, regardless of the budget contents. Lecornu’s survival depends on the abstention by some of Les Républicains and the Socialist Party. The latter amongst others uses its outsized leverage to demand a wealth tax, higher company taxes, smaller budget cuts and a suspension of one of president Macron’s flagship pension reforms. Chances of Lecornu II not making it by the end of the week remain uncomfortably high. Euro and OAT underperformance are likely. The pound loses in a first reaction to the labour market data this morning. Both earnings and employment growth fell short of expectations while the unemployment rate ticked higher to 4.8%, a four year high. EUR/GBPrises to 0.87. The Q3 earnings seasons kicks off with the biggest of US financial firms.

News & Views

UK retail sales growth (same store sales) slowed from 2.9% Y/Y in August to 2% Y/Y in September (vs 2.5% consensus). Details showed both food (3.8% Y/Y from 4.2%) and non-food (0.5% Y/Y from 1.8%) sales growth slowing. Electrical sales were buzzing thanks to new Apple releases while milder weather delayed refreshing autumn and winter wardrobes. The CEO of the British Retail Consortium said that retail spending rose more slowly than in recent months with the (November) budget looming large and households facing higher bills: “Rising inflation and a potentially taxing budget is weighing on the minds of many households planning their Christmas spending. Retailers also face difficult decisions about investment and hiring over the Golden Quarter given uncertainty over business rates bills arriving in April (new business rates surtax).”

Japan’s main opposition parties are likely to meet today to discuss the possibility of rallying behind a unified candidate to take on the new LDP-leader in a parliamentary vote on becoming the new PM. LDP Takaichi’s road to succeeding PM Ueda hit a first road block last week when LDP’s junior coalition partner Komeito decided to end their understanding. Yuichiro Tamaki, leader of the small but rapidly growing Democratic Party for the People (DPP), would be the opposition’s joint candidate. He shares a platform with Japan’s main opposition party (CDP) and the Japan innovation party (Ishin) with a clear promise to raise people’s take-home pay. Both LDP and the trio of DPP-CDP-Ishin would rule a minority government, but the opposition block (210) outvotes LDP (196) when it comes to securing the next PM. If Komeito were to flip sides completely, they could have a razor-thin majority in Japan’s key lower house (234 vs 233 threshold). If Tamaki were to succeed in his PM bid, it would be the first time since 2009 that LDP was forced to the opposition.