Investors cast eyes on China bond market

Asia’s data highlight has passed without incident, with China’s 1-year and 5-year Loan Prime Rates left unchanged at 3.85% and 4.65% respectively. The result was as expected, with China’s economy firing on all cylinders and Covid-19 firmly under control, as the world looks on enviously. With the heavy lifting coming from the targeted fiscal of the equation, China needs no transforming of its optimal prime rates.

As the rest of the world descends into a zero forever interest rate environment, China’s carry is likely to attract more and more attention. Despite a closed capital account, China’s bond market is expected to more and more yield-hungry international investors. Investors will take comfort from China’s economic data as well as comments from the PBOC that markets should set the exchange rate. If that is so, and despite having a dirty peg versus a major currency basket, the yuan is likely to remain a bastion of calm in the storm into 2021.

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Elsewhere, financial markets are very much locked into tail-chasing mode as the noise from the US elections, fiscal stimulus and Covid-19 provide so much noise, they drown out the lyrics. Wall Street equities wilted overnight as Nancy Pelosi’s pre-election stimulus deadline approached today, with no sign of a breakthrough between the antagonists. Headlines suggesting that Pelosi and Mnuchin were closing differences and would talk again today, has seen the dentists of Minnesota piling into US equity index futures this morning in Asia, sending them sharply higher.

The final US presidential debate has been confirmed, including mute buttons, for 0900 SGT on Friday morning. That will provide a welcome distraction to the street’s US fiscal stimulus negotiation love affair. In the shorter-term, those negotiations remain the only game in town, even drowning out the very concerning Covid-19 lockdown developments occurring across Europe. It is clear that the FOMO gnomes of Wall Street are limit long, expecting Ms Pelosi and Mr Mnuchin to reach a deal, ignoring the US Senate Republicans at their peril.

Whatever the outcome, there will probably be a profit-taking sell-off or a deal failure sell-off in equity markets, in particular. Both the US dollar and gold should be beneficiaries. Any fall in equity markets could be sharp but short-lived though, as the herd quickly looks for another reason to be long everything. In this case, it is likely to be that with a Democrat clean sweep, a juicy stimulus package will arrive anyway, it will just be delayed. Ignoring that that will probably be by early 2021 at best. But that is ok, because we will have billions of doses of Covid-19 vaccine by Christmas if you believe the narrative.

Given the number of holes in that line of thought, I would expect the US dollar, gold, Japanese yen, and yes, even offshore yuan to potentially do very well in the next few weeks. The only tail-chasing I intend to get involved with is watching our kitten, Twinkle, chasing hers. It will be far more productive.

 

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