Market Awaits US Leadership

Overview: The capital markets appear to be waiting for US leadership for direction. The dollar is mostly slightly firmer against the major currencies, though the dollar bloc is firm. Among emerging market currencies mixed, though the high beta Turkish lira and South African rand are posting modest gains. The weakest is the Mexican peso. It is off about 1.5% as the market responds to news that Mexican voters preferred, by a clear majority (~70%), upgrading the existing international airport rather than building a new one in Mexico City. Many large equity markets in Asia eased, but the rout in China continued to a 2% drop and South Korea’s Kospi eased 1.5%. India, Australia, Hong Kong, and several smaller bourses edged higher. European bourses were firmer, led by Italy (~1.3%). The Dow Jones Stoxx 600 was up about 0.5% near midday. Interest rates are.lower. A less than hawkish central bank of Korea saw the 10-year benchmark yield fall eight basis points. The move was matched in Europe by Italy. Core European yields are slightly lower, while the periphery is outperforming. US 10-year yields are pinned near last week’s low near 3.05%, as US stocks trade with a heavier bias in Europe.  

China

Many investors expect Chinese officials to take more steps, including reducing interest rates, to support the economy. In addition to the focus on the domestic policy response to the equity market slide and economic slowdown, the trade conflict with the US is set to intensify. First, while Trump and Xi may still meet at the end of next month on the sidelines of the G20 meeting, reports suggest the White House may take trade off the agenda. Second, the WTO dispute settlement body will hear US charges on China’s violation of intellectual property rights today. Third, the 10% tariff on $200 bln of Chinese goods is still set to increase to 25% as on January 1.  

Europe

There are three main stories from Europe today. First, S&P kept Italy’s rating at BBB, two steps into investment grade, but shifted the outlook to negative from stable. This was very much in line with expectations and reinforces our idea that Italy is not on the verge of losing this status. Still, investors have responded favorably to this and to some signals from Italy’s Prime Minister Conte that there may be some flexibility within the government.  Specifically, he seemed to suggest that the tax cuts be implemented quickly (League) but that the citizen’s income (Five Star Movement) and the pension reform (both) could have a later implementation. Separately, Italy will sell nine billion bills and notes this week, testing the market’s appetite.