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Flood of Japanese money rushing to USD assets

  
  Analysis
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Bloomberg report on Japanese investors, facing ongoing negative rates domestically, are buying dollars and risk assets

  • “The presence of the Japanese as the main carry trade driver seems to be growing as they must turn to overseas investments”
Demand for higher-yielding American assets growing
  • In April, Japan’s money managers bought the most U.S. corporate debt in eight years and the second-highest amount of equities in five years
  • “Japanese investors use yen to fund purchases of Treasuries or U.S. corporate bonds, for instance, to seek credit spreads and these flows are continuing,” said Koichi Sugisaki, a strategist at Morgan Stanley MUFG Securities Co. in Tokyo.
Check out USD/JPY … its net more or less unchanged, even a little lower, since November last year …. Without all the Japanese money leaving yen into USD it’d have to be lower I guess?
Bloomberg report on Japanese investors, facing ongoing negative rates domestically, are buying dollars and risk assets 

ICYMI – US Senate moves to punish China on coronavirus

  
  Analysis
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From the US afternoon, when equities and risk currencies dropped away …. or more accurately, continued to drop away …

US Senator Lindsey Graham, (persistent brown nose to Trump), weighing in yet again to try to cover up from the disastrous US fumbling of the crisis:
  • accused China’s Communist Party of deception over the virus
  • “I’m convinced China will never cooperate with a serious investigation unless they are made to do so.”
Graham proposed a “COVID-19 Accountability Act”
  • requiring China provide “a full and complete accounting to any COVID-19 investigation led by the United States, its allies or UN affiliate such as the World Health Organization
  • require certification that China had closed all wet markets
  • bill would authorize the president to impose a range of sanctions
all within 60 days.
It weighed on markets and there is a little more follow through in early Asia.

AUD/USD months-ahead view – below 0.59

  
Analysis, Forex
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  • outlooks for their respective main commodities, posing downside risks over the medium term
  • Oil prices have plunged over the past year, partly due to excess supply, but also due to a dire economic outlook
  • metals tend for follow (or co-move with) oil
  • iron ore prices have help up … mainly due to supply bottlenecks .. Once those have been cleared, there’s potential for iron to more closely reflect the deterioration in demand. So too for coal
For the AUD
  • multi-month, we hold a negative bias … targeting as low as 0.59. 

Deficit discipline is dead

  
  Analysis
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Debt is no longer a four-letter word

The legacy of the coronavirus crisis may be that it kills the idea that deficits matter.
The Tea Party derailed Obama’s legislative agenda, lamenting high deficits. At least 12 Senators and at least 50 members of the House were elected on Tea Party platforms. These were the most-hardcore deficit hawks in history.
Trump vaulted himself to the White House by tapping Tea Party sentiment. Here’s a sample:
For reference, the combined deficit in Obama’s final four years was $2.19 trillion.
Yesterday, Trump tweeted this:
tweet
The deficit in the US this year will be at least $3 trillion and probably $4 trillion.
I’m not here to point out they hypocrisy, you can get the anywhere.

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This was the best chart from Jeff Gundlach’s presentation

  
  Analysis
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It’s impossible to hedge

It's impossible to hedge 
The big risk in the FX market is that there are massive flows of unhedged foreign bond buying in the US.
The problem is that Japanese and European investors can’t get positive yield. A traditional option is to buy foreign bonds and hedge in a classic carry trade. The problem he highlights here is that you can’t do that now because the hedge pushes the return into negative territory.
So instead the theory is that they’re buying Treasuries unhedged. That is a wildly risky trade because you’re getting 1.8% a year for 10 years but the currency could drop 18%. What could happen is that if/when the US dollars falls, it starts a rush to the exits and you get a very quick, very painful drop and overshoot.
That should be a key risk that everyone is watching, especially with a President who wants a weaker currency.

20 risks to markets in 2020 – Use them to make profit

  
  Analysis
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Watch out for those risks

What exactly are the risks to the markets that you should pay attention to? The chief economist of Deutsche Bank Torsten Slok has prepared a list of top 20 risks to global markets in 2020. Each one of them may trigger a downtrend.

  1. Continued increase in wealth inequality, income inequality and healthcare inequality.
  2. Phase one trade deal remains unsigned, continued uncertainty about what comes after phase one.
  3. Trade war uncertainty continued to weigh on corporate capex decisions.
  4. Ongoing slow growth in China, Europe and Japan Triggering significant US dollar appreciation.
  5. Impeachment uncertainty & possible government shutdown.
  6. US election uncertainty; implications for taxes, regulation and capex spending.
  7. Antitrust, privacy and tech regulation.
  8. Foreigners lose appetite for US credit and US Treasuries following Presidential election.
  9. MMT-style fiscal expansion boosts growth significantly in US and/or Europe.
  10. US government debt levels begin to matter for long rates.
  11. Mismatch between demand and supply in T-bills , another repo rate spike.
  12. Fed reluctant to cut rates in an election year.
  13. Credit conditions tighten with more differentiation between CCC and BBB corporate credit.
  14. Credit conditions tighten with more differentiation between CCC and BBB consumer credit.
  15. Fallen angels: More companies falling into BBB. And out of BBB into HY.
  16. More negative-yielding debt sends global investors on renewed hunt for yield in US credit.
  17. Declining corporate profits means fewer dollars available for buybacks.
  18. Shrinking global auto industry a risk for global markets & economy.
  19. House price crash in Australia, Canada and Sweden.
  20. Brexit uncertainty persists.

Nikkei 225 closes lower by 0.85% at 23,319.87

  
Analysis, Global Indices
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Asian equities slump amid some caution in the risk mood

Nikkei 13-11

Japanese stocks are lower as tariffs continue to be a niggling issue in US-China trade talks. We had Trump threaten more tariffs – should talks not go well – in his speech before a WSJ report noted that both sides are still struggling to find common ground on the matter.

Meanwhile, the civil unrest in Hong Kong is continuing to affect the risk mood in the region as well, with the city continuing to descend into total chaos. The Hang Seng is down by 2.2% on the day as it sinks to session lows at the moment.
US futures are also a tad softer and that is keeping risk trades on edge as we begin the session. The franc is among the better performers with USD/CHF approaching 0.9900 though the yen has given up some of its earlier gains with USD/JPY still around 109.00.

China trade balance data for August – surplus comes in below median estimate

  
Analysis, Economy
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Trade balance data out from China Sunday will not be viewed as a positive input for China-related risk markets.

The counter to this is, of course, the expectation of stimulus from China, some of which we have already indeed seen (eg. only on Friday we got news of  the cut to the RRR) and more is forecast.

Yuan terms trade balance data

Surplus for the trade balance of 239.60bn … miss

  • expected CNY 299.3bn, prior was CNY 310.26bn

Exports +2.6% y/y … miss … slowing global growth and US tariffs key points for exports missing

  • expected +6.3%, prior was +10.3%

Imports -2.6% y/y  – falling imports are often associated with domestic economic weakness -this result not as sharp a fall as expected.

  • expected -3.1%, prior was +0.4%

USD terms

China trade balance: $+34.84

  • expected $44.3bn, prior was $44.58bn

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IMF issues annual report on China

  
Analysis, Economy
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Risks tilted to the downside amid trade uncertainty

The IMF is out with its annual report on China. They say:

  • risks are tilted to the downside amid trade uncertainty
  • China should maintain flexible yuan  if tariffs rise
  • China could intervene to support one in adverse scenario
  • China GDP growth could slowed to 4% by 2030
  • escalating trade tensions could warrant China stimulus
  • China augmented government debt to top 100% of GDP in 2024
  • The yuan is not significantly overvalued or undervalued. In line with fundamentals
  • IMF has been pressing China for more exchange-rate flexibility, less intervention in currency markets
  • China should open up more sectors to foreign competition to put its economy in best position to deal with trade pressures

How will the Fed react if US and China reach a trade truce this weekend?

  
Analysis, Economy, Global Indices
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A trade truce between US and China will be good for risk assets but does that mean the Fed will shelve its rate cut plans?

WIRP US 28-06

Although risk assets will steal the focus in the aftermath of the Trump-Xi meeting tomorrow, the dollar and the Fed are likely to be the more talked about topics in the coming weeks with the next FOMC meeting scheduled for 31 July.
A 25 bps rate cut is all but a given at this point but markets are still seeing a 22% probability that the Fed may cut rates by 50 bps, according to Fed fund futures.
But if US and China are able to achieve a trade truce this weekend, which I reckon they will find some form of agreement to resume talks at the very least, it puts the Fed in an interesting spot ahead of their July meeting.
Final Q1 GDP data yesterday gave little concerns for the Fed to be immediately cutting rates and the revised uptick in PCE is also a welcome sign on the inflation front. And if trade talks find some limited progress in the near-term, it’ll be very interesting to see how they would phrase their decision in cutting rates in July.

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