Equity Meltdown Aborted, Dollar Eases

After a poor start in Asia, equities recovered. The MSCI Asia Pacific
initially extended last week’s losses and fell to its lowest level since
February 12 before recovering to finish near its highs, 0.4% above last week’s
close.  European markets followed suit.  They did not have to take
out last week’s lows.  The Dow Jones Stoxx 600 is up about 0.4% in late
morning turnover.  Health care, energy led the wave, though consumer
staples and retail lagged.  The S&P 500 is trading a little more than
1% higher.

Bond yields are firmer, with the US 10-year yield up three basis points
to almost 2.85%.
  European bond yields are mostly firmer.  Spain
is a notable exception; the yield is slightly softer following S&P’s
decision before the weekend to match Fitch and upgrade Spain’s credit rating to
A- from BBB+.  S&P cited the strong economic performance, the current
account surplus, and fiscal consolidation for the upgrade.  In contrast,
Italy’s stocks and bonds are underperforming as the prospect of a coalition
between the Five Star Movement and the Northern League weighs on investor

What appeared to have stopped the equity meltdown was signs that a trade
war could in fact be averted. 
We have argued that the market, egged
on by the media, had exaggerated risks of trade war, just like it exaggerated
the prospects of a currency war.  

First, the US and Korea have reportedly struck an agreement that will
modify the Korea-US free-trade agreement and exempts Korea from the steel
Still, Korea agreed to reduce the amount of steel it exports
to the US (by ~30% of its three-year average), while increasing the quota of US
autos to 50k per producer compared with 25k now.  Korea is the third
largest supplier of steel to the US and it is the largest importer of Chinese
steel.  GM and Ford exporter less than 10k vehicles each to Korea last
year.  Korea also agreed to extend the ban on pick-up truck exports to the
US by another 20 years to 2041.   Korean shares were among the best
performers in Asia.  The KOSPI advanced 0.85%, while the KOSDAQ rallied

Second, the US and China are reportedly engaged in extensive discussions
that Treasury Secretary Mnuchin suggest could result in an agreement that would
avert the tariffs announced at the end last week.
  Recall that last
week, the US proposed tariffs on at least $50 bln of Chinese imports, intended
on proposing new investment restrictions on Chinese investment, and sought a
quantitative reduction of the bilateral imbalance (~$100 bln).  China
announced tariffs on $3 bln of US imports (in response to the steel and
aluminum tariffs, but planned a different response to the new

Some participants suspect that any agreement between the US and China
will likely include more yuan appreciation.
  The offshore yuan rose
0.80% today, the most in two months.   The onshore yuan is up 0.7%. 
Separately, China launched its yuan-denominated oil futures contract. 
China provided incentives to attract foreign participation by waiving taxes on
oil futures trading profits.  About a dozen and half foreign institutions
registered to trade the contracts, but it is unclear whether it will become a
key benchmark.  There have been other attempts in Asia, including in Singapore
and Japan, to create an Asian benchmark with little luck.  

The dollar is on its back foot.  It is only stronger against the
yen, and there it is trying to re-establish a foothold above JPY105 that was
violated at the end of last week.  A move above JPY105.30 is needed lift
the tone.   Note that there are large option expires today including
$1.3 bln at JPY!05 and $420 mln struck at JPY105.30.  The euro is moving
above $1.24 for the first time in eight sessions.  Resistance is seen near
$1.2450.  Sterling is challenging last week’s high near $1.4220.  The
$1.4280 high form February is the main obstacle in the way of a challenge on
the post-Brexit high reached in late January near $1.4345. There is a GBP335
mln options struck at $1.42 that expires today. 

New Zealand unexpectedly reported a NZ$217 mln trade surplus for February
(compared with a NZ$42.3 mln deficit in February 2017). 
This helped
send the New Zealand dollar higher.  The 0.85 gain puts it among the
strongest of the major currencies, followed by the Scandis.  The
Australian dollar is trying to forge a base below $0.7700.  Last week’s
highs (~$0.7780) is the nearby objective. 

The economic calendar is light for North America today.  The
Chicago Fed’s National Activity Index for February is due as is the Dallas
Fed’s manufacturing index (March).  These are not typically market
movers.  Three Fed officials speak but only Dudley during market
hours.  Mester and Quarles speak after the markets close.  Meanwhile
reports over the weekend suggest San Fran Fed President Williams is a lead
candidate to replace Dudley who will retire near midyear.  Reports also
suggest Clarida is leading to become next Fed vice chairman.  

Lastly, we note that US deluge of bills continues this week. 
Some $294 bln in bills will be sold this week, which appears to be a
record.  Today, $96 bln in bills will be sold as well as $30 bln in
two-year notes.  The two-year auction is the largest since


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