Holiday Markets Remain on Edge

The holiday-induced calm in the capital markets conceals a high
degree of anxiety.
The investment climate has been challenged by heightened geopolitical risk
and unusual complaints about the US dollar’s strength from the sitting US
While sending an
“armada” toward the Korean peninsula, the US ordered a missile strike
against Syria in retaliation for the use of
chemical weapons and dropped the largest
bomb in the world on Afghanistan. 
Investors do not seem to have gotten a handle on what is happening.  For
several years, even before deciding to run for President, Trump was critical of
US foreign policy.  He repeatedly argued against attacking Syria.  
He wanted to reset the relationship with Russia, but both sides now recognize
that the relationship is strained at
There were other remarkable
volte-face moves this week. 
 After repeatedly criticizing the
Obama Administration for not citing China as a currency manipulator, he
indicated this week, he won’t either.
China’s abstention in the UN Security
Council vote to condemn Syria for its use of chemical weapons was an important
diplomatic signal.  The US, Russia, and China are in a fluid dynamic.
 One of the criticisms of Obama’s foreign policy was that he allowed the
other two large nuclear powers, China and Russia to have an alliance of
convenience and frustrated US multilateral efforts, including at the UN.  
Initially, it appeared the
Trump would try to peel Russia away so
better to confront China on trade and activity in the South China Sea. 
 The investigation into connections between some
people in Trump’s campaign and Russia may add another dimension to the
Administration’s response.  Russia’s support for Syria’s Assad and its
apparent complicity revealed the underlying conflict of interest.
 Meanwhile, Trump has made some warm
comments about China and seems hopeful
that China will rein in North Korea. 
Many investors and observers
are worried that North Korea may conduct another nuclear test as early as
tomorrow, which is the 105th anniversary of the birth of North Korea’s founder
Kim II Sung. 
 Gold is has gained 2.6% this week, its fifth weekly advance.  Indeed,
here in 2017, the price of gold has fallen in only three weeks and is up around
After posting corrective
upticks over the past two sessions, the Korean won,
and the Korean stock was sold earlier
The US
dollar rose almost 0.9% against the won
and finished about 0.5% higher on the week, following last week’s 1.5% rise.
 The Kospi fell 0.6% today and about 0.8% on the week.  It is the
second weekly decline, leaving the Korean benchmark up 5.35% for year-to-date,
though the KOSDAQ is off 2% this year.  In the region, only Japanese
markets are down on the year.   The MSCI Asia Pacific Index fell 0.3%
today, which reverses the previous gains to finish 0.1% lower on the week, its
fourth consecutive weekly loss.  
China reported its yuan loans
and aggregate financing for March.
  Yuan loans slowed to CNY1.02
trillion from CNY1.17.  The median guesstimate in the Bloomberg survey was
for a small increase rather than a decline.  Nevertheless, the slower yuan
lending was more than offset by the jump in shadow banking activity.  The
aggregate financing in March jumped to CNY2.12 trillion from CNY1.15 in
February.  Since last September, aggregate financing has alternated
between rising and falling.   Many observers see China’s debt binge to be
a key challenge and vulnerability.  Some also see it part of the fuel of
capital outflows.  
While most European centers are closed, the French presidential election
remains a source of angst. 
for the margin of error, recent polls suggest a four-way draw.
 France’s premium over Germany on 10-year yields widened seven basis
points this week to return to levels since in February after a calmer March.
 The spread has narrowed in only three weeks since the start of the year.
 The two-year premium jumped 10 bp
this week to new five-year highs.  
It is a partial holiday in
the United State, where the stock market will be
 The US reports March consumer prices
and retail sales.  Headline CPI is expected to be flat, which would allow
the year-over-year rate to ease to 2.6% from 2.7%.  The core rate, on the
other hand, may tick up to 2.3% from 2.2%.  That would put it back at the
upper end of where it has been since early last year. Headline retail sales may
be dragged a little lower by the softness in auto sales and gas prices.
Excluding these components, retail sales are expected to have increased by
0.3%, which is also what the GDP component is expected to have risen.  
The risk, however, is on the downside.  Consumers have pulled back in Q1
17 after a strong showing in Q4 16.  In
addition, the poor weather in part of March that depressed auto sales
may have deterred shopping more generally.   
Nevertheless, we argue that
the Fed’s hike last month renders less relevant Q1 data. 
 The forward-looking
nature of monetary policy means the March data will not influence the FOMC’s
decision in June (there is practically no chance of a May move).   We do
note that since the US election last November, the Fed hiked interest rates
twice, more than in the previous eight years.

US 10-year yield fell 14 bp
this past week; it is the fifth
consecutive weekly decline and the biggest since early last June.
  The yield on the two-year note fell
eight basis points this week, which is also the most since last June.   The
US dollar fell against all the major
currencies this week (and on the day is only up against the New Zealand
dollar), led by the Japanese yen (2%) and sterling (1.1%).  The euro (and
Danish krone) are the poorest performers, gaining around 0.3%. 


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