Markets Looking for a New Focus

The US dollar is consolidating after retreating since reversing lower following the US jobs data at the end of last
  While the greenback has largely been
confined to yesterday’s ranges against the major currencies, the euro
has made a marginal new high, briefly trading through the $1.1830 area noted

Spanish assets are rallying following Puigdemont’s attempt to square the
circle yesterday by deferring the independence announcement, which he claims he
is still entitled to make,  for a few “weeks” hoping for talks
with Madrid.
  Prime Minister Rajoy has called an emergency cabinet
meeting for today, and the outcome can be announced any minute.  Although
investors are having a collective sigh of relief, Madrid will seek greater
closure, but it will likely reject any talks under the threat of
secession.  If Puigedemont gives up the drive for
independence, what political future has he?  

Spain’s 10-year bond yield is off three
bp while the comparable yield in Italy is off less than a single basis point,
and core bond yields are slightly higher.
  Spanish stocks are up 1.3%,
outperforming all the major bourses
today.   Telecoms and real estate of leading what is a broad
advance.  Only consumer staples are lower,
and this is due to a sell-off a leading supermarket.  

New revelations from Japan’s Kobe Steel that its deception of its
materials extend beyond copper and aluminum to include iron ore powder and an
unspecified metal still being investigated, saw its share prices fell another
18% after yesterday nearly 22% decline
.  Nevertheless, the Nikkei and
Topix managed to post minor gains, which were sufficient to lift both to new
two-year highs.  

The dollar, which briefly dipped below JPY112 yesterday is trading inside
yesterday’s range.
  On the one hand,
this may suggest a bit of resilience on the dollar’s part, as the US 10-year
Treasury yield is off nearly two bp
(@~2.34%).  On the other hand, the dollar has not been able to distance
itself from the 20-day moving average, which is near JPY112.20.  The
dollar has not closed below the 20-day moving average since September 11. 
A break is seen testing support near JPY111.50.  

The US 10-year yield had risen to 2.40% in the initial response to the
jobs data.
  This is the upper
end of the six-month range.  Some profit-taking on the run up from nearly
2.0% on September 8 should not be surprising or require a large
explanation.  Nevertheless, many accounts see doubts over US tax reform as
the proximate driver.  

First, several Senators appear to be carving out a position that is
critical for various reasons.
  Second, there is an ongoing squabble
between the White House and Senator
Corker, a fiscal hawk, and an early supporter of the President.  Third,
Trump himself has indicated he will adjust his tax plan in the new few
weeks.  Fourth, the IMF has dropped the prospects for fiscal stimulus from
the US next year (though it sees the US economy expanding 2.3% in

China has announced it will raise $2 bln by selling a five- and ten-year
dollar bonds in Hong Kong shortly. 
It is the first time in more than
a decade that the central government is issuing dollar bonds.  Despite the
recent downgrade and concern over the country’s debt burden, we suspect there
will be strong demand for this offering. 

 It is a relatively small offering.  There is a scarcity of such paper.  While
some emerging market countries that borrow dollars may experience a currency
mismatch if they do not have sufficient dollar receivables, but that is not
China’s problem.  It is sitting on over $3 trillion of reserves, and have,
according to US data, bought more than $100 bln of US Treasuries in the first
seven months of the year.   

The economic highlight from the US today will be the FOMC minutes from
the September 20 meeting, at which it provided new economic forecasts and
decided to begin its balance sheet operations. 
In some ways, the
minutes are old news.  The day before the FOMC meeting concluded,
Bloomberg calculated at 53% chance of a hike before year end was discounted.  Now it says there is a
nearly 77% chance.  On September 19, the Dec funds implied a 1.23% yield.  Today the yield is 1.265%. 
Our work suggests fair value, assuming no chance of a November hike, is

Lastly, we note that the fourth round of the NAFTA negotiations is set to begin.  Although some
progress had been reported in earlier
rounds, there is a sense of foreboding about the new round, which is to discuss
domestic content rules, which will prove very controversial. Ironically, the US
is pushing for a higher minimum wage in Mexico, and Canada wants better labor
rights in the US. 

Reports suggest the US is arguing that 85% of vehicles must be made in
NAFTA countries to count and up to as much as 50% must originate in the US.
Such a demand, coupled with the push for a “sunset” clause (which
would end NAFTA at some future date unless explicitly endorsed by all three
countries) is seen a part of the “poison pill” strategy, according to
the Chamber of Commerce.  The idea is that although Trump backed off from
his threat to leave NAFTA, his Administration’s demands will not produce an

The US Congress will ultimately have to ratify the final agreement. 
Just like the White House stance spurred a bipartisan response from Congress regarding sanctions against Russia, North
Korea, and Iran, there seem to be
bipartisan efforts to resist a disruption
of supply chains and trade relations.  Thisis part of the check and balances, which, at least up until now are working. 


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