XI’s Day, but Not So Good for Putin

It did not look so good.  The S&P 500 fell about 1.65% in the last
couple hours of trading yesterday paring its gains.
  Press reports
indicated that President Trump’s lawyer’s office, house and hotel were the
subject of search warrants.  A Bloomberg report citing people who knew
said that China would consider devaluing the yuan. 

China’s President Xi’s speech at the Boao Forum today hit the right tone
today and the market have reacted positively. 
The MSCI Asia Pacific
Index rose 0.75%, the most in two weeks to test the 20-day moving
average.  It is approaching a trendline drawn off the late January and
March highs.  Chinese shares, both mainland and that trade in Hong Kong
led the region with around a 2% advance.  

Europe is following suit.  The Dow Jones Stoxx 600 is up 0.55%
near midday on the Continent, led by consumer discretionary and materials
sector.  Real estate and utilities are weaker.  The benchmark is at
its highest level since March 16.  US shares are higher in Europe and the
S&P 500 is about 1% higher.  

President Xi did not appear to break new ground, though he announced,
“a new phase of opening up.” 
He suggested China would allow
more foreign participation in autos, manufacturing, and banking.  That it
would do more to protect intellectual property, and expand imports.  There
was nothing not to like.  However, the rub lies not with the declaratory
policy but with putting the words in to action. 

The US confrontation with China is only partly idiosyncratic. It may
be a serious misjudgment if China does not recognize that its emergence on the
world stage and its trade practices are of widespread concern.  The Trump
Administration’s tactics may be off-putting, but the signal and frustration are
shared.  It is not simply one of few issues that bring together large
elements of both US political parties, but as will likely become more evident
in over the next week or so, is that Germany, France, and Japan share similar
misgivings.  That said, a multilateral effort goes against the thrust of
the Trump Administration and may require reduced tensions within such a

The US and China are negotiating and the $50 bln in sanctions initially
announced for the intellectual property violations do not going into effect
until after a 60-day public comment period. 
Part of the negotiations
are taking place in the public and part in private.  Reports about the
private negotiations, which may has stalled following Trump’s threat of tariffs
on another $100 bln of Chinese goods, saw China willing to take measures to
reduce trade imbalance by $50 bln by importing more liquefied natural gas,
agriculture, semiconductors, luxury goods, and open the financial sector. 

If investors took seriously the risk that China would devalue the yuan,
what would they do? 
We suspect they would sell the yuan, not on the
mainland (CNY) where the currency continues to be managed (even if not through
intervention) but would express the views in the offshore market
(CNH).    Today both rose, with CNY edging slightly higher than
CNH (0.23% vs. 0.20%). 

Russia is not having it nearly as good.  The latest US sanctions
have dealt Russia a blow.   The ruble had been weakening, declining in
February and after January’s gain.  It gained about 0.5% Q1. The dollar
rose 4.2% against it yesterday and another 3.5% today.  Both the dollar and
local currency bond yields are jumping.  The 10-year dollar bond yield is
up 28 bp today to almost 5.0% after a similar rise yesterday.  The ruble
bond yield is up 24 bp to 7.50%, after finishing last week near

Between the latest turn in investigation of Russia’s attempt to influence
the US election, and the new unrelated sanctions, and the US-China trade
confrontation, most of the economic oxygen has been exhausted.
Europe, both France and Italy reported the February industrial output
figures.  They disappointed, like Germany did last week, and this give the
EMU report (due Thursday) downside risks.  

Although French industrial output for 1.2% (instead of 1.4% of the
survey median forecast), which did not offset the 1.8% fall in January,
manufacturing output fell 0.6%.
  The market had looked for a gain of a
similar magnitude.  It is the fourth consecutive month that French
manufacturing output has fallen.  It cannot simply be dismissed as
weather-related or a technical issue.  Note too that France is being hit
by a rolling strike among rail workers that is also a new source of

Italy reported that February industrial output fell 0.5%.  The
median forecast was for a 0.8% increase, following a 1.8% decline (revised from
-1.9%) in January.  The workday-adjusted year-over-year rate slowed to
2.5%, the lowest since last April, and identical with last February’s
pace.  The political backdrop remains unresolved.  It had looked like
the Five Star Movement was going to form a pact with the Northern League, but
its demand to jettison Berlusconi, appears to be proving too big of an
ask.  Meanwhile, the center-left PD shows no interest in forming an
alliance with the Five Star Movement, which ironically seems to share some of
its social democratic ideas.  

The US reports March producer prices and February wholesale
  These are second-tier reports even in the best of
times.  Tomorrow’s CPI is more important, and it could see the first move
in the core rate back above 2% in a year, as some of the factors that Fed had
identified as transitory drop out.  Canada reports housing starts (March)
and permits (February).  Both likely softened.  

The Canadian dollar posted a big outside day yesterday, trading on both
sides of the pre-weekend range and closing well below that low.
US dollar has carved a potential head and shoulders top against the Canadian
dollar and the neckline is at CAD1.28.  The pattern projects toward
CAD1.2475.  The greenback is finding some bids today near

The euro is building on its pre-weekend recovery from approach on
$1.2200.  Initial resistance is seen in the $1.2340-$1.2360 area. 

The dollar has recovered from the JPY106.60 area to resurface above JPY107.00. 
Nearby resistance is seen near JPY107.50.  Sterling, which had dipped
below $1.40 in the second half of last week, is pushing closer to $1.4200
today.  Last month’s high was near $1.4245 and is the next important
technical target.  The Australian dollar is trading above its 20-day
moving average (~$0.7710) for the first time since mid-March.  It has run
into offers near $0.7740. 


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