Tuesday, December 6, 2022

China To Sell Additional Bonds In Hong Kong; Strong Aussie Employment Data


Back-end points climbed higher after the HKMA said that China will sell an additional CNY3.5 bn of 2022 bonds and CNY1.5 bn of 2025 bonds in Hong Kong. China usually sells central bank bills in Hong Kong to reduce CNH liquidity and ease depreciation pressure from offshore speculators, but that should not be the case this time as the yuan has rallied a lot with the economy recovering and fundamentals still favor the currency. It’s more likely an intention to improve the offshore RMB yield curve, expedite the development of the CNH money market, encourage other issuers to issue RMB bonds in offshore markets, and drive yuan’s internationalization.

How far could GBP move on a Brexit-deal announcement?

There is a very narrow range of possibilities at this point for a skinny free trade agreement with potential concessions on fisheries and state-aid vs. no-deal risk. Despite the more constructive risk backdrop overall, it is hard to see a substantial upside in given those potential outcomes. I expect any move higher to be met by selling from faster money. The risk is skewed, especially given positioning where my sense is the street is still long GBP (despite some reduction in early September as negotiations broke down). This is particularly obvious in the options space: spec traders are long GBP via 1-3m digitals in both GBPUSD and .
This thing has dragged, and everyone who needs to be positioned already is, so here is my grid scenario.
                  GBPUSD / EURGBP / EURUSD
Deal agreed +3%    /     -2%    /.        +1%
No deal        -10%  /   +9%.     /        – 2%
Beyond the Brexit bounce and post-yo-yo, sterling trends have been closely correlated with global growth. Given that the vaccine boost could be a boon for the heavy services sector of the UK economy, unlike pre-vaccine days where a fade was the order of the day, I think the Brexit move on Sterling could hang around as the vaccine means fewer upside risks.

Strong Australian Employment Data

A much stronger-than-expected from Australia, with jobs rising 178.8k in October (cons: -27.5k). The split between full-time and part-time is 97.0k / 81.8k. A rise in the (7.0%, from 6.9%) reflects a fairly sharp rise in the participation rate from 64.9% to 65.8%.

An improvement in labor market conditions is a necessary, but not sufficient, condition for the RBA to move away from ultra-accommodative monetary policy. Nonetheless, this data release supports the Board’s view that negative rates are “extraordinarily unlikely And supports Governor Philip Lowe suggesting the economy is “back on track” (though noting the recovery will be uneven).”

These data sets are notoriously volatile on a month-to-month basis. Still, it does offer some optimism that the rollout of a covid vaccine in 2021 could deliver faster employment than the consensus expects, which would be -positive.

More on US COVID-19 surge

The surge in new COVID-19 cases in the US in recent weeks poses clear downside risks to the economy in the near term. Many states are already introducing new measures in response to the spike in cases. High-frequency data have shown some early signs of economic softening as consumers become more cautious again. Hence, the overwhelming sense of caution in the stock market emerging again.

While daily cases have been high for some time (roughly 40k per day in September), numbers have risen sharply in recent weeks to over 150k cases per day. And far more states are being hit than in previous waves. In some, the numbers are staggering.

US equities were weaker again Wednesday, down ½% heading into the close. Once again, rising infection rates and lockdown concerns are the market’s primary focus. And in what could be a foreshadowing of more wide-sweeping public health measures needed to combat the spread of COVID-19, in the US, New York City (NYC) Schools announced a halt to in-person instruction starting Thursday. And this looks very likely to impact the local labor market negatively. And predictably, the US stock market has reacted extremely negatively, as traders cut and trim while hedging against this necessary health care move that could be the trigger that sends both the market and the economy back on the COVID-19 doom loop.  

It is not just the soft lockdown that hurts sentiment, but it’s the virus’s pernicious influence over how we live our lives and integrate with the society that becomes the great unknowns for the market. Sure, we shop more online, but the Virus’s downstream impact on the big city job market, especially huge US urban centers, is likely irreparable, and for that, the vaccine cannot provide a cure. 

At least 1,707 new COVID-19 deaths were reported Tuesday, according to data from Johns Hopkins University. That is the highest daily death toll since May 14 and suggesting that the US is losing the war on COVID. If you are alarmed at the sound of the current death knell (1700 today), two or three weeks from now, it could easily be 3000 or more given the statistical lag, which is a horrible thought and will weigh on year-end positioning. Investors were already getting keen to mitigate year-end risk to protect gains early in the week, knowing that 2020/21 is still likely to be a tough period for northern hemisphere economies, as evidenced by soaring US coronavirus case counts and new pre-NYC virus containment measures in Washington, California, and Pennsylvania.

Year-end risk reduction was stamped all over the market yesterday. Despite more excellent vaccine news, there was only a speedy pop-up and down in risk and was barely noticeable in fixed income and equities. Investors are becoming more fearful of the economic damage already done and what will be exerted while waiting for the vaccine rollout.

One can only imagine how far this sell-off could have run without multiple vaccines in the pipeline. And while the vaccine does offer bright green lights at the end of the tunnel, the tunnel just got more cavernous and lengthier. 

Regardless of what positive input there is, be it a vaccine or a flattening of the curve, it seems like we always have a “short-clock ” to work with, given the omnipresent COVID nasties. Yup, some days you feel like the king of the market than other days, the offside bullish court jester on days like today. Fortunately, I reminded myself of this yesterday and wiped the slate clean of any bullish risk.  

Oil Markets

For most of the session, prices had shrugged off the mixed and figures to focus on positive Chinese import data instead, that was until the COVID -19 doom loop struck again when NYC halted in-person instruction.

And with virtually every US state’s COVID curve heading in the wrong direction, with dozen or so densely populated major urban centers and states extremely peaky, traders are forced to hedge the downside risk as it could be a matter of time before political pressure gives in to shutting down the whole holiday season. 

As cases surge across the US, more public schools and universities are currently plotting a defensive course of action. Road-mapping what their next defensive healthcare measures should look like, especially following a holiday season where most medial experts fear will further fuel the Virus’s rampant spread.

Forex Markets

 The Ringgit

I would expect to see a pullback in the today on the back of weaker global risk sentiment after the NYC health care concerns. Also, not great news for the ringgit is that Oil prices slip as traders need to hedge against falling back into the COVID -19 doom loop and where traders may start to write off the holiday season.

The Yen

Outside of the , which is being consumed as one of the few viable hedges left for the market to digest, the FX markets treaded water overnight. Still, the street is relatively short and nowhere near hedged short enough on the , so I think the dollar will be in demand for safe haven purposes.

The Euro 

strength  can be mainly attributed to USD weakness rather than EUR strength, so with risk losing traction Euro could look to move lower 

Gold markets 

is under pressure as more good news in the form of vaccine developments hit the wires. There was no “panic” behind last week’s sell-off; it was a clear transfer of ownership from weak hands to strong, which remains the case. However, gold traders will need to be on the lookout for safe-haven US dollar demand.

There are some green shoots from the physical side of the street. The Singapore Gold Exchange discount has narrowed, touching $13 against London, which is the lowest since mid-June.

Gold demand in Thailand is notable and can be a good bellwether of a Chinese market recovery.

Strategic gold longs are reluctant to cut at current levels, and fast money is reluctant to instigate fresh shorts as the macro/stimulus story has not changed. 

However, I do not think your non-typical gold investors, a huge component of the enduring gold rally, are comfortable being speculatively long gold with more vaccines in the pipeline based on ETFs’ continued bleeding holdings, which are down 1.4 mn oz. 

In sum, physical provides temporary support, but we need a reversal of ETF flows (and for crypto to run out of steam) for gold to recover towards 1900.

News of another vaccine is most welcome but is intuitively negative for bullion prices. Moderna (NASDAQ:)’s report suggests that other vaccine candidates could elicit a similar degree of efficacy and have the same intuitive result on gold prices. Yields will surge at some point, so the question is will the Fed be there to backstop the rise to any significant degree.

Still, gold is caught between the conflicting narrative of surging COVID19 cases and vaccine news. Despite being supported by financial fragility and ongoing Fed policies, the yellow metal still faces an uphill battle to rally. 


It’s not just FOMO or YOYO  

The crypto world is a lot less lawless and maniacal these days. There are clearer signs that crypto is becoming a viable emerging asset class by the month and just not a hedge for the currency debasement story.

There is a far more sophisticated player in the market that reduces the element of the wild wild wild west nature of the game. Indeed, with more HFT and hedge funds participation, it brings a soothing effect to the market as not only does a higher level of risk management comes to the fore, but investors feel better knowing that strong hands are there for support. 

Of course, there will always be a huge uptick on vol, like any other asset class, as price discovery takes over when markets move above recent fresh highs. 

Although you can read a gazillion opinions on why have gone moonshot, one thing is for sure, with pandemic-induced lockdowns forcing people to shop online, the rapid digitization helps matters greatly. With pandemic-induced lockdowns pushing people to shop online, the shift to cashless societies is moving forward rapidly, and that may bode well for digital money in whatever form it takes.

Indeed, this is the bread and butter for blockchain technology, which should ultimately speed up the transaction process and where is so intrinsically interwoven. As the world continues to move deeper into the new age of global electronification and digitization, Bitcoins could be in huge demand. The big problem is there is only a finite number available. 

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