Hong Kong Stocks Rally as Stand-Off Continues

Overview: The run-up in equities continues to be the dominant development in the capital markets. Although the Japanese and South Korean bourses fell, the rise in Australia, China, Hong Kong, and Taiwan underpin the MSCI Asia Pacific Index. The Hang Seng's gains  (1.5% on top of yesterday's 1.3% rise) are notable as the situation on the ground remains intense and unresolved. European markets are higher, and the Dow Jones Stoxx 600 is at new four-year highs, while US shares are firmer in Europe, pointing to new record highs for the S&P 500. Debt markets are quiet. Asia Pacific yields slipped, while European rates are a little firmer, and the US 10-year is hovering around 1.82% yield. The foreign exchange market is subdued, and the dollar is largely confined to a +/- 0.15% band against the major currencies, while most of the freely accessible and liquid emerging market currencies are trading with an upside bias. Oil prices are little changed, and the January WTI contract is near the middle of its $56-$58 range. Gold has surrendered yesterday's gains after running into offers near last week's high (~$1475).  

Asia Pacific

The Hong Kong political crisis is intense. The stand-off at the university continues. The situation remains ominous.  The escalation of violence and disruption cannot continue. The US has endorsed the call of the protesters for an independent inquiry into the unrest and has expressed concern about the use of unnecessary force, though it is largely silent about the violence in other countries that face social unrest such as Bolivia.  The US Senate is seeking new export controls to ensure that goods that the Hong Kong policy or China could use to clamp down are blocked. Beijing is also critical of the Hong Kong High Court that nullified the face mask ban.

The minutes from the recent meeting of the Reserve Bank of Australia seemed to show it closer to a rate cut than may have been appreciated. It recognized that a case for a rate cut exists but chose to wait for more evidence that additional action is necessary. It has cut rates three times since June. Previously, the RBA seemed to emphasize the labor market's performance but now appears to be placing more weight on consumption. It recognized that the ongoing drought is depressing farm income. Although the RBA meets in early December, the derivatives market sees a cut in Q1 20 more likely.  The Australian dollar was sold on the news but has recovered to little changed levels in the European morning.  

Bank of Japan Governor Kuroda also held out the possibility of lower rates if necessary, but the signal is that fiscal policy may be the key lever going forward. We are concerned that between weak exports and the sales tax hike, the world's third-largest economy risks contraction and that the BOJ would be under some pressure to respond. Meanwhile, the lower chamber of the Diet approved the trade agreement with the US. The upper chamber is expected to ratify the deal by December 9 when the current session ends. 

For more than a month now, the dollar has been confined to a JPY108-JPY109.50 range. After slipping to JPY108.45, the greenback has recovered toward JPY108.80 in uneventful turnover. There are options for $1 bln struck between JPY108.90 and JPY109.00 that expire today and another of expiring options for nearly $1.5 bln between JPY108.35 and JPY108.50. Before the weekend, the Australian dollar traded between $0.6785 and $0.6825, and it remains within that range so far this week. It was pushed lower on the RBA minutes initially but climbed steadily back to reach $0.6815 in the European morning. The recovery stretched the intraday technical readings suggesting the range will likely hold. The dollar rose to CNY7.03, its best level since November 5 and the 20-day moving average, but has drifted back toward CNY7.0225. Our bias is for additional yuan weakness.  

Europe

With a light economic diary, the market's focus remains on Brexit. The first debate is in a few hours. The latest developments include the head of the Liberal Democrats declaring that the party will not support either Johnson or Corbyn should they fail to secure a majority. The latest ISM/Reuters poll puts the Tories at 42% (+3) and Labour at 32% (+1), with the Lib Demos at 13% (-2). In the US, the debates do not seem to sway voters as much as boost enthusiasm for one's choice.  

A break-through in Spanish politics is possible. A Catalan nationalist party (Esquerra Republicana) appears to be moving toward endorsing the Socialist Premier Sanchez in exchange for a serious and sincere dialogue over the future of Catalonia.  The issue had been unresolved since the referendum a couple of years ago, and the jailing of several of the leaders recently reignited violent demonstrations. There is risk that a Barcelona court could rule in the coming weeks that Catalan President Torra cannot hold public office because he incited protests. It would escalate the regional tension and could force new elections.  

The euro has been confined to a little more than a 10-tick range on either side of $1.1070 as it consolidates within yesterday's range, putting at risk its three-day advance. The intraday technical indicators favor a push higher in the North American morning, but we suspect the $1.11 area will hold. Sterling is also trading quietly in a narrow range within the price action seen yesterday. It is in about a 15-tick range on either side of $1.2955. It peaked yesterday near $1.2985. There are around GBP1.2 bln of options that expire today struck between $1.2875 and $1.2900. Note that in the coming days, there are large options at $1.30 that will expire. Tomorrow, there is a GBP1.2 bln option there, and on Thursday, a GBP1.5 bln strike.  

America

Reports indicate that President Trump summoned Federal Reserve Chairman Powell to the White House on Monday. Although journalists and the blogosphere globbed on to it, investors look in stride. Some tried to link the decline in the dollar, which finished last week on a down note to the meeting, even though the interest rate market itself was little changed. Trump obviously wants lower rates, and arguably, uses the Fed to deflect blame away from the tariffs and trade conflict. Powell's position is just as clear. Economic data will drive the Fed's considerations. In fact, the statement issued by the Fed after the meeting was nearly identical to the one issued in February after Powell and Clarida had dinner with Trump and Mnuchin. There was one notable exception. Yesterday's statement added the words "as required by law" to describe its mandate of full employment and price stability. The frugality of the statement means, like the FOMC statements, every word has meaning.  That the phrase was inserted suggests that Powell thought it necessary. One can only guess why this was the case, but the takeaway is that the Fed's independence remains secure.

The US reports October housing starts and permits. The report typically does not more the markets. It is a volatile number month-to-month. After falling for three months (~5% cumulatively), housing starts jumped 15% in August and gave a chunk back in September (-9.4%). Economists look for around a 5% gain in October as overall starts remain near cyclical highs. Permits rose to new cyclical highs in August and are hovering around there still. NY Fed President Williams speaks to a capital markets conference before the stock market opens. Canada reports manufacturing sales today ahead of tomorrow's CPI.  

The US dollar remains pinned near CAD1.3200. It has weakened for the past three sessions coming into today. The rally that carried it from near CAD1.3050 in late October ran out of steam last week near CAD1.3270 (just in front of the 200-day moving average). The CAD1.3200 area houses the 100-day moving average, and the initial (38.2%) retracement of its rally is found near CAD1.3185. US 2-year rates, which had dipped below Canada's yield, is back above and around 10 bp is the most since September. On the other hand, the risk-appetite driver is supportive for the Canadian dollar. Oil prices remain rangebound. The greenback extended yesterday's recovery against the peso in Asia but has drifted back in the European morning. It found support before the weekend and yesterday near MXN19.18, where the 20-day moving average is found. The 200-day moving average is near MXN19.27. This area may hold today. The dollar spiked above MXN19.40 last week but was unable to close above it, but it may offer nearby resistance.  

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