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Borrowing costs creep uncomfortably high

Trump’s Asia trip wraps up, Chinese and Indian bond damage in focus, and a monthly update on the state of the world’s second-largest economy. Here are some of the things people in markets are talking about.

Homecoming

(Bloomberg)-The final day of U.S. President Donald Trump’s sojourn abroad will see him attend the start of the East Asia Summit before heading back to Washington, D.C., where he’ll find domestic politics raging even hotter than when he left. The Republican Congress is still struggling to put together a tax cut plan that’ll be palatable to a sufficient number of lawmakers in the House and the Senate, while another woman has come forward accusing Roy Moore, the Republican candidate for the U.S. Senate from Alabama, of sexually assaulting her when she was 16. During his first presidential visit to Asia, Trump characterized the region as the “Indo-Pacific,” affirming the U.S. desire for India to step up its influence as a countervailing force to China. His failure to hold an official meeting with Russia’s Vladimir Putin at the APEC summit in Vietnam, coupled with comments suggesting he believed the Russian president’s pledge that Russia didn’t intervene in the 2016 U.S. presidential election, managed to please neither side. In Manila, the president did manage to bond with Philippine President Rodrigo Duterte over their mutual dislike of Trump’s predecessor.

A Tale of Two Bond Selloffs

Two powerhouse Asian economies are seeing borrowing costs creep to uncomfortably high levels, taking their cues from the retreat in U.S. Treasuries. Ten-year Chinese sovereign bond yields rose to a three-year high of close to 4 percent on Monday as data showed October credit growth slowed by more than analysts anticipated. Still, side effects of China’s deleveraging campaign don’t warrant a freak-out about global growth just yet. In India, a quickening of inflation that exceeded economists’ expectations in October drove domestic 10-year yields to nearly 7 percent, with the data dimming the potential for further interest rate cuts from the Reserve Bank of India.

Chinese Checkup

The monthly Chinese data dump may command even more attention than usual amid the jitters in the nation’s bond market. Retail sales in October are forecast to accelerate to an annual pace of 10.5 percent, while industrial production growth is expected to moderate to 7.3 percent year-on-year. Last month’s figures, released during the Chinese Communist Party Congress, pointed to resilience in third-quarter activity. Elsewhere in the Asia-Pacific region, Australian business confidence and Indian wholesale prices for October are also due out. A jam-packed economic calendar in Europe features the preliminary third-quarter reading of German growth, forecast to hold steady at 0.6 percent quarter-on-quarter, GDP updates from Italy, Poland, Hungary, the Czech Republic, and the Netherlands, and a host of inflation releases.

Small Gain for Stocks

U.S. stocks crawled higher to start the week, and 10-year Treasury yields inched above 2.4 percent. Shares of General Electric Co. plunged more than 7 percent after the blue-chip company cut its quarterly dividend and new CEO John Flannery detailed a turnaround plan that failed to impress many investors. The British pound was the worst-performing G-10 currency, with U.K. Prime Minister Theresa May’s colleagues in open revolt. Bitcoin provided investors with another reminder that it’s an unreliable store of value, with the cryptocurrency tumbling nearly 30 percent from a record high over the weekend before paring a good chunk of those losses as Monday wore on. West Texas Intermediate futures traded sideways as OPEC Secretary-General Mohammad Barkindo said that production cuts were the “only viable option” to rebalance the global crude market.

Futures Mixed

Nikkei 225 futures are trading to the upside a day after the gauge suffered its biggest loss in seven months. During his speech early on Tuesday morning, Bank of Japan Governor Haruhiko Kuroda stressed the difficulty of breaking the country’s deflationary mindset. S&P/ASX 200 futures, meanwhile, are in negative territory ahead of the open. JD.com Inc. posted an unexpected third-quarter profit that saw its American depositary receipts end the session 3.5 percent higher. Japanese bank Mizuho Financial Group will remain in focus after putting forward an uninspiring long-term outlook and saying it will cut thousands of positions. Dimming odds of U.S. tax reform were cited as the proximate cause for the retreat in the MSCI Asia Pacific Index to start the week.

 

And finally, here’s what Luke’s interested in this morning

As the low volatility regime in U.S. equities persists, it’s worth asking – and answering –  the question, “What’s different this time?” In 2017, there’s been a simple reason why the CBOE Volatility Index hasn’t breached 18: three pillars of the market refuse to fall together. Let’s look at the KBW Bank Index, QQQ (the ETF that tracks the Nasdaq 100), and the Energy Select Sector SPDR fund (ticker XLE). There have been only two sessions this year where all three of these names have declined by at least 0.1 percent (on August 10th and 17th), compared to 14 such instances in 2016 and 20 in 2015.

The bullish theses underpinning these pillars of the 2017 market rally are so diverse, it’s understandable why they haven’t come apart at the seams all at once. For energy, there’s a macro rebalancing story of the global crude market; U.S. banks have been buoyed by hopes of deregulation and tax reform, and tech stocks keep managing to post exceptional top and bottom line results in what’s still a relatively low-growth environment. Implied volatility won’t rise and stay elevated if at least one of these segments keeps stepping up to alleviate the damage in broad indexes when storm clouds appear. Like Cerberus, this three-headed hound continues to stand on guard over the bull market, preventing equity bears from escaping the underworld.

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