North Korea is back in the headlines, bitcoin’s surge enthralls Wall Street, and is a Treasury curve collapse in the cards? Here are some of the things people in markets are talking about.
Watching for a North Korean Missile Test
(Bloombeg)-Japan is said to have received radio signals suggesting North Korea is preparing for a missile launch test, according to Kyodo News and TBS. There’s a lot still up in the air, as Japan didn’t give more specifics on the type of missile, and the signals could simply be from North Korea’s winter training for the military. The yen strengthened through 111 per dollar on the report, while Treasuries advanced. North Korea’s last provocationwas on Sept. 15, when it fired its second missile over Japan in as many months. The 73-day pause is the longest since a 116-day break between October 2016 and February.
Flat as a Pancake
Morgan Stanley is telling clients to prepare for a near total collapse in the two- and 30-year Treasury spread. Global head of interest rate strategy Matthew Hornbach believes a continued expansion of central bank balance sheets worldwide will buoy demand for long-term debt as the Federal Reserve lifts interest rates once a quarter in 2018, fostering the flatter curve. The forecast, if realized, may roil markets. A flat-to-inverted yield curve is considered a portent of a U.S. recession, and could spark waves of fear for investors across all asset classes. But such worries are ill-founded, Hornbach notes, as the S&P 500 Index peaked well after the previous two instances in which the yield curve completely flattened.
No Stopping Bitcoin
Bitcoin hit a record high over the weekend, and the rally continued on Monday. The digital currency closed in on $10,000 as investors feared they would miss out on a further rise if they stayed on the sidelines. The move is a continuation of the biggest price jump since August, with the ascent stirring reflection by traditional market participants and fanning speculation of a potential bubble. From Wall Street executives to venture capitalists, observers have weighed in as bitcoin has risen about 45 percent over the past two weeks. Even Central Bankers are starting to weigh in. At least one billionaire investor is worried the ‘bubble’ is going to end in tears.
It’s a light day for data and speakers Tuesday. Hillary Clinton will be in Beijing as the keynote at Caijing Magazine’s three-day annual conference, while PBOC adviser Bai Chongen will speak about the Chinese economy at the event. South Korea just reported that business confidence that’s little changed for December from a month earlier, while on the auction slate Japan will sell 40-year bonds and Australia is set to issue 2027 linkers. Later in the day the data docket remains light, but markets will be able to focus on Bank of England stress tests, Jay Powell’s Fed confirmation hearing and meetings between President Trump and Congressional leaders to avoid a government shutdown.
U.S. Markets Seesaw
U.S. equities fluctuated at the start of a busy week as declining oil prices pulled down energy stocks. Treasuries ended higher across the five- to 10-year sector, with the long-end and front-end of the curve largely unchanged, while the dollar reversed losses to post a modest gain toward the end of the U.S. session after President Donald Trump tweeted that negotiations on the tax bill are coming along “very well.” Asia equity futures are in the red, signaling a sluggish start to trading from Sydney to Tokyo.
And finally, here’s what David’s interested in this morning
Samsung got whacked Monday. Shares fell the most since the 8 percent plunge in October last year. The drop virtually pulled down the entire Korean stock benchmark. Morgan Stanley put a note out lowering its call on the stock to equal-weight and its target price to 2.8 million won ($2,564.95) as it sees the peak in the semiconductor super-cycle. Prices of DRAM chips are on to watch. The advice is to reduce exposure to Samsung three to six months ahead of the price peak in that category: the company derived about 70 percent of its profits from its semiconductor arm last quarter.
The chart above visualizes the gap between reality and projections in Samsung’s share price. In light of the Morgan Stanley note, the street may be overly optimistic, especially since shares have moved lower since the last round of upgrades, in October. Curiously, KB and Hana Daetoo Securities are both reiterating their buy call on the stock. Anyway, seeing how changes to Samsung’s outlook can almost single-handedly influence the narrative in the industries the company’s in and the indices its stock is part of, it’s definitely worth tracking if others follow in Morgan Stanley’s footsteps. For our Bloomberg clients, the chart above is G #BTV 1275, and for a broader look at the latest analysts’ calls, ANR <GO> is the function .