The BOJ takes center stage, shorting Asia corporate bonds just got easier, and China’s war on risk. Here are some of the things people in markets are talking about.
All Eyes on Japan
(Bloomberg)-All signs point to the Bank of Japan keeping monetary stimulus unchanged when its board meeting concludes in Tokyo Thursday, putting an end to the quietest year for policy since Governor Haruhiko Kuroda took the helm in 2013. The focus of this meeting will thus turn to where the BOJ is headed in 2018, with great interest in the possibility of policy change, and whether Kuroda drops any hints about the likelihood of him staying on as governor after his current term ends in April. It won’t just be what Kuroda says that will be parsed by investors, but the general tone of his remarks as well. Market participants will be looking for signs of improvement in the inflationary environment and how far away the BOJ sees its 2 percent price target. While a majority of economists forecast the BOJ will maintain the status quo through the next year, talk of policy change is increasing among observers. Any further comments by Kuroda on the “reversal rate“ theory will receive intense scrutiny.
Asian companies are turning to the dollar bond market like never before, selling record amounts of securities that leveraged investors desperate for yield are scooping up. But there’s a flip side to all that growth: it’s getting easier for funds to sell them short. Booming issuance and more buying by banks is increasing the supply of securities available for lending — and therefore shorting, threatening to shake up what’s been a notably stable market. With unprecedented
Bond Selloff Continues
The Treasury selloff continued unabated Wednesday, with losses led again by the long-end of the curve, mirroring price action from Monday and Tuesday amid robust trading. In a few swift moves this week, 10-year Treasury yields broke through key levels to the highest since March, while the yield curve, which had been relentlessly flattening, steepened the most since September 2016 and market-implied inflation rates reached an eight-month high. The pain isn’t just isolated to the U.S. In Europe, core bond yields continue to follow Treasury rates higher. Elsewhere in markets, U.S. stocks fluctuated near record highs, while tech shares led the Stoxx Europe 600 Index to its biggest decline in almost three weeks. Oil climbed above $58 after a report of a drop in U.S. crude stockpiles, while gold edged higher.
China’s War on Risk
China’s top leaders are taking a hard line when it comes to a number of risks, including pollution, poverty and those within the financial system. Economic policy makers led by President Xi Jinping agreed to “fight the battle of preventing and resolving major risks, with a focus on preventing and controlling financial risks,” according to a statement following the annual Central Economic Work Conference in Beijing. In the coming three years, China will seek to keep a handle on financial risks and encourage a “virtuous circle” between finance and the real economy, they said. The reiteration of 2017’s stance can be taken as a signal that policy makers will continue to balance the goals of reining in the nation’s rampant credit growth and polluting industries with the desire not to let economic growth slow too drastically. Policy makers also agreed to move faster to put in place a housing system that ensures supply through multiple sources and encourages both purchases and rentals in 2018.
In addition to the BOJ, the central banks of Taiwan and the Czech Republic are also expected to keep interest rates unchanged Thursday as the trio hold the final monetary policy meetings of 2017 for major economies. Data due in the Asian day includes initial December South Korean trade, Thailand’s November exports and imports, and Hong Kong CPI. As the world turns, Catalonia holds regional elections, while Europe’s data highlights include Dutch unemployment, Danish consumer sentiment and retail sales, Swiss trade figures and French manufacturing confidence, before the U.S. reports on final 3Q GDP.
And finally, here’s what David’s interested in this morning
We don’t spend time bothering with the Hong Kong Dollar because there’s frankly little to talk about. For the unfamiliar, the exchange rate is allowed to move within a very, very tight range between HK$7.75-7.85 per USD. And even then, it’s not uncommon to see moves not more than a few HK cents for weeks on end. But when you do see a sustained move from one end of the trading band to the other (or in some cases, through it), then you know something out of the ordinary is taking place — like now. The chart below shows the exchange rate under a microscope then zoomed out for a 20-year view. This in itself tells you a lot about the history of financial markets from periods of calm to extreme stress. Not to say that there’s an extreme scenario ahead but the slope on the exchange rate does signal less tranquil waters lie ahead.
On a related note, the Hong Kong Monetary Authority offered to calm concerns recently and said this move toward the weak end of the bank is normal as the Fed continues to normalize. And so far, despite HKD interbank rates also moving higher rapidly, there’s nothing major so far to indicate liquidity’s become an issue. Let’s hope it stays that way.