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The final countdown

Bloomberg
Asia traders brace for U.S. tariffs on Chinese goods set to go into effect Friday, as they digest the FOMC meeting minutes from June. Here are some of the things people in markets are talking about.

Tariff Terrors

U.S. companies for months bemoaned tariffs on Chinese imports taking effect Friday. Now they fear the worst is yet to come in an escalating confrontation with Beijing over trade. Duties on $34 billion of Chinese goods will take effect at 12:01 a.m. in Washington, the U.S. Trade Representative’s office confirmed in an email Thursday. China has promised to immediately impose retaliatory duties of a similar size on American goods. The U.S. has also released a list of an additional $16 billion in products targeted for tariffs, and President Donald Trump has ordered the USTR to identify another $200 billion of Chinese products on which to possibly levy duties.

Fed Minutes Affirm Rate Path

Trade worries won’t deter the Federal Reserve from its plan to gradually tighten monetary policy. Officials reaffirmed their commitment to hiking rates, even amid rising risks from trade battles and emerging-market turmoil, according to the minutes from the Fed’s June 12-13 meeting. Yet the minutes did highlight a debate among policy makers over how many more rate increases would be needed to keep the economy on a stable footing in the long run. A “number” of officials said it might “soon be appropriate” to modify language in the Fed’s post-meeting statement language that describes rates as “accommodative.”

U.S. Stocks Soldier Higher

U.S. stocks returned from a holiday break with a strong advance led by technology shares, even as markets prepared Friday’s jobs report and the implementation of fresh tariffs between America and China. All major equity benchmarks in the U.S. advanced, with the Nasdaq indexes climbing more than 1 percent on strength in chipmakers. European automakers drove the continent’s stock markets higher on hopes of a  trans-Atlantic tariff agreement. Asian shares earlier sank to a nine-month low as trade fears increased. Trading was quiet during the U.S. holiday week, with turnover on the S&P 500 and Nasdaq 100 more than 20 percent below normal.

Japanese Investors Shun U.S. Debt

It’s easy to see why Japan has soured on Uncle Sam. After all, returns on Treasuries have been lousy for years. And the sky-high costs to hedge the dollar’s ups and downs mean Japanese investors can often do better at home – despite the minuscule yields there. But it doesn’t mean they’ve given up on America altogether. In fact, investors from Japan have plowed record amounts into U.S. stocks, corporate bonds and agency-backed securities, pushing investments in those assets past $1 trillion for the first time ever this year. That’s a stark contrast to the big pullback from Treasuries, which has cut Japan’s holdings to a seven-year low. The shift reflects a sea change in Japanese investing. For decades, the U.S. Treasury market has been the go-to destination for the nation’s historically risk-averse investor base. Faced with ultra-low returns in Japan, the yield pickup from owning the world’s preeminent haven asset was a no-brainer, and more than covered any currency-hedging costs. But now, as those expenses soar, traditional Japanese buyers of Treasuries such as pension funds and insurers have been forced to look elsewhere.

Asia Earnings Blues

Those hoping the upcoming earnings season will give some respite to tumultuous Asian stock markets might be in for disappointment. Analysts and strategists have been trimming their expectations for companies in the MSCI Asia Pacific Index, in direct contrast to firms from Europe and the U.S., where estimates are still rising. Early results from Japan are pointing to a bleak picture. Out of 66 members of Japan’s Topix index that have reported earnings this season, 81 percent have missed projections, data compiled by Bloomberg show. This follows  weak results at the start of the year, when the average sales surprise for MSCI Asia Pacific Index companies fell to the lowest since 2016 and about half that of the previous quarter. In less than a month, analysts have lowered their 12-month profit projections for members of the Asian index by 17 cents to $13.18 a share.

What we’ve been reading

This is what caught our eye over the last 24 hours.

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

I was playing around on my Bloomberg and somehow ended up putting the chart below together. I basically wanted to see how the Japanese Yen was holding up during this volatile period in global markets. The top panel is dollar-yen. Second panel is the correlation between the pair and the VIX. Third panel is the U.S. yield premium over 10-year Japanese government bonds. What appears to be the case, and this is where I hope you guys can have a look and chime in, is the negative correlation between the pair and the VIX has generally been breaking down these last three years. To put it simply, when expected volatility spikes, the pair doesn’t fall as much (yen strengthening) as it did back, say, in 2015.

Admittedly there may be other factors involved that this chart leaves out. One theory here is that it’s harder to buy and justify holding the Japanese currency when yield differentials between treasuries and JGBs are already this wide. Why bet on its strength when rate differentials and policy divergence mean the currency should be much weaker? I showed the chart to LGT Capital Partners’ Global Strategist Mikio Kumada on the shows. He shares his theory on why the currency is perceived as “safe”, but equally hopes that the chart is in fact correct and that volatile markets wean themselves of this yen addiction. Today is likely a good acid test, with markets possibly volatile on Trump’s tariffs and a Chinese response just hours away.

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