China
There seems to be a broader safe haven tilt hitting the China market that's transcending subtle market de-risking ahead of the CPI data. A selloff in the credit of state-majority owned China Huarong Asset Management seems to be the trigger as Huarong (largest bad debt investor in China) sees its bond prices move to record lows. Huarong has ~$22 bn bonds outstanding. Still, the government does not guarantee its offshore USD bonds.
China A50 shares fell fast and furious and took a number of cross-assets with it into the plunge pool as fear of contagion and default concerns ripples across broader markets.
But X China investors should continue to live life vicariously through the lens of a dovish Fed. After all, if Federal Reserve Chair Jerome Powell's dovish cadence during the '60 Minutes' interview doesn't betray something like utmost sincerity, then I don't know what will.
Markets
While the re-opening trade probably has more to go, soaring share prices/valuations suggest that “more profits” are increasingly more important during this earnings season in particular.
US Treasury yields have been slowly edging upwards over the last few days, likely pricing in CPI boomy expectations—not enough on any single session to draw much attention, but the market is moving closer to recent highs and technology stocks are ceding some ground.
The 10-year has added 8bp in the last 4 days and now only 8bp away from the post-pandemic high of 1.77% at the end of March. The bulk of the adjustment in the last few weeks: real rates have driven the run-up to the yield highs, the backtrack and now the most recent push back higher. This has been weighing on gold sentiment over the past 18 hours or so.
Forex
The yen has weakened after some direct comments from Bank of Japan Governor Kuroda. He said there are a lot of benefits for Japan from a weak yen. Kuroda said the benefit of a weak currency was more a rise in the yen-based profits earned by Japanese businesses abroad than through higher export volume.
He was a little critical of the government, suggesting that it could have done better on structural reforms. USD/JPY was up 0.3% or 40 pips so far today.
Oil
And when it rains, it generally pours for oil markets these days as the Osaka Government confirms that they expect to report >1,000 COVID cases today (fresh record high).
The more frequently these headlines come out, the more and more traders will start asking themselves who's next, and oil prices predictably sag.
The revolving carousel of misfortune
Trading and writing about this market can be, at times, similar to getting trapped on a revolving carousel of misfortune, whether it is "the two steps forward and one step back" in stocks as the US yields ebb and flow, the more obvious COVID headline scares, or the back and forth bubble concerns in China. It becomes almost a catch-as-catch-can experience to rewind and then unwind hedges.
London Open
Markets
It feels eerily quiet out here with the CPI today and volatility and volumes near 2021 lows in most asset classes. The reflation trade is wholly in the price, and US data doesn't mean much for policy normalizing until June or July based on the Fed's new "string theory."
Forex
As talks pick up between the UK and the EU concerning the implementation of the Northern Ireland protocol, there's growing optimism that progress could lead to an outline plan that may restore trust and ease tensions that have escalated into violence in recent days.
Against this backdrop, last week's persistent GBP supply, particularly in the crosses, seems to have abated triggering a bit of reversal on EUR/GBP and softening the EUR/USD as GBP/USD is talking on a bit of a relief rally of sorts.
Still, as the EU vaccination program builds positive momentum, some of the negativity that has weighed on the euro is perhaps dissipating. With the US economic optimism already well-priced, there is scope for a bit of catchup in EUR/USD.
Wider Credit Spreads; 10Y CGB Yields Lower
A selloff in the credit of state-majority owned China Huarong Asset Management, a distressed asset manager, has seen the yield of its $300 mn May 2022 3.375% coupon bond rise to 23% from 9% this morning.
Huarong has ~$22 bn bonds outstanding, although the government does not guarantee its offshore USD bonds. The selloff related to a potential restructuring of the company after its auditor delayed its financials. Wider credit spreads drive safe-haven flows into the sovereign market, where 10y CGB yields are 2.5bp lower on the day. Recall that a sell-off in China credit through November 2020 pushed CGB yields higher.
This could be helping gold a touch today.