Asia Stumbles, Europe Recovers, Waiting For Trump

The late recovery in US equities before the weekend did little good for Asian markets. Nearly all the Asian equity markets moved lower, led by the 1.0% decline in Japan’s Topix. It was the third successive loss for the Topix, which is the long losing streak of the year so far. The MSCI Asia Pacific Index lost 0.6%, further pushing it off the 17-month high seen last week.  

European bourses are mixed, with shares in Italy and Germany moving higher, but not sufficiently to offset the other markets, leaving the Dow Jones Stoxx 600 off 0.2%. In late morning turnover, information technology and materials are leading the gainers, while real estate and telecoms are the largest drags. News that Italy’s Intesa will not be purchasing Generali is helping lift the Italian banking sector which declined in four of last week’s five sessions. The FTSE Italia All-Share Banks Index is up 2.4%, recouping the pre-weekend loss.  

Bond markets are mostly firmer. The benchmark 10-year JGB yield is off two bp to yield less than four basis points.German bunds are flat to slightly lower, while other EMU member yields are off 3-5 bp. This is allowing the spreads to narrow a bit. US 10-year yields had approached 2.30% before the weekend.It is now 2.33%. As we have noted the correlation on of the percent change of the dollar and interest rate spreads (10-year vs. Japan and 2-year vs.Germany) continues to be robust.  

As the US 10-year yield approached 2.30%, the US premium over Japan narrowed. It finished last week near 2.24%. It began the month at 2.36%.It is slightly firmer today. The dollar made a marginal new low just above JPY111.90 in early Asia before recovering toward JPY112.35. The intraday technical reading warns of a likely range-bound North American session. 

The US premium over Germany on two-year money is pushing through 2.10% today. It is the most since 2000.It finished last month near 1.90%. The German debt market is a  safe haven, and the combination of political anxiety and the shortage of German paper (for investment and collateral purposes) has seen the German two-year yield fell to record lows and approach minus 100 bp.