Article / 11 January 2018 at 2:09 GMT

Morning Report APAC: Markets react to China's remarks on US Treasuries

APAC Sales Trading Desk / Saxo Capital Markets


  • Reports said China sees US Treasuries as less attractive, creating a brief selloff
  • USD rallied overnight following the Chinese news on US yields
  • But USDJPY dropped 1% on a possible policy change of Bank of Japan
  • Oil has hit its highest level since 2014; Opec may soon try to talk oil prices down
  • Precious metals closed with minor gains, led by gold

By Saxo APAC Sales Trading

Economic data of the day (Singapore Time)


Speeches (Singapore Time)

  • 0430: US – Federal Reserve's William Dudley speaks on the US economic outlook.

Overnight news, bond yields

  • News reports said that China's officials are seeing US Treasuries less attractive, which created a selloff in US Treasuries that was completely reversed by the very good auction result for a $20bn, 10 year bond which had a bid-to-cover ratio of 2.69, the highest since 2016.
  • Few experts comments came in following the remarks from China: the financial manager and author Bill Gross said that he doesn’t foresee an “investment Armageddon” and Pimco's Dan Ivascyn said he would consider adding Treasuries on further weakness.
  • To put things in perspective, Bloomberg analytics note that China added $131 billion in Treasury holdings in the first 10 months of last year, or $13bn a month. But that pales in comparison to the more than $500bn of US government securities traded among primary dealers every day last year. China has also enough reserves at the moment to offset some capital outflows and doesn’t really need to sell its treasuries.
  • China's Treasury holdings peaked at $1.3 trillion in 2013, after rising from $78bn in the beginning of 2002. It’s been oscillating around $1.2tn since 2010. If China pursues a policy to diversify away from dollar assets, then it could have a bigger impact on rates.
  • On another note, have a look at the following two graphs from Saxo's chief economist Steen Jakobsen, who sees see the US yields close to breaking the 30 year range:



Overnight news, crude oil
  • Crude oil advanced to its highest level since 2014 after EIA data confirmed US crude stockpiles fell for an eighth straight week of 11.19 million barrels for the week ending January 5, with Brent approaching the $70/barrel mark. Goldman Sachs pointed that Opec  doesn’t want central banks around the world the start responding to inflationary pressure from oil prices above $70/b, nor do they want US shale investments to rise. So the cartel will try to talk oil prices down if Brent exceeds $70/b in the coming days.
  • Opec members Iran, Iraq, and Nigeria have already expressed concern that oil prices this high would give more incentive to rival oil producers outside of the production cut pact, most of all US shale, to ramp up production faster than expected.
Overnight news, Federal Reserve
  • Federal Reserve Bank of St. Louis President James Bullard said that “TIPS yields are based on CPI inflation, headline, so we would expect the oil price increase to feed through to inflation expectations in that market and drive nominal TIPS yields higher and feed through to other securities”. “Inflation expectations have gone up somewhat. The question for that story is how sustainable is the oil price increase and to what extent will it stimulate US production”.
  • He added:“My concern is we do not raise the policy rate into the teeth of an inverted yield curve without taking into account what that might signal about the prospects for the U.S. economy”

Foreign exchange



  • USD rallied overnight following the Chinese news on US yields. Added to that a rise in oil prices and we had some volatility in the market, but not the USD rally that we would expect in such circumstances. We don’t feel yet there is clear sign of a sustained USD rally; the market is hedging against a decorrelation with the USD.
  • USDJPY was the main mover overnight and dropped 1% on a possible policy change of Bank of Japan. The reality is there is little positioning in the market in USDJPY in general, but we are seeing banks being active in the option market in AUDJPY, EURJPY and CADJPY. There is room for these crossjpy to move lower. The level to watch in USDJPY is ¥110.80 in our graph. We have been in the same range since October last year, so we need a break to get more excitement.
  • USDCAD had a reaction from speculations that the odds of the US getting out of NAFTA is increasingm but the US are not confirming anything on the subject.
  • For more detailed levels in FX, please have a look at our FX Technicals for Active Traders
  • Emerging Markets: USDEM didn’t really see any rally overnight and the interest in EM bonds remain the same for the time being. For example, there has been $402 mln of equity inflows in India this year, $155mln into Indonesia, $359mln to Malaysia, $887mln in Taiwan and $1.7bn in Korea. On the bonds side, there was $1.7bn in inflows into Indonesia, $1bn in Malaysia and $1.68bn in Thailand. So we can’t really talk about any risk off in that space yet!

Foreign exchange movements


  • As mentioned, the main interest in the market is the decorrelation with the USD in the options space. Banks are buying Vols from one month to six months in crossJPY, namely AUDJPY, EURJPY and CADJPY in case of risk off.



  • US yields surged in earlier session on news that China is thinking about slowing or even halting its purchases of US treasuries. But they recovered post-auction. However, note that the Fed’s Robert Kaplan still emphasized that inflation pressure is building up, and that three three hikes arepossible in 2018.
  • Trading in European bonds was muted. We should watch out for the possibility of China switching to buying European treasuries.





US equities

  • United Continental Holdings rose 6.72% after the airline reported its Dec operational performance which came in better than expected. The airline said it was the best December ever for the company, and United now expects fourth-quarter passenger unit revenue to be flat compared to the year-earlier quarter. On chart, United Continental Holdings broke a key resistance at $70 and is scheduled to release its next earnings on 23rd Jan.
  • Kodak advanced another 57% today after its massive Monday performance of more than 100%. This only showed that the market would want to buy and hype anything that is Crypto/BlockChain related. is licensing its brand to something called KodakCoin, which would use a blockchain to track rights to digital photos and other images.
  • Sears department stores rose 5.1% after it  announced that the retail company has raised $100 million in new financing and is trying to drum up another $200mln from additional sources. Sears holdings closed at $3.29.

European equities

  • In Europe, bank stocks were the best performer with notable gainers such as Metro Bank and CommerzBank gaining 4.3% and 5.1% respectively.
  • IG group closed 4.36 percent lower after the Financial Conduct Authority published a letter about its findings of a review of the CFD market.

Hong Kong equities

  • In Hong Kong, Hong Kong Exchange was a notable gainer, already up 7.3% this week after news that Alibaba will consider listing its affiliate companies in Hong Kong.


  Precious metals closed higher led by gold, which was partly due to safe haven buying following hints from Beijing that it may slow down or even stop buying US treasuries. Photo: Shutterstock

– Edited by Robert Ryan

This report was compiled by the Saxo APAC Sales trading team in Singapore – the home of social trading. Follow the team on @SaxoStrats or post your comment below to engage with Saxo Bank's social trading platform. Follow us on @SaxoStrats on Twitter

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