Article / 02 February 2018 at 1:51 GMT

Morning Report APAC: US yields put pressure on shares

APAC Sales Trading Desk / Saxo Capital Markets
Singapore

 

  • Asian stocks dipped, challenged by a surge in US bond yields
  • 10-year Treasuries yield at 2.79%, up about 13 basis points this week
  • US employment report is the next pitstop for active traders 
  • They will be paying attention to wages with a view to labour costs
 
By Saxo APAC Sales Trading

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Speeches

1800 – EUR: ECB’s Coeure Speaks in Kranj, Slovenia

Overnight news

Treasury yields rally: 10 Year Treasury yields touched 2.80%, the highest level since 2014 and the 30-year broke 3.00% for the first time in 8 months. 

Pension Funds have been inactive in the bond market for the past few days helping the bond selloff. The 5-30 year spread is touching fresh lows and is now at 45 basis points after being at 40 bps two days ago. Levels not seen since 2007.   

Strong US ISM, but low productivity: ISM Manufacturing came in better than expected at 59.1 (expected: 58.6) from 59.3. 

The details show that new orders and production - remained near post-recession highs. New orders moderated to 65.4 from 67.4 prior and production dipped to 64.5 from 65.2. 

US worker productivity unexpectedly fell in the fourth quarter to -0.1%, the first decline since early 2016 and an indication that it be difficult to boost annual economic growth to 3% on a sustainable basis.

Unit labor costs, the price of labor per single unit of output, rose at a pace of 2% pace in the final three months of 2017 after slipping at a rate of 0.1% in the third quarter.

For those looking for arguments that inflation won’t pick up sustainably: compared to the fourth quarter of 2016, unit labor costs rose at a rate of 1.3%. 

They gained 0.2% in 2017, the smallest increase since 2010, after rising 1.1% in 2016.

India bond sell-off: Indian bonds got crushed after the government widened its deficit targets to free up cash before elections next year. 

The shortfall will be 3.5% of GDP this year and 3.3% next. The yield on 10-year debt rose to 7.61%, the highest closing level since March 2016. 



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The USD trend lower continued overnight and as we talked about before, any attempt to catch a falling knife is really not worth it. 

The market will continue to find any reason to sell USD after the nonfarm payroll tonight unless wage inflation pick up way more than expected.

We suggested to go long EURJPY in the Technical Report at 135.50 and worked very well. The main resistance is at 137.80 but I would take 80% out of the table after this nice run higher and keep the 20% to target the 137.80. 

The main reason is that we could move tonight from a cross JPY trade to a pure USD move.   

Emerging Markets: USDINR was the main mover yesterday rallying 0.8% following the budget and the selloff in the bond market. Technically, we are still in a consolidation phase and I would only go long above 64.25. 
 
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Strong interest in Selling USDJPY R/R (Buying USD Calls) from funds with higher US Treasury yields.

GBP vols are very bid with the Funds getting nervous from the Brexit talks and most having long GBP spot positions.

CNH Gamma continues to be super bid with spot continues its appreciation below 6.3000

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Bonds continues to be sold off with 30 year US treasury bond yield soared above 3% for the first time in eight months while the US 10-year treasury yield also surged above 2.8%, its highest since 2014. 
 
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US: Amazon released its quarterly result after closing and posted a very good set of results which saw the e-commerce giant trading 6.3% higher after market closes, trading above the 52 weeks high again. 

PayPal stock was down 8.1% as eBay announced it would be phasing out Paypal as a checkout option after 2023. eBay management said it will begin transition to a smaller company, Adyen, to process payments.

Though Alibaba reported its strongest revenue growth in 15 quarters, the $1.63 earnings per share was a slight miss against consensus. 

But most importantly, Alibaba changed its structure with Ant Financials which results in the sell-off.  Previously, Alibaba will receive 37.5% of pretax profits whereas now it has 33% ownership of the company. 

The new equity swap arrangement involves nil-cash but in exchange Alibaba will be giving up certain intellectual property rights owned by Alibaba exclusively related to Ant Financial.

Europe: European equity traded lower on the first day of trading in Feb as the German Dax finished 1.4% lower to close at 13,003. Nokia rallied 12% after the Finnish telecom gear company posted earnings and revenue ahead of expectations. 

The profits were boosted by a one-off patent payment of 210 million euros from China's Huawei. Nokia’s operating profit from the networks business fell 25% year-on-year.

Hong Kong: The Hang Seng slipped 245 points but was trading higher at opening before heading south.  China property stocks were the best performer with China Resources Land and China Overseas the best performer, surging about 4%.


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 Shares in Asia are weaker this morning as bond yields continue to rise. Photo: Shutterstock


– Edited by Adam Courtenay


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