EQUITIES: Eurostoxx 50 Futures Remain Close to 6000.00 Handle
A bull cycle in Eurostoxx 50 futures remains intact and a fresh cycle high this week, reinforces the bull theme and confirms a resumption of the primary uptrend. Note that moving average studies are in a bull-mode position, highlighting a dominant uptrend. Sights are on the 6000.00 handle next. On the downside, initial firm support to watch is at 5795.81, the 20-day EMA. A pullback would be considered corrective. The trend condition in S&P E-Minis remains bullish. A key near-term support has been defined at 6771.50, the Dec 18 low. Clearance of this level is required to signal scope for a deeper retracement and would also highlight a possible short-term reversal. For bulls, sights are on key resistance at 7014.00, the Oct 30 high. A move through this hurdle would confirm a resumption of the primary uptrend.
- Japan's NIKKEI closed lower by 556.1 pts or -1.06% at 51961.98 and the TOPIX ended 27.1 pts lower or -0.77% at 3511.34.
- Elsewhere, in China the SHANGHAI closed higher by 2.105 pts or +0.05% at 4085.772 and the HANG SENG ended 251.5 pts lower or -0.94% at 26458.95.
- Across Europe, Germany's DAX trades higher by 111.83 pts or +0.45% at 25003.44, FTSE 100 lower by 53.19 pts or -0.53% at 10069.36, CAC 40 down 19.9 pts or -0.24% at 8217.53 and Euro Stoxx 50 down 17.21 pts or -0.29% at 5914.58.
- Dow Jones mini up 22 pts or +0.04% at 49742, S&P 500 mini down 8.75 pts or -0.13% at 6979, NASDAQ mini down 69 pts or -0.27% at 25753.
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BONDS: A Look Into Why Japan Continues To Buy UK Paper
{JN}{GB} BONDS: The Japanese demand for UK paper that we flagged in a recent bullet is even more striking given the fact the 10+-Year JGBs continue to provide much higher yields (more than an ~80bp pickup) than gilts for a Japanese investor when FX hedging costs are accounted for.
- While not all of the flow may have been directed into gilts, there are several observations to note here:
- Basic portfolio diversification and the size of the gilt market may drive flows in that direction, unless we get a meaningful UK macro shock.
- Japan has plenty of its own fiscal risks at present, which could promote an increase in active offshore capital allocation.
- The recent flows into UK paper may not have been FX hedged and focused more on signals from the labour and inflation data, which deepened the market-implied BoE rate cutting cycle, in addition to the increased market confidence that Chancellor Reeves was set to deliver a credible Budget.
Fig. 1: JGB Yields Vs. 10-Year Gilt Yields FX-Hedged From The Perspective Of A Japanese Investor
Source MNI - Market News/Bloomberg Finance L.P.
EGB OPTIONS: Large Bobl Put Spread
OEF6 116.50/116ps, sold at 21.5 in ~11.56k.
CHINA: USDCNH Holds Steady in Face of Rising Geopolitical Tensions
- Tensions between China and Japan escalated again over the weekend amid allegations that Chinese military jets locked on to Japanese fighter aircraft. Commenting after the weekend’s events, Japan’s chief cabinet secretary Minoru Kihara said that Japan was aware of the incident and would deal with the situation calmly but firmly.
- Meanwhile, China’s foreign ministry said that Japan was making false accusations and said that Japanese jets had flown into its training area.
- Despite the tensions, the Chinese yuan remained resilient overnight, with USDCNH continuing to hold near cycle lows. The USD/CNY fix printed at 7.0764, marginally above expectations, and spot is little changed since.
- However, the increase geopolitical tensions between the two countries, coming on top of renewed property market concerns in China following the recent troubles at property developer China Vanke, are a reminder of potential challenges to the medium-term outlook. Recent highs for USDCNH just above 7.0800, are a potential upside focus point.
