Asia stocks recover losses even as US-China war of words continues

Asia Market Update: Asia stocks recover losses even as US-China war of words continues; JPY strengthens on strong Yuan fix & JP political concerns as Gold hits record high on Fed rate cut bets.

General trend and developments

- Asian stocks brushed off trade tensions, led by Korea’s Kospi +2.6%, with Nikkei +1.9% and Hang Seng +1.4% gains, taking back most if not all of yesterday's steep trade-fear induced losses.

- US-China war of words and mutual suspicion over not living up to respective trade promises continued, amid reports that China had in practice already placed tighter scrutiny on rare earth magnet exports since September, well before last week’s announcement on extra permitting requirements.

- China PBOC set the Yuan reference rate in the 7.09 handle for the first time since Nov 6th last year. Offshore Yuan moved up into 7.12 handle again.

- JPY a beneficiary of the strong fix, along with political uncertainty in Japan (see below) and ongoing US-China trade tensions.

- China deflation continued apace, with CPI falling more than expected (-0.3%) for September, and PPI at -2.3 recording its 36th month of negative reads.

- Japan LDP PM-elect Takaichi’s search for coalition partners continues at a higher intensity as several opposition parties (including DPP, CDP and Ishin no Kai negotiate to potentially back DPP leader Tamaki in a bid to become Prime Minister instead of Takaichi. [The three parties together represent 210 seats, with 233 the magic number for a majority. Would create a very uncertain situation for Japanese politics. Comes as Japan parliamentary committee still cannot agree on holding the PM election session on Oct 21st.].

- At close of business last night OIS chances of a BOJ October rate hike dropped sharply to just 7% from 20% prior, while a December hike fell to 49% vs 63% higher.

- Today’s 20-year JGB auction firmly supported at 3.65x coverage (although lower than last month’s very strong 4.0x coverage, as the yield curve flattened somewhat at the longer end with 20,30,40-years all down around 3bps.

- Gold hits another record high on Fed rate-cut bets, a further 25bps cut now at nearly 96% for Oct 29th FOMC meeting.

- Special Note for China entrepreneurship: China’s entrepreneurs face ever-increasing danger of being thrown into harsh detention facilities (“Liuzhi”) with no reason or explanation forthcoming from the Chinese state or local governments. Western press has recently reported that in 2024 >60K people from the pharma sector and >17K from the finance sector were detained (with ~38K in the harsh Liuzhi detention). Cash-strapped local governments in China have frequently been using the “anti-corruption” laws to extort funds from arrested executives and/or their businesses. A further 200K entrepreneurs and executives have been put on China’s notorious “credit lists” so far this year, meaning they cannot fly, ride high-speed trains or stay in nice hotels. The abuse has been increasing particularly since the pandemic, casting a risk-off pall over Chinese private businesses, the complete opposite of their cavalier risk-taking attitude just a decade ago.

- US equity FUTs +0.4% to +0.5% during Asia trading.

Looking ahead (Asian-weighted releases, using Asian time zone)

- Thu Oct 16th AU Sept jobs,

- Fri Oct 17th KR jobs,

** Note: US releases scheduled for this week but postponed due to the govt shutdown: Sept PPI, Sept Retail Sales, Sept Housing Starts, Sept Building Permits.

Holidays in Asia this week

- Mon Oct 13th Japan, Thailand, US bond markets closed.

Headlines/economic data

Australia/New Zealand

- ASX 200 opens +0.9% at 8,977.

- Australia Sept Westpac Leading Index M/M: -0.03% v -0.08% prior.

- Australia sells A$800M v A$800M indicated in 4.25% Dec 2035 bonds: Avg Yield: 4.2436% v 4.2384% prior; bid-to-cover: 3.38x v 2.16 x prior.

- RBA Assist Gov (Econ) Hunter: Board will adjust policy as appropriate as new information comes to hand - speech at Citi Conference in Sydney, Australia.

- RBNZ Chief Economist Conway: RBNZ has reviewed the frequency of its monetary policy decision announcements.

- S&P: Affirms New Zealand foreign currency rating at 'AA+/A-1+' and local currency sovereign rating at 'AAA/A-1+.

China/Hong Kong

- Hang Seng opens +1.1% at 25,714; Shanghai Composite opens +0.1% at 3,867.

- CHINA SEPT CPI Y/Y: -0.3% V -0.2%E; PPI Y/Y: -2.3% v -2.3%e (36th month of negative readings).

- China PBOC may inject further liquidity in the coming months - Shanghai Securities News, citing analyst.

- (US) Pres Trump: Believes that China purposefully not buying our Soybeans, and causing difficulty for our Soybean Farmers, is an Economically Hostile Act.

- Reportedly Chinese rare earth magnet companies have been facing tighter scrutiny on export license applications since September; Scrutiny is similar to April, at height of U.S.-China trade war – press.

- China Premier Li Qiang: To make full use of policy resources; to expand new consumption growth points.

- China Commerce Ministry (MOFCOM): Urges US to correct its mistakes regarding US shipping 301 restrictions; Hope US to resolve concern matters via dialog.

- US Trade Rep Greer: China realized they've overstepped; We've had constructive talks with China over the past 6 months; The China rare earths measure is disproportionate; Believes we can work through it with China.

- CHINA PBOC SETS YUAN REFERENCE RATE: 7.0995 V 7.1021 PRIOR (strongest since Nov 6th, 2024).

- China PBOC Open Market Operation (OMO): Injects CNY44B in 7-day reverse repos; Net injects CNY44B v injects CNY91B prior.

Japan

- Nikkei 225 opens +0.4% at 47,032.

- Japan parliamentary committee fails to agree on holding PM election at extra-ordinary Diet session on Oct 21st – Jiji.

- JAPAN SELLS ¥800B VS. ¥800B INDICATED IN 20-YEAR JGB BONDS; AVG YIELD: 2.6740% V 2.6540% PRIOR; BID-TO-COVER: 3.65X V 4.00X PRIOR.

Korea

- Kospi opens +0.5% at 3,580.

- South Korea Aug M2 Money Supply M/M: 1.3% v 0.8% prior.

- South Korea Presidential National Security Office holds rare earths supply chain meeting; discussed measures to secure stable supplies of rare earths.

- South Korea Pres office: Will have to analyze whether China sanctions will affect MASGA project; See limited immediate impact from China sanctions against Hanwha.

- South Korea Foreign Ministry: To minimize the impact of China sanctions on the US-linked subsidiaries of Hanwha Ocean.

Other Asia

- * Foxconn Chairman: Limited impact so far from China rare earth restrictions; if the ongoing restrictions continue to escalate tensions, it will impact industries across the board, not just Foxconn.

North America

- (US) TRUFLATION PROXY OF US AGGREGATED INFLATION INDEX ROSE TO 2.2% V 2.0% END-SEPT V 1.4% BEFORE 'LIBERATION DAY'.

- IMF WORLD ECONOMIC OUTLOOK (WEO): RAISES 2025 GLOBAL GDP GROWTH FROM 3.0% TO 3.2%, citing less-severe trade shocks and easier financial conditions than expected.

- (US) Fed's Bowman (voter, dove): Still see 2 more rate cuts before the end of the year.

- (US) Fed Chair Powell: Available data show tariffs are pushing up price pressures; Rising risks to the job market justified Sept interest rate cut; Sees space for Fed to be more 'Nimble' with balance sheet size; May be approaching end of balance sheet contraction (QT) in coming months.

- (US) Pres Trump: We have to be careful with China; have great relationship with China Pres Xi, but sometimes it gets testy; We have fair relationship with China; Think China relationship will be fine.

- (US) Pres Trump: Believes that China purposefully not buying our Soybeans, and causing difficulty for our Soybean Farmers, is an Economically Hostile Act; Will have list on [Fri Oct 17th] on shutdown of Democrat programs [Unclear what constitutes a Democrat govt program].

- (US) Fed's Collins (voter in 2025; non-voter in 2026): Seems prudent to cut rates further given lower inflation risks and job market concerns; Policy is not on a pre-set path, there are scenarios that would keep rates steady.

- (AR) US Pres Trump: Think Argentina Pres Milei on verge of economic success; Will endorse Pres Milei today.

Europe

- (FR) France Govt Spokesperson: Aim to get budget deficit to GDP well below 5% level (from ~5.8-6.0% in 2024).

- (UK) BOE's Taylor (dovish dissenter): Sees wage settlements clore or below 3% in 2026- (EU) ECB Pres Lagarde: Quite surprised how resilient economy has been; Would never say that the ECB is done cutting rates - CNBC.

- (FR) France PM Lecornu: Propose suspending French pension reform bill; Suspension of pension reform will be paid for by belt-tightening measures - National Assembly speech.

- (EU) ECB's Makhlouf (Ireland): Inflation is where we want it to be; ECB is in good place with the disinflationary process over.

- (FR) Reportedly French Socialists will not vote for no-confidence to oust PM Lecornu - press.

- (FR) ECB's Villeroy (France): Next ECB move more likely to be a cut than a hike; More downside than upside inflation risks.

- (EU) ECB Pres Lagarde: Quite surprised how resilient economy has been; Would never say that the ECB is done cutting rates - CNBC.

- EU said to consider forced tech transfers for new China investments and enforcing joint ventures – press.

- (EU) Trade Commissioner Sefcovic: China trade curbs cause problems for EU industry; G7 video call would soon be advisable.

Levels as of 01:20 ET

- Nikkei 225 +1.9%, ASX 200 +1.0%, Hang Seng +1.4%; Shanghai Composite +0.4%; Kospi +2.6%.

- Equity S&P500 Futures +0.4%; Nasdaq100 +0.5%; DAX +0.4%; FTSE100 +0.2%.

- EUR 1.1602-1.1626; JPY 151.01-151.88; AUD 0.6481-0.6519; NZD 0.5706-0.5728.

- Gold +1.1% at $4,207/oz; BTC +0.1% at $112,740; Crude Oil -0.1% at $58.65/bbl; Copper +0.8% at $5.0365/lb.