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Risk Appetites Return to Start the New Week

Overview: China and Hong Kong re-opened after the Friday and holiday and equities rallied strongly. Japan, Taiwan, and South Korea advanced as well. However,…

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Overview: China and Hong Kong re-opened after the Friday and holiday and equities rallied strongly. Japan, Taiwan, and South Korea advanced as well. However, India and Australia equities fell. Europe’s Stoxx 600 is up around 0.9% to recoup its pre-weekend loss and more. US futures are broadly higher. Benchmark 10-year yields are mostly firmer. The US 10-year yield is up about three basis points to 2.96%. European core yields are firmer but the yields in the periphery are lagging amid speculation that the ECB will announce a new facility to support them if needed. The 10-year UK Gilt yield is up nearly five basis points to 2.20%, a new three-month high. The dollar is trading lower against all the major currencies. Sterling is the strongest with almost a 0.6% gain. The yen and Swiss franc are the weakest, rising about 0.1%. Emerging market currencies are also mostly higher today. The main exceptions are a few Asian currencies and the Turkish lira. Turning to commodities, gold steadied after the pre-weekend reversal. It found support a little below $1850. July WTI reached almost $121 for easing back below $120. US natgas has jumped 4.3% today and Europe’s benchmark is up marginally. With China re-opening, iron ore prices extended their three-day rally into today with a 1% gain. It is trading at its best level in a month. Copper extended its reversal. At the end of last week, it reached 457.70 before reversing to close a little below 446.00. It fell to 440.60 today before stabilizing. July wheat has rallied 4.7% today after falling 10% last week.

Asia Pacific

China's May services Caixin PMI rose to 41.4 from 36.2, disappointing expectations for a larger rise. The composite rose for the first time this year (from 37.2 to 42.2). With the lockdown lifted in Shanghai and restrictions easing in Beijing (public transportation resume today), and the investigation into Didi completed (mobile app may appear in store again later this week), the world's second-largest economy appears to have turned the corner.

While BOJ Governor Kuroda has persuasively argued that the rise in Japan's CPI, with the core reaching the target will not spur a change in monetary policy, fiscal policy in play. Prime Minister Kishida offers a "new form of capitalism."  It seems like it is the traditional LDP-economics of easy monetary and fiscal policies with an emphasis on greater economic equality. To be sure this is not a warmed-over socialism. Kishida thinks it can be done through growth efforts, including mid-career educations (retraining and acquisition of new skills). At the same time, he wants to promote an equity culture and is working on efforts to encourage households to participate in the returns to capital. Household financial assets were estimated to be worth around JPY2 quadrillion at the end of last year, or about $15.5 trillion. Over half is invested in low yielding savings accounts. Last year's supplemental budget had a commitment to record a primary budget surplus (excludes debt servicing costs) by the end of the fiscal year ending in March 2026. This year budget dropped the reference. Still, there is no sign that Japan's fiscal stance is an important market consideration. The 30-year bond yield is slightly above 1%. It set a six-year high in late March near 1.10%. Japan's 10-year breakeven poked above 1.0% in early May for the first time in seven years. It rose 11 basis points last week, the first increase in four weeks.

The RBA meets the first thing tomorrow in Canberra. The swaps market has almost 30 bp of tightening discounted. Economists, in Bloomberg's latest survey, look for a bit more, 40 bp. Since the end of April, the Australian dollar appreciated by about two cents, but the speculators in the futures market have boosted their net short position to almost 48.7k contracts (each contract is for A$100k) five weeks in a row through last Tuesday (May 31) and for a cumulative 20k contracts during the run. As we noted in the weekly commentary on prices, the Australian dollar's bounce faltered after retracing a little more than half of the decline from April's high (~$0.7660) to the mid-May low (~$0.6830). Australia's new Treasurer, Chalmers, warned that he may revise sharply higher this year's inflation forecast next week, and plans on publishing a new budget in early Q4.

The dollar held JPY131 and is consolidating in about a half a yen below there. Support is seen in the JPY130.40 area, which has been the low since the better-than-expected US jobs data before the weekend. The greenback may be bolstered if the 10-year yield resurfaces above 3%. After reversing lower after the US jobs data, the Australian dollar fell further today to a slightly below $0.7190 before finding a solid bid. Its recovered began in the middle of the Asia Pacific sessions and carrying into the European morning, where it approached $0.7230. Recall, the pre-weekend high was near $0.7285. China's mainland markets were closed last Friday, and the offshore yuan was virtually unchanged. The dollar gapped lower today and fell to CNY6.6415, its lowest level in a month. A small gap remains (~CNY6.6568-CNY6.6595). The PBOC set the dollar's reference rate at CNY6.6691 compared to the median (Bloomberg) projection of CNY6.6708.

Europe

The euro bottomed against the dollar on May 13 (~$1.0350). The same day, the swaps market slipped to price in 60 bp of ECB rate increases through October. It has been trending higher and rose 13 bp last week to a little more than 100 bp. A similar force has seen the US two-year premium over Germany narrow by 50 bp over the past two months to approach 200 bp. To put this in some context, consider that the US premium peaked in the last cycle near 350 bp (November 2018) and around 220 bp at the end 2019. It bottomed ahead of 75 bp during the acute phase of the pandemic. Speculators in the futures market were long from early January through early May when the net position switched briefly to favor the shorts. However, in last four CFTC reporting periods, the bulls stepped in and have been net buyers of euros for the past four weeks. At almost 52.3k contracts (125k euros per contract) the net long position is the largest in two-and-a-half months. The median forecast in Bloomberg's survey shows a near-term flat view ($1.0705 in three months), but a bullish outlook after. The median for year-end is $1.0850 and $1.1050 for the middle of next year. The year-end forecast (median) is $1.1500.

Sterling is the strongest of the major currencies today, nearly recouping in full the roughly 0.7% pre-weekend decline. The gains appear to come as Prime Minister Johnson is expected to win the vote of confidence, which will take place later today. The vote of confidence requires at least 54 MPs to call for Johnson's resignation, but it appears the Prime Minister still enjoys the support of a majority of Tories in Parliament and the leading contenders in the government, including Sunak and Truss say they support Johnson. Surviving a vote of confidence today protects the PM from another such vote for a year. However, recall that Johnson's predecessor May survived a vote of confidence but resigned shortly after. Assuming Johnson survives today, the next challenge is the June 23 two special elections to replace two Tory officials that resigned amid separate sex scandals. Labour looks set to re-take its traditional stronghold in Wakefield, while the Lib-Dems may take the Tiverton and Honiton district from the Tories.

The euro is trading inside the pre-weekend trading range (~$1.0705-$1.0765). The single currency is near the middle of the $1.07-$1.08 range protects by expiring options of a little more than 1.4 bln euros each side today. The risk of a hawkish hold by the ECB later this week may underpin the euro. Sterling's advance from the sub-$1.22 low in mid-May ran out of steam last week near $1.2660. It fell back two cents and has been confined to last Tuesday's range ($1.2460-$1.2655). The intraday momentum got stretched as sterling approached $1.2580 in the European morning. The consolidative tone looks likely to persist a bit long.

America

There are several reasons why gasoline prices are high and the size of last year's stimulus or the easy monetary policy are not among the major drivers. One factor that does not appear fully appreciated is the loss of around 1 mln barrels a day in refining capacity. Some was shuttered. Some was converted to biofuels. Another factor that has not received much attention is the strong gasoline exports, the most in a few years. Mexico's demand has been strong. Brazil and Argentine demand for distillates have been robust as in the face domestic shortages. Europe is shipping gasoline to the US East Coast, which may be cheaper that from the Gulf due to the Jones Act. OPEC+ agreed last week to boost output by 648k barrels a day next month. It had problems fulfilling their previous quotas. An unscientific survey found a range of 132k to 350k barrels a day are expected to be provided. It was not seen as sufficient to ease the shortage with given the EU sanctions, the re-opening of China, and the seasonal demand in the US. The potential game changer is Iran. However, talks for the US to re-enter and for Iran to move back in accordance stalled in March. Some have raised the possibility that the US does not enforce the sanctions. However, the latest confrontation was late month when the US confiscated Iranian oil on a Russian-operated ship near Greece and Iran retaliated by seizing two Greek ships. News that Saudi Arabia was boosting next month's premium for Asian customers $2.10 a barrel to $6.50 on top of its benchmark was more than expected and helped lift July WTI to a new high of almost $121 a barrel today before pulling back toward $119.

The US jobs data did not sway economic views. The 390k increase in nonfarm payrolls was a little stronger than expected, especially after the ISM and ADP reports. It was the least number of jobs created in a year and was consistent with other high-frequency data points suggesting that the world's largest economy has lost momentum. However, the report was seen as sufficiently strong to keep the Fed on course. In fact, the implied yield of the December Fed funds rose every session last week for a cumulative 17 bp increase (to 2.70%). The Federal Reserve has committed to lifting the target rate by 50 bp at the next two meetings. Although some officials have been reluctant to venture what will happen at the September meeting, the market has increased the chances of another 50 bp hike. The Fed's quiet period ahead of the June 14-15 FOMC meeting has begun.

Today's is a subdued start to the week's data releases. Tomorrow sees the US trade balance and consumer credit. The trade deficit may be less of a drag on Q2 GDP than it was in Q1. American's have sustained consumption partly by drawing down savings, using credit cards (record increase in revolving credit in March) and monetizing the rise in house prices, through equity withdrawal refinancing. The highlight of the week is the May CPI figures on Friday. Little change is expected. Canada also reports trade figures tomorrow, but the highlight is the employment report at the end of the week. Employment is expected to rise by about 25k after a 15k increase in April. Mexico reports May CPI on Thursday. The year-over-year pace may steady around 7.6% and the core around 7.2%. Brazil's IPCA inflation measure is due the same day, and it is expected to moderate. April retail sales will be reported the following day and are expected to have edged higher. Chile has raised rates every other month this year but after hiking by 125 bp last month, many expect it to move again tomorrow. The overnight target rate stands at 8.25%. May CPI is due Wednesday and is expected to have risen by 1.1% for an 11.4% year-over-year rate (from 10.5%). Peru's central bank meets Thursday and is expected to hike rates 50 bp for 10th consecutive meeting. The tightening cycle began last August with a 25 bp move. The reference rate stands at 5.0% now with Lima inflation running near 8%.

The US dollar settled last week on the session highs a little shy of CAD1.26. It briefly poked above there today before sliding back to almost CAD1.2555, just above the pre-weekend low (~CAD1.2550). Little technical support is seen ahead of CAD1.2500, where a $600 mln option expires today. The greenback looks more likely to return to the CAD1.2580-CAD1.2600 area. The Mexican peso is bid, and the US dollar is slipping through the low from the end of last week (~MXN19.50). The two-year low was set last Monday near MXN19.4135. Here too, the North American market may be more favorable disposed to the greenback. Initial resistance now is seen near MXN19.55.


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International

Apple Reportedly Shifting Watch And MacBook Production To Vietnam

Apple Reportedly Shifting Watch And MacBook Production To Vietnam

Wary of soaring tensions surrounding out-of-favor countries like China,…

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Apple Reportedly Shifting Watch And MacBook Production To Vietnam

Wary of soaring tensions surrounding out-of-favor countries like China, multinational corporations such as Apple are diversifying production to places with less geopolitical risk.

Nikkei Asia spoke to three sources with direct knowledge of Apple's plans to shift Watch and MacBook production out of China to Vietnam for the first time. 

Apple suppliers Luxshare Precision Industry and Foxconn have already piloted a production run of the Watch in northern Vietnam. 

The move by Apple is a further win for the Southeast Asian country as it already produces iPads and AirPods. 

Two sources told Nikkei Asia that Apple had requested suppliers to set up a MacBook test production line in Vietnam. They said progress in constructing laptop production in the country has been "slow, partly due to pandemic-related disruptions but also because notebook computer production involves a larger supply chain."  

"AirPods, Apple Watch, HomePod and more ... Apple has big plans in Vietnam, apart from iPhone manufacturing," one of the people with direct knowledge of Apple's plans said. "The components for MacBooks have become more modularized than in the past, which makes it easier to produce the laptops outside of China. But how to make it cost-competitive is another challenge."

This trend is called "friendshoring." While it's a play on "offshoring," this isn't about companies moving operations back to the US and Europe, but rather seeking foreign alternatives that retain the benefit of low labor costs but with less international controversy. 

Apple's production diversification comes as the US and China already had an increasingly adversarial relationship before House Speaker Nancy Pelosi's visit to Taiwan sparked anger with Beijing. The fact is, geopolitical and trade war tensions aren't going away anytime soon and will only push Apple further away from China. Though reshoring production to the US is unfeasible because of labor costs, maybe robotics can offset some of those costs or perhaps set up shop in Mexico, where there's abundant cheap labor and healthy demographics. 

A recent Rabobank analysis of friendshoring showed that chief beneficiaries would include countries like Vietnam, India, Brazil, Bangladesh, Indonesia, Mexico, Turkey, Egypt, and South Africa.

Apple's Tim Cook appears to have learned a valuable lesson this year that high exposure of supply chains to China during Beijing's zero-Covid policies and worsening geopolitical tensions with the West is a dangerous cocktail, and the need to diversify production in a trend dubbed friendshoring is essential for survival in a multi-polar world. 

Tyler Durden Wed, 08/17/2022 - 18:30

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International

Apple Reportedly Shifting Apple Watch And MacBook Production To Vietnam

Apple Reportedly Shifting Apple Watch And MacBook Production To Vietnam

Wary of soaring tensions surrounding out-of-favor countries like China,…

Published

on

Apple Reportedly Shifting Apple Watch And MacBook Production To Vietnam

Wary of soaring tensions surrounding out-of-favor countries like China, multinational corporations such as Apple are diversifying production to places with less geopolitical risk.

Nikkei Asia spoke to three sources with direct knowledge of Apple's plans to shift Watch and MacBook production out of China to Vietnam for the first time. 

Apple suppliers Luxshare Precision Industry and Foxconn have already piloted a production run of the Watch in northern Vietnam. 

The move by Apple is a further win for the Southeast Asian country as it already produces iPads and AirPods. 

Two sources told Nikkei Asia that Apple had requested suppliers to set up a MacBook test production line in Vietnam. They said progress in constructing laptop production in the country has been "slow, partly due to pandemic-related disruptions but also because notebook computer production involves a larger supply chain."  

"AirPods, Apple Watch, HomePod and more ... Apple has big plans in Vietnam, apart from iPhone manufacturing," one of the people with direct knowledge of Apple's plans said. "The components for MacBooks have become more modularized than in the past, which makes it easier to produce the laptops outside of China. But how to make it cost-competitive is another challenge."

This trend is called "friendshoring." While it's a play on "offshoring," this isn't about companies moving operations back to the US and Europe, but rather seeking foreign alternatives that retain the benefit of low labor costs but with less international controversy. 

Apple's production diversification comes as the US and China already had an increasingly adversarial relationship before House Speaker Nancy Pelosi's visit to Taiwan sparked anger with Beijing. The fact is, geopolitical and trade war tensions aren't going away anytime soon and will only push Apple further away from China. Though reshoring production to the US is unfeasible because of labor costs, maybe robotics can offset some of those costs or perhaps set up shop in Mexico, where there's abundant cheap labor and healthy demographics. 

A recent Rabobank analysis of friendshoring showed that chief beneficiaries would include countries like Vietnam, India, Brazil, Bangladesh, Indonesia, Mexico, Turkey, Egypt, and South Africa.

Apple's Tim Cook appears to have learned a valuable lesson this year that high exposure of supply chains to China during Beijing's zero-Covid policies and worsening geopolitical tensions with the West is a dangerous cocktail, and the need to diversify production in a trend dubbed friendshoring is essential for survival in a multi-polar world. 

Tyler Durden Wed, 08/17/2022 - 18:30

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Economics

Reduced myocardial blood flow is new clue in how COVID-19 is impacting the heart

Patients with prior COVID may be twice as likely to have unhealthy endothelial cells that line the inside of the heart and blood vessels, according to…

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Patients with prior COVID may be twice as likely to have unhealthy endothelial cells that line the inside of the heart and blood vessels, according to newly published research from Houston Methodist. This finding offers a new clue in understanding covid-19’s impact on cardiovascular health.

Credit: Houston Methodist

Patients with prior COVID may be twice as likely to have unhealthy endothelial cells that line the inside of the heart and blood vessels, according to newly published research from Houston Methodist. This finding offers a new clue in understanding covid-19’s impact on cardiovascular health.

In a new study published today in JACC: Cardiovascular Imaging, Houston Methodist researchers examined the coronary microvasculature health of 393 patients with prior covid-19 infection who had lingering symptoms. This is the first published study linking reduced blood flow in the body and COVID-19.

Using a widely available imaging tool, called positron emission tomography (PET), researchers found a 20% decrease in the ability of coronary arteries to dilate, a condition known as microvascular dysfunction. They also found that patients with prior COVID-19 infection were more likely to have reduced myocardial flow reserve – and changes in the resting and stress blood flow – which is a marker for poor prognosis and is associated with a higher risk of adverse cardiovascular events.

“We were surprised with the consistency of reduced blood flow in post covid patients within the study,” said corresponding author Mouaz Al-Mallah, M.D., director of cardiovascular PET at Houston Methodist DeBakey Heart and Vascular Center, and president elect of the American Society of Nuclear Cardiology. “The findings bring new questions, but also help guide us toward further studying blood flow in COVID-19 patients with persistent symptoms.”

Dysfunction and inflammation of endothelial cells is a well-known sign of acute Covid-19 infection, but little is known about the long-term effects on the heart and vascular system. Earlier in the pandemic, research indicated that COVID-19 could commonly cause myocarditis but that now appears to be a rare effect of this viral infection.

A recent study from the Netherlands found that 1 in 8 people had lingering symptoms post-covid. As clinicians continue to see patients with symptoms like shortness of breath, palpations and fatigue after their recovery, the cause of long covid is mostly unknown.

Further studies are needed to document the magnitude of microvascular dysfunction and to identify strategies for appropriate early diagnosis and management. For instance, reduced myocardial flow reserve can be used to determine a patient’s risk when presenting with symptoms of coronary artery disease over and above the established risk factors, which can become quite relevant in dealing with long Covid.

Next steps will require clinical studies to discover what is likely to happen in the future to patients whose microvascular health has been affected by COVID-19, particularly those patients who continue to have lingering symptoms, or long COVID.

This work was supported, in part, by grants from the National Institutes of Health under contract numbers R01 HL133254, R01 HL148338 and R01 HL157790.

———————–

For more information: Coronary microvascular health in patients with prior COVID-19 infection. JACC: Cardiovascular Imaging. (online Aug. 16, 2022) Ahmed Ibrahim Ahmed, Jean Michel Saad, Yushui Han, Fares Alahdab, Maan Malahfji, Faisal Nabi, John J Mahmarian, John P. Cook, William A Zoghbi and Mouaz H Al-Mallah. DOI: www.doi.org/10.1016/j.jcmg.2022.07.006

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