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A setback in Brexit talks, Xiaomi considers going public, and why Japan is to blame for the flattening Treasury curve. Here are some of the things people in markets are talking about.
The Brexit breakthrough that many were hoping for Monday didn't happen. London and Brussels failed to clinch a deal after a series of twists that saw a tentative agreement derailed by the delicate question of how to handle the Irish border. U.K. Prime Minister Theresa May traveled to Brussels Monday to meet European Commission President Jean-Claude Juncker for what was supposed to be a chance to hash out some of the finer details. However, May interrupted the luncheon to speak with the leader of the Northern Irish party that props up her government and also opposes the EU’s plan for the Emerald Isle post-Brexit. Shortly after the phone call, May and Juncker emerged to declare that no deal was reached. Talks will resume later this week, with some leaders still confident there will be an agreement.
Xiaomi, the Chinese smartphone maker that was once the most valuable startup in the world, is in talks with investment banks about a possible initial public offering and seeking a valuation of at least $50 billion, according to people familiar with the matter. The Beijing-based company is considering an offering as soon as next year with banks suggesting Hong Kong as the most likely destination. While banks have talked up Xiaomi’s prospects as they seek to win the mandate, they have concerns about whether the company can reach the $50 billion level, much less a $100 billion target that some top executives have embraced, the people said. Xiaomi last raised money in 2014 at a $46 billion valuation.
Gains in the Dow Jones Industrial Average were led by companies that stand to be winners from tax cuts, with progress coming over the weekend on the Republican overhaul plan. Yet the Nasdaq was sharply lower as investors assessed a rally that’s propelled technology stocks to numerous records this year. The dollar strengthened against most of its G-10 peers, while gold resumed its downward trajectory. West Texas crude fell below $58 a barrel amid worries that OPEC’s deal to extend production cuts may spur more U.S. shale output. Treasuries drifted higher during U.S. trading, paring losses from the Asia session. Long-end led gains fueled continued curve flattening, with the spread between five- and thirty-year debt reaching fresh multi-year lows.
Tuesday is well and truly a data dump in Asia, with Australia at the center of matters even though the nation's policy makers are expected to match a record 15-meeting stretch of inactivity by leaving the benchmark interest rate at its 1.5 percent nadir. That meeting comes after Australia delivers updates on balance of payments, retail sales and net exports. Elsewhere in the Asia-Pacific region we get South Korea's BOP, inflation data for the Philippines and Taiwan and also PMIs for Hong Kong and Singapore.
The European day brings reports on industrial output in Spain, Sweden and Ireland, as well as European retail sales, and Irish unemployment. European Union finance ministers meet in Brussels to decide which countries to include on a tax-haven blacklist. The U.S. has data on the trade balance and services PMIs -- which may show the sector's growth rate held near a 12-year high.
Blame Japan for Flat Treasury Curve
Turns out we can blame Japanese bankers for the flattening Treasury Curve, according to analysts at Citigroup. They say that a combined uptick in currency-hedging costs and paper losses on Treasuries with short maturities has spurred Japanese lenders to decrease their exposure to short-dated U.S. debt in recent months. Japan’s commercial lenders typically use swaps to protect returns from foreign-exchange swings. Currency-adjusted carry from Treasuries with terms up to three years is now negative, and Japanese buyers are nursing losses on FX-hedged U.S. bonds that they snapped up in 2015, with interest-rate markets now pricing in a more hawkish Federal Reserve.
What we’ve been reading
This is what caught our eye over the last 24 hours.
- Here’s how to tell when North Korea is about to test a nuclear bomb.
- China’s infrastructure binge is set for a slowdown.
- BlackRock and Vanguard are closer than you think to managing $20 trillion.
- Amazon is open for business in Australia.
- Say hello to cheap HIV drugs.
- Sydney and Melbourne are fueling two-thirds of growth in Australia.
- Bitcoin is bigger than Buffett, Boeing and New Zealand.
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