Asia Having a Decent Day, For a Change

After opening down (the Nikkei was down over 2.5%, the Hang Seng over 4%, Singapore over 1%), the specter of the US stock market blasting through two support levels in two days was treated, for now, as a thing of the past. In particular, the markets seemed to take cheer from the idea that Citigroup would be sold (!).

As of this writing, the yen had weakened to just above 95. Brent and WTI crude had strengthened more than 1%. Interesting, gold has traded in a very narrow range (relative to everything else) and is now $753 an ounce. Dow futures are up 242.

The Treasury markets are also retreating from their panicked highs, as we discuss below. First, on stocks, from Bloomberg:

Asian stocks and U.S. futures rose on speculation governments will step up efforts to revive economies and the Wall Street Journal reported Citigroup Inc. may be sold.

HSBC Holdings Plc gained 4.5 percent after Hong Kong’s monetary authority said China branches of the city’s banks can receive liquidity from the mainland’s central bank. Mizuho Financial Group Inc., Japan’s second-largest bank, climbed 10 percent on optimism the sale of Citigroup may reduce risk in the financial system. Fortescue Metals Group Ltd. jumped 40 percent after reporting a quarterly “trading profit.”

“The best stimulus out there is for governments to spend,” said Jonathan Ravelas, a Manila-based strategist at Banco de Oro Unibank Inc., which manages more than $6 billion. A Citigroup merger would “avert a collapse, which the financial system and investors wouldn’t want to hear at this stage.”

The MSCI Asia Pacific Index added 3.2 percent to 77.57 at 3:21 p.m. in Tokyo, erasing a 2.3 percent retreat. Finance companies were the biggest contributor to the gain. Today’s advance pared the weekly retreat to 7.5 percent…

Japan’s Nikkei 225 Stock Average added 2.7 percent to 7,910.79, with most markets in the region reversing earlier declines. South Korea’s Kospi index advanced for the first time in nine days, rising 5.8 percent, while Hong Kong’s Hang Seng Index gained 4.5 percent.

Futures on the U.S. Standard & Poor’s 500 Index advanced 3 percent. U.S. stocks tumbled yesterday, with the S&P 500 dropping 6.7 percent to its lowest in 11 years, as economic data pointed to a worsening recession and lawmakers postponed a vote on a plan to salvage the auto industry….

China branches of Hong Kong banks can pledge collateral to receive cash from the mainland’s central bank if needed, Joseph Yam, Chief Executive of the city’s monetary authority, said today.

Although the massive moves in the Treasury market were in part due to a flight to liquidity, they got a very big impetus from short covering. From John Jansen:

There have been stunning and dramatic moves in the market since wrote my earlier piece. The Long Bond is trading at a yield of 3.43 percent and the dollar price has exploded 9 points today. I have done this for nearly 30 years. I have never witnessed this before. Even more incredible is the 30 year swap spread and swap rate. The 30 year swap rate is 2.84. It has dropped about 80 basis points on the day and is about 60 basis points rich to the 30 year Treasury.I just spoke with an options trader about this historic move. He said that there structured product trades buried in trading books all over the world which are melting. There is a massive short in the 30 year sector (in Treasury paper and in the swap market) which resulted from sales of cheap volatility. Some of these positions have been on the books of various entities for years and it is only recently that the chickens have come home to roost. Each time the spread turns more negative, that movement forces some one to receive in swaps to hedge there position. There are short the long end trades in every permutation and combination along the curve. The receiving creates a self fulfilling prophecy which compels someone else to receive. He had no opinion on when this would end.

Bloomberg says that some of the moves of Thursday are already reversing themselves. However, while the five year and ten year have shown meaningful reversals, longer-dated bonds still appear to be holding onto their gains. From Bloomberg:

Treasuries fell, with 10-year notes eroding the biggest weekly gain since the market crash of 1987, as Asian shares advanced and Standard & Poor’s 500 futures rose.

Notes slid after Federal Reserve Bank of St. Louis President James Bullard said the central bank has limited room to cut interest rates and downplayed the risk of deflation. Yields climbed from record lows, after the five-year rate dropped to levels not seen since 1954 yesterday, as the gain in equities curtailed demand for the relative safety of sovereign debt.

“Treasury yields are probably too low,” said Peter Jolly, head of markets research in Sydney at NabCapital, the investment- banking unit of National Australia Bank Ltd., the nation’s largest lender. “Asset markets are getting very cheap under any reasonable outlook.” Investors should consider buying corporate bonds, Jolly said.

The yield on the 10-year note increased 12 basis points to 3.13 percent as of 7 a.m. in London, according to BGCantor Market Data. The price of the 3.75 percent security maturing in November 2018 dropped 1 3/32, or $10.94 per $1,000 face amount, to 105 9/32. The yield fell 60 basis points this week and reached 2.99 percent yesterday, the lowest level since at least 1962.

Five-year rates climbed 13 basis points to 1.99 percent today, after declining to 1.864 percent in New York…

Futures on the Chicago Board of trade show 32 percent odds policy makers will lower the 1 percent target rate for overnight lending between banks to 0.25 percent at their next meeting on Dec. 16, from zero percent odds a week ago…

The central bank may shift the focus of monetary policy to increasing liquidity, Bullard said yesterday in Evansville, Indiana.

“It would take some doing to get some deflation,” he told reporters after a speech at an economic conference. Bullard doesn’t vote on policy this year or next.

Longer-dated Treasuries, which are more sensitive to inflation expectations, outperformed this week on speculation the economic slump will trigger deflation, or a prolonged decline in consumer prices.

JPMorgan Asset Management Japan Ltd. and Mizuho Asset Management Co. are favoring longer maturities….

The yield on the benchmark U.S. 10-year bond may decline to 2.75 percent by early next year, Francesco Garzarelli, Goldman’s chief interest-rate strategist, wrote in a report.

German 10-year bond yields may fall to 3.0 percent from 3.40 percent late yesterday and yields on similar-maturity U.K. securities may decline to 3.5 percent from 3.89 percent, according to Goldman Sachs.

Treasuries have returned 9.3 percent in 2008, heading for their best year since 2002, according to Merrill Lynch & Co.’s U.S. Treasury Master Index.

U.S. corporate bonds with an A rating have handed investors a 13 percent loss, set for the worst year since the Merrill figures start in 1989. The ranking is No. 6 of S&P’s 10 investment-grade levels.

The index yields 6.20 percentage points more than Treasuries, almost doubling since the start of September.

Figures like that are starting to attract investors, said Tan Su Shan, head of private wealth management for Southeast Asia and Australia at Morgan Stanley.

“Clients are now looking for opportunities,” she said in a Bloomberg Television interview in Singapore. “There should be some flow into the investment-grade bond areas.” Morgan Stanley, based in New York, was the second-biggest U.S. securities firm before converting to a bank in September.

Former Fed Chairman Paul Volcker, an adviser to President- elect Barack Obama, told Major League Baseball owners that weakness in the economy will last for a while, according to Tampa Bay Rays owner Stuart Sternberg, who attended the meeting yesterday.

The Fed has cut its target for overnight lending between banks from 5.25 percent in 14 months as it tries to revive an economy that may shrink 2.05 percent in the fourth quarter, based on a Bloomberg News survey of banks and securities companies. Gross domestic product contracted 0.3 percent in the three months through September.