EM ASIA CREDIT: SK Hynix (HYUELE, Baa2/BBB/BBB) - DeepSeek positive for chips

The Japanese Ministry of Finance (MoF) is set to auction ¥700 billion of 40-year JGBs today. In the previous 40-year auction held on November 27, 2024: the auction achieved a cover ratio of 2.2364x, with a high yield of 2.550%, a low price of 91.34, and 71.8181% of bids allotted at the high yield.

• The previous auction faced a lukewarm reception, with the high yield marginally exceeding dealer expectations. A Bloomberg survey had forecasted a yield of 2.54%, slightly below the realized 2.55%.
• Additionally, the cover ratio was weaker at 2.2364x compared to 2.5798x in the prior auction.
• Today's auction comes amid robust demand observed in recent 20-year and 30-year JGB auctions earlier this month. Notably, the current 40-year auction yield is approximately 15-20bps higher than November's, though 10bps below the cyclical high of 2.815% recorded this month.
• Furthermore, the 20/40-year yield curve has steepened by 5-10bps since the last auction, marking its steepest level since at least 2008.
• Results are due at 0335 GMT / 1235 JST.

US President Trump held an impromptu press conference in the oval office as he signed executive orders. Comments around 25% tariffs on Canada and Mexico, most likely to be enacted on Feb 1 (per Trump comments) drew a significant market reaction. 

• The USD BBDXY recouped earlier losses from sub 1300 to highs of 1310.28. We sit a little lower now, last around 1307.3, still up 0.40%, versus end Monday levels in NY.
• Some market relief around lack of tariff action from Trump on Day 1 of the administration has clearly given away to a more cautious market tone. In the cross asset space, US equity futures flipped from early gains to back in the red, although sit up from lows (last near flat). US yields are still holding lower, the 10yr last down 8bps to 4.55%. Earlier lows were just under 4.54%.
• USD/CAD got to highs of 1.4516, fresh highs since 2020. We sit back around 1.4440 in latest dealings around 0.90% weaker. USD/MXN got to 20.7987, sub recent highs. We are back around 20.73 in latest dealings, off a little over 1.0%.
• USD/CNH is higher, last near 7.2870, up around 0.35%. Trump didn't specify anything around tariffs on China, but made threats on BRICS countries more broadly (something he stated around the election time last year). Trump also stated he had been invited to China. This suggests potential for negotiations with China, but market sentiment is still likely to remain cautious. He added that the administration is not ready for a universal tariff yet.
• USD/JPY got to highs of 156.23 but sits back at 155.50/55 now, little changed for the session. The lower US yield backdrop and less positive equity backdrop helping yen outperformance. AUD and NZD are holding weaker but up from lows. A$ last near 0.6230/35, NZD around 0.5640/45. 

On the first day of his second term, President Trump has said that he thinks a 25% tariff on imports from Canada and Mexico will be enacted from February 1. This has driven a sharp increase in the US dollar (USD BBDXY +0.4%) and seen CAD (-0.9%), MXN (-1.1%) and AUD (-0.7%) sink against the greenback and equities lower. This is bad news for Canada and Mexico but intense negotiations are likely over coming days. 

• Increasing protectionism can easily lead to a trade war. Assuming the 25% US tariff goes ahead, Canada and Mexico are highly likely to retaliate, which would also hurt the US as 17% and 16.3% respectively of its total exports went to those destinations in 2024. Canada’s foreign minister Joly has already said that there will be a response.
• In 2024, over 28% of US merchandise imports came from Canada and Mexico and thus a 25% tariff is likely to result in higher prices certainly in the short- to- medium terms. 

US imports by source % total

• In the year to November, the US’ trade deficit with Canada narrowed around $4.5bn to its lowest since 2021 but it is $46bn wider than when Trump was last in office, making it a target. With Mexico it was $19bn wider in 2024 and over $60bn respectively.
• Canada is extremely exposed to the US with exports to its southern neighbour accounting for 76% of the 2024 total and in 2023 over 20% of GDP. But with supply chains highly intertwined between the two, US tariffs are likely to hurt both economies. Oil is a major export to the US, ranked 1 and 2, but Trump has previously said that it won’t be exempted from tariffs.
• Mexico’s exports to the US in 2024 accounted for 83% of the total but the economy is less exposed than Canada with them worth 6.8% of GDP in 2023.

Exports to the US 2023 %

Source: MNI - Market News/Refinitiv