Overview: Stocks and bonds ae selling off today. The
greenback is also trading heavily. Ironically, the yen is the strongest among
the G10 currencies and the Chinese yuan is the strongest among emerging market
currencies. The dollar is firmer against the Scandis and Canadian dollar. Most
emerging market currencies, including the Mexican peso, which traded at its
best level yesterday since 2015.
While nearly all the bourses
but India fell in the Asia Pacific region, Hong Kong and mainland shares that
trade there were tagged for more than 3%. Europe's Stoxx 600 is off more than
1% and if these losses hold, it would be the biggest down day since late May. US
index futures are extended yesterday's losses. The bond market is not offering
a haven today. Benchmark 10-year yields are up 6-7 bp in Europe, though Gilt
yields are up a little more. The 10-year US Treasury yield is about four basis
points higher to 3.98% to its highest level since mid-March. The two-year yield
is drawing nearer 5%, which it last traded above on March 9. The minutes from last month's FOMC meeting struck a hawkish tone. Gold is confined
to a narrow range above yesterday's low slightly below $1915. August WTI is
extending yesterday's gains on the back of a large drawdown of US inventories
and extension of cuts recently announced by Saudi Arabia and Russia.
Asia Pacific
Earlier today, Japan
reported weekly portfolio flows for the last week of H1. There are two elements that stand out.
First, Japanese investors have returned as buyers to the global bond market
after having been massive sellers last year. In the first six months of the
year, Japanese investors have bought JPY14.63 trillion (~$108.4 bln) of foreign
bonds compared with net sales of JPY12.75 trillion in the first half of 2022
calendar year. Second, foreigners have been notable buyers of Japanese equities
this year. In H1 23, foreign investors bought near JPY5.94 trillion of Japanese
shares. In H1 22, foreign investors sold about JPY1.43 trillion of Japanese
stocks.
Australia's trade surplus
widened in May to A$11.8 bln from a revised A$10.45 bln (initially nearly A$11.2
bln in April). In
May 2022, it reported a A$14.1 bln surplus. Shipments of non-monetary gold
(16%), LNG and other mineral fuels (3.4%) and coal, coke, and briquettes (1.6%)
helped lift overall exports by 4.4%. They helped offset the nearly 2% decline
in iron ore and other minerals. The export revenues, in turn, saw the
government record a record May budget surplus (A$24 bln).
Despite firmer US yields,
the dollar was sold to an eight-day low against the yen near JPY143.55. A combination of resistance near JPY145,
amid rising fear of intervention, and the expiration of $2.4 bln in options
today struck at JPY144 seemed to play role. There are also $1.1 bln of options
at JPY145 that expire today and another batch for $1.24 bln expire there
tomorrow. The greenback is straddling the JPY144 level in the European morning.
Nearby resistance is seen near JPY144.20. The Australian dollar is
recovering from a four-day low near $0.6635 set in the Asia Pacific session and
rose to almost $0.6690 before Europe entered the fray. It is consolidating
around $0.6670 in the European morning. Options for A$1.6 bln at $0.6700 expire
tomorrow. The PBOC continues to signal its concern by setting the dollar's
reference rate well below market projections. Today's fix was at CNY7.2098
compared with the median forecast in Bloomberg's survey for CNY7.2458. The yuan
is trading fractionally higher. Note that the dollar settled last week near
CNY7.2535. It has risen in all but three weeks since the end of Q1.
Europe
German reported a 6.4% surge
in May factory orders. It blew away expectations for 1% gains in Bloomberg's survey.
April's 0.4% decline was revised to a 0.2% gain. Europe's manufacturing sector
is the doldrums, and this is particularly true of Germany. Orders for
"other transport equipment" which includes ships and military
equipment surged 137%. Note that May factory orders in France also jumped (best
level in three years). The manufacturing PMI was lowered to 40.6 from the flash
estimate of 41.0 and 43.2. Exports unexpectedly softened in May (-0.1%).
Tomorrow, Germany reports
industrial output figures. The
median forecast in Bloomberg's survey is for a flat reading after a 0.3% rise
in April and a 2.1% drop in March. The year had begun considerably better. After
falling 2.9% in December, Germany industrial production jumped 3.5% in January
and 1.7% in February. Ironically, Germany competitive position within the
monetary union is improving as it experiences a modest internal devaluation by
having higher inflation than the other large EMU members at 6.8% (Italy is the
closest at 6.7% and Spain the lowest at 1.6%, on the harmonized measure).
Separately, Germany June construction PMI softened to 41.4 from 43.9 in May.
The last time it was above the 50 boom/bust level was March 2022. In contrast,
the UK June construction PMI slipped for the first time in three months to
stand at 51.0. It dipped below 50 last December and this January.
The euro was sold to a
three-week low near $1.0835 but recovered to around $1.0875. Pushing the single currency above
$1.0889, where options for 775 mln euros expire today, could spur additional
euro buying. Still, we note that the euro's five-day moving average (~$1.0885)
is dipping below the 20-day moving average (~$1.0890) for the first time since
June 13, illustrating the euro's heavier tone. Sterling found support
slightly below $1.2700 but is not going anywhere quickly unless it overcomes
resistance that extends into the $1.2735-60 area, which it has not traded above
for two weeks. The UK's construction PMI dropped to 48.9, its first sub-50
reading since January and the BOE's survey of inflation expectations eased
slightly. Nevertheless, l0-year Gilt yields have jumped more than 10 bp to
4.60%. Last year's panic peak was near 4.64%.
America
Amid a bevy of data today,
jobs data ahead of tomorrow's nonfarm payroll report stand out. There is the June Challenger job report,
the ADP private sector jobs estimate, the weekly initial jobless claims, the
JOLTS report, and the employment component of the ISM services survey. The
bottom line is that the labor market is slowing gradually, but it remains
strong enough to underpin demand, which overwhelming majority of Fed officials
see in excess of supply. Separately, the final services and composite PMI tend
to be overshadowed by the flash estimates and the ISM services index. The
median forecast in Bloomberg's survey anticipates a modest gain (51.3 vs. 50.3)
even though the services PMI slowed in June for the first time this year (54.1
vs. 54.9). The May trade deficit will also be reported. The advance goods
balance was already reported, and it helps explain why the trade balance now
elicits little reaction. The advanced goods deficit narrowed more than expected
in May to $91.1 bln from $97.1 bln. The improvement was driven by a 2.7%
decline in imports, and especially consumer goods. Exports of food and
industrial supplies weighed on exports, which fell by 0.6%. Lastly, one of the
new Fed presidents, Logan from Dallas is speaking before the equity market open
on the policy challenges for central banks. She has the vote on the FOMC this
year and her comments seem to put her on the hawkish side.
Canada reports its May
merchandise trade figures today ahead of the June jobs report tomorrow. Canada's positive terms of trade
shock is waning. Through April, the goods trade surplus has averaged C$854 mln
a month. In the first four months of 2022, the trade surplus averaged C$2.46
bln a month. Canada enjoyed a C$9.48 bln goods surplus with the US in April and
a C$7.23 bln surplus in March. Canada ran a C$2.45 bln goods deficit with China
in April and a C$2.51 bln deficit in March. The strike that is disrupting
shipments from Canada's first and third busiest ports account for around a
quarter of all the country's traded goods or around C$800 mln a day (~$605
mln). The disruption is likely to be seen in data for July. Although the
disruptions to supply chains may be inflationary, it will also be a drag on
economic activity.
The Canadian dollar has
fallen out of favor. The
greenback set a nine-month low near CAD1.3115 on June 27 and today rose above
CAD1.33 for the first time since mid-June. The CAD1.3320 area is the (38.2%)
retracement of the US dollar decline from the end of May high (~CAD1.3650). The
next retracement (50%) is around CAD1.3385. There are options for $1.3 bln at
CAD1.3300 that expire tomorrow. The US dollar traded below MXN17.00 yesterday
for the first time since the end of 2015. The peso is under some pressure
today amid profit-taking and what may be unwinding of a favorite carry trade
(short yen/long peso). The greenback has approached MXN17.0965 today. More
stops may be triggered above MXN17.13-15.
Reviewed by Marc Chandler
on
July 06, 2023
Rating:
