Capital Market Developments

The US dollar remains firm against most of the major currencies today as the participants await the ECB meeting, which given the events in Europe, is the most important meeting arguably since 2008.

There are three currencies that stand out today. First, sterling is independently heavy. A weak CIPS service PMI (55.3 vs 57 expected and 56.5 in March) and last minute jitters ahead of the election results weighed on sterling and encouraged paring back of long sterling/short euro cross positions after nine month lows were set just below GBNP0.8470 in Asia.

Second, the Swiss National Bank that has been thought to have intervened in large size in recent days appeared to step away from the market today and this has led to sharp franc gains against the euro and dollar.

Lastly, other notable stand out is the New Zealand dollar, which has been bolstered by a much stronger than expected employment report (1.0% increase in Q1 vs expectations of 0.2%).

After further sharp losses in Asian equities, the European bourses are posting modest gains. The MSCI Asia-Pacific Index fell 2.6% and all ten industry groups fell. Tokyo returned from the Golden Week holiday and had some catch-up to do. The Nikkei slid 3.3%. China’s Shanghai, though, tumbled 4% amid concern officials will take more measures to cool the real estate market and that largest destination of it exports, namely Europe, is going to experience weaker aggregate demand. Foreign selling has been evident in most Asian markets this week, with the notable exception of the Philippines. European bourses are up around 0.5%. Basic materials, financials and utilities are bouncing back today, while health care and telecom are slightly lower.

Southern European bond markets and the related credit-default swap market remains under pressure. This comes despite an apparently successful Spanish 5-year bond auction. Yet the 2.35 bid-cover comes at a steep price. The 3.58% yield represents a 70 bp increases from the last auction. Safe haven flows appears to have diminished, as German bunds and US Treasuries are trading a bit heavier today as well. Elsewhere, the yield on the benchmark 10-year Japanese government bonds slipped a coupled basis points to 1.26%, a new four month low.