Capital Market Overview

The US dollar is little is generally firmer. However, the main driver is not really the greenback but heightened risk aversion and fears of a renewed economic downturn given the austerity in Europe and weakness in the US. Yesterday’s dramatic drop in new home sales and the Fed’s downgrade of its economic assessment weighs on risk appetites.

Despite a relatively healthy GDP in New Zealand (0.6% Q1) and new prime minister in Australia who is open to negotiations on the resource tax, the antipodean currencies are among the hardest hit. Weaker commodity prices and risk aversion are the main culprits.

The euro’s upticks ran out of steam near $1.2350 for the third day. Pressure from the crosses may have contributed. The euro has fallen below GBP0.8200 for the first time in more than 1 1/2 years. Sterling itself has tested the air above $1.50, setting a new six week high. The $1.5050 area may pose for formidable resistance. The dollar has set a new low for the month against the Japanese yen, but is find a bid near JPY89.50, which if it does not hold, could drop to JPY89 quickly. The euro is flirting with support near JPY110, which stands in the way of a return to low since 2001 set on 7 June near JPY108.

Most Asian equity markets were lower, though the MSCI Asia-Pacific Index was essentially flat. Resource companies did well in anticipation of revisions to Australia’s tax and the health care sector did well, but multinational companies and exporters did not appear to fear as well. The mixed nature of Asia’s equity performance is illustrated by the Nikkei edging higher, while the Topix slipped; Shanghai slipped, Shenzhen rose. Nothing mixed about Europe today, with bourses off around 0.75% near midday in London. Financials and basic materials are among the worst performing sectors today, with telecoms and health care trying to turn up.

Sovereign bond markets are generally firmer. Greece is the main exception. This corresponds with new record highs in the credit-default swaps market. In addition to safe haven buying helping underpin bunds and Treasuries, there are heightened concerns about renewed contraction in the US as well as in Europe. The US 2-year yield is within spitting distance of the low made in late 2008 near 0.605%.