Dollar Firms, Risk Off

The US dollar is sporting a firmer profile against most of the major currencies but is largely confined to yesterday’s ranges. The yen is a main exception and been bid higher across the board as risk appetites wane. The market continues to wrestle with two main issues, the state of European bank balance sheets and the continued string of economic data warning of a loss of momentum.

The report by the Committee of European Bank Supervisors is awaited for insight into the pending European bank stress tests may be the key event of the session, underscored by the absence of first tier US economic releases. Most emerging market currencies are also under pressure today in the more risk averse environment.

Global equity markets are lower. The snapping of the seven day losing streak in the Dow Jones Industrials offered little comfort in Asia where the MSCI Asia-Pacific Index slipped 0.7%. Japanese multinationals were squeezed by the strength of the yen, which also spurred calls for by Japanese auto markers. The Nikkei eased 0.6%. The Chinese Composite Index bucked the regional trend by rising 1.3%, perhaps helped by a Securities Times report that the country’s national pension fund recently bought CNY2 bln (~$295 mln) worth of stock.

European bourses are 1.5%-1.8% lower near midday in London. Poor corporate news appears to be taking a toll. The world’s second largest maker and distributor of build materials had disappointing news and this is dragging down the entire construction sector. Financials are also a particular weak sector, if not the worst performing sector, it is among them. Nervousness over the stress tests is a key concern.

US Treasuries, UK gilts and German bunds are benefiting from a safe haven bid today. There is some pressure on the peripheral bonds. Although Greek credit-default swap prices rose, the yields for cash bonds fell and are the main exception. Portugal successful sold 762 mln euros of 6-month bills today. The average yield was 1.947%. This is about 100 bp less than the yield on 6-mopnth bills sold in early May. The successful auction failed to deter selling of Portuguese bonds—both the 2-year and 10 year yields are rising among the most in Europe today—4 and 6 bp respectively. Three-month euro LIBOR rose slightly but sufficient to lift it to new 10-month highs just below 75 bp.