Push-Me, Pull-You in Global Capital Markets

The US dollar is broadly mixed as the news stream buffets the foreign exchange market. A better than expected reception to the Greek T-bill auction helped mitigate the reaction to Moody’s decision to cut Portugal’s credit rating two notches to A1. The ZEW survey captured the nature of the push/pull impulses today as the economic sentiment component was weaker than expected but the assessment of current conditions was stronger than expected.

In a similar fashion, sterling was initially weighed down by lingering disappointment, S&P maintained its negative outlook, and the RICS fell to an 11-month low only to reverse in response to slightly higher than expected inflation (3.2% year-over-year vs consensus of 3.1% and 3.4% in May). Choppy price action may continue as many participants seem to lack near-term conviction. Short-term momentum indictors warn that the foreign currency recovery may not be sustained in North America today.

News that’s contrary to speculation, China indicated it would continue to curb real estate speculation weighed on Asian equity markets, despite the better than expected start to the US earnings season. The MSCI Asia-Pacific Index was off 0.4%, with the 1.6% drop in the Shanghai Composite the biggest decline in the region. Weak commodity prices took a toll. European stocks are advancing for the sixth consecutive session, encouraged by favorable earnings news. Favorable guidance by BMW helped lift the auto sector, which is the top industry sector today. In North America, Intel’s earnings are reported after the market closes today. About 5% of the S&P 500 will report this week.

The combination of the Portugal’s downgrade and rising equity markets is weighing on European bond markets. The 10-year bund is 4 bp higher and most of the peripheral spreads are steady today except for Portugal, where the spread has widened 3 bp to about 280 bp. The pressure on Portugal is clearer in the 2-year tenor where the yield is up 13 bp and the spread has widened 11 bp to 244 bp. The US Treasury will sell $21 bln of 10-year notes today and yields have resurfaced above the 3% threshold.