Capital Markets Overview THursday

The US dollar is mostly firmer today after yesterday’s surge. After yesterday’s gains were briefly and marginally extended in early Asian trading, a consolidative/corrective attempt was made that was extended into early European activity, when the euro reached just above $1.2930 and sterling made two attempts runs above $1.57.

However, a poor news stream out of the euro zone, which included an unexpected decline in June industrial output (-0.1% vs consensus forecast of +0.6%) encouraged new selling. And a sloppy gilt auction helped send sterling back to its lows. Japan’s verbal intervention and indications that it checked rates has helped steady the yen, but may have deflected the speculative attention toward the Swiss franc, which is the exception today, posting across the board gains today.

Global growth concerns and the nearly 3% drop in the S&P 500 yesterday took a toll on Asian equities, with the MSCI Asia-Pacific Index dropping 1.3%. Having fallen every day this week, it has lost a little more than 4% in this downdraft. It is set to snap a five week advancing streak. The Nikkei lost almost 0.9% and briefly touched the 20% decline threshold since its multi-month high set in early April. Technology shares tumbled in the wake of Cisco’s poor guidance and the growth worries hit the commodity producers. European bourses open firmer but have struggled to maintain the early upside momentum. Telecoms are the clear leader today, with consumer goods and utilities also helping, but technology and commodities here too are week. Of note, Irish financials, which have been a source a renewed concern in the markets, are off more than 3% today, underperforming the market considerably. The tech sector has also been hit hard (-6%+).

Bond markets are quieter today after yesterday’s sharp advance. JGBs remain firm in the wake of the yen’s strength and equity market weakness. European bond activity is subdued. Irish bonds have steadied, though Portuguese bonds remains under a little pressure. The shorter end of the curves in Europe are outperforming with 2-year yields mostly 2-3 bp lower, with some notable exceptions. The Irish 2-year is off 8 bp to 2.81%, while Portuguese and Greek yields are a a bit higher. Of note the US-German 2-year spread, which finished last week 24 bp in Germany’s favor has steadily fallen to about 15 bp now, which is a three-week low, as is the euro against the dollar.