Capital Markets Overview Tuesday

The US dollar is sporting a somewhat firmer profile against most of the major currencies, with the exception being the Japanese yen, against which the greenback has fallen to new 8-month lows. This has brought it within striking distance of the JPY85 level, which has been suggested as a pain threshold for Japanese officials.

Modest profit-taking, encouraged by softer economic data, consistent with the price action in the other risk-on trades, is largely responsible for the modest pullback in the European currencies. The shallowness of the pullback, talk that the market may be reducing estimates for the US employment report and speculation that the Fed may renew asset purchases suggests the bearish sentiment to the greenback remains intact even if the correction is extended somewhat.

Corrective forces are evident in the equity markets as well. Growth concerns and weaker commodity prices spurred profit-taking as the MSCI Asia-Pacific Index fell 0.7%. This was fueled largely by the Nikkei’s 2.1% drop, which was the largest in the region and the largest drop in a few weeks. Companies with proportionately high foreign sales in the tech, consumer goods and industrial space were exceptionally weak. That said, as we noted, such companies, may indeed be taking a hit on the yen’s strength but this is being offset by stronger sales. Many companies, including Toyota earlier today, raised their profit forecasts. Equity markets in the greater China (China, Taiwan and Hong Kong), India, Thailand and Indonesia advanced. Strong foreign buying in the region continues to be reported. European bourses are getting harder hit, despite favorable earnings from a number of financial firms. Indeed financials are the weakest sector in the Dow Jones Stoxx 600 today. Most markets are off 0.7%-1.5% and early losses are anticipated in the Americas.

Sovereign bonds are higher today. The 10-year Japanese government bond yield below 1% for the first time in seven years. There is increasing speculation the BOJ will also (like the Fed) have to extend QE. US and European benchmark yields are mostly 2-3 bp lower. Of note the UK gilts are under-performing today, despite the softer than expected service sector PMI. Peripheral spreads in Europe are a bit wider today, especially in Greece, but also in Spain and Portugal; this despite the latter having successfully sold a bit more 6 and 12-month bills than it initially planned.