New Month Same Forces

The US dollar is broadly mixed. Poor sentiment toward the greenback, following last week’s soft Beige Book, talk of the potential need for quantitative ease by a Fed official often seen as a hawk, soft Q2 GDP figures, coupled today with fairly positive European PMI readings have conspired to keep the pressure on the dollar in general. The dollar, bloc, sterling and the Scandi currencies are leading the way. The euro, for its part, is trading choppily in the upper end of last week’s trading range. The Swiss franc and yen are under-performing and are losing a bit of ground amid a stronger appetite for risk. Emerging market currencies in Asia and Europe are generally extending recent gains and Latam is expected to do likewise.

It may be the first trading day of a new month, but global equities are continuing last month’s advance. The MSCI Asia-Pacific Index added 1.1% on top of July’s 5.6% advance. Positive earnings news and strong foreign demand helped most bourses rally. Even in China, where the PMI slowed to a 17-month low (51.2 vs 52.1) saw the Shanghai Composite rally 1.3% after July’s 10% gain. Disappointing ban k earnings saw the Nikkei’s initial 1.5% gain pared back to a more modest 0.4%. An unexpected 25 bp rate hike from Pakistan saw the local bourse drop almost 1.5%. European equities have also begun the new month with a strong advance, snapping a 3-day losing streak. Basic materials and banks (with reports linking the latter’s gains with re-weighting by foreign investors) are among the strongest sectors. Most bourses are 1.3-2.0% higher near midday in London.

US Treasury and core European bond yields are mostly higher as the safe haven appeal is diminished. However, peripheral spreads in Europe continue to narrow in the aftermath of the stress tests and relative ease at which several have been able to raise funds. Japanese developments are noteworthy today. The 10-year (generic) JGB yield slipped to a new 7-year low today, while the Euroyen rates fell in Tokyo to their lowest level in five years amid continued speculation that the BOJ will be pressed into more action to counter deflation, especially given the strength of the yen.