Quick Snapshot

The US dollar is trading with a firmer bias across the board. The main driver appears to be a reassessment of the likely outcome of today’s FOMC meeting as many Fed-watchers play down the likelihood of renewed asset purchases and this has been sufficient to force some weak shorts (dollars) to cover. In addition, a disappointing French industrial output report (June -1.7% month-over-month vs consensus of -0.3%) and widening sovereign spreads in Europe has weighed on the euro.

Weak UK BRC retail sales and the first decline in RICS house prices undermined sterling and better trade balance failed to repair the damage after yesterday’s failure at $1.60. The BOJ as widely expected left rates unchanged and refrained from taking new measures to combat deflation.

Profit-taking is the theme in global equity markets today, despite the 0.5% rise in the S&P 500 yesterday. The MSCI Asia-Pacific Index fell 1%, led by a 2.9% decline in the Shanghai Index. News that urban property prices rose at their slowest pace in six-months (10.3% year-over-year) weighed on that sector and may have contributed to the 1.50% drop in Hong Kong as well, stopping the six day advancing streak.

Most bourses in Europe were off 0.6%-1.0% near midday in London. The Dow Jones Stoxx 600 is succumbing to profit-taking after reaching new 15-week highs yesterday. Basic materials, industrials and financials are leading broad decline, with only the health care sector posting gains. US shares are not immune with early indications pointing to 0.5%-0.8% opening losses.

The retreat in stocks is not spurring demand for most bond markets. Japanese 10-year yield rose 3 bp following the failure of the BOJ to increase its rinban operations for which there was some speculation.

European bond yields are rising and sovereign spreads are widening. The premiums Ireland and Portugal pay over Germany, for example, are their widest since 2-3 weeks. Their 10-year yields are up 13 and 8 bp respectively. Greek 10-year bond yields are also 13 bp higher today. Spain and Italy are experiencing a 5-6 bp backing up in yield. German 10-year yield is up a modest 2 bp. In comparison, US yields are flat to slightly lower ahead of the $34 bln 3-year note auction later today.