Thumbnail Sketch Capital Market

The US dollar is seeing gains over the past 24-hours pared. No single event appears to be the trigger, though a successful Spanish bond auction and indications that Greece will receive the second 9 bln euro aid tranche from the IMF/EU may have helped spark the euro’s bounce from near $1.3120. The Swiss franc is actually leading the move in the majors today.

The Bank of England left rates on hold as widely expected and despite the string of relatively good bank earnings reports continuing today, sterling is lagging, though many still look for a test on the $1.60 area. The ECB meeting, and more importantly, Trichet’s press conference is the main focus ahead of tomorrow’s US employment report. Stepped up verbal comments from Japanese officials may have helped keep the dollar in a narrow 25 tick range on either side of JPY86.25 thus far today.

Asian equities are more mixed than the 0.6% rise in the MSCI Asia-Pacific Index would suggest. The pullback in the yen encouraged short-covering in some of the Japanese multinationals, helping the Nikkei recoup the lion’s share of yesterday’s losses with a 1.7% advance today.

Indonesia’s market rose nearly 2.1%, encouraged by a stronger than expected Q2 GDP (6.2% vs 6% expected and 5.7% in Q1). But many other regional markets, including, China, Korea, Taiwan and India are lower. The performance in Europe is cleaner, with all the major bourses higher. Basic materials and commodities are leading the way. Consumer goods are the only sector lower in the Dow Jones Stoxx 600. The DAX is trading at new 23 month highs today.

Sovereign bonds markets are mostly higher, with 10-year yields in Europe and the US mostly 1-2 bp lower, but the exceptions are noteworthy. After falling below 1% yesterday, the 10-year JGB yield rose 4 bp today, depressed, as it were, by the recovery in the Nikkei and the slippage in the yen.

The US/German 2-year rate differential, that we have noted is tracking the euro-dollar exchange rate nicely, it has moved in the US favor consistently since the middle of last week, but is at risk today with the strong German industrial orders and ideas that ECB President Trichet is not going to protest the rise in euro zone money market rates that has taken place in recent weeks.