Capital Markets Wednesday

The US dollar is mostly softer, though within yesterday’s ranges as market participants await the ECB’s press conference and US economic data. Sterling is under-performing perhaps being impacted by the softer string of recent data, including today’s construction PMI (52.1 vs 53.2 consensus and July’s 54.1) and the fifth consecutive monthly decline in Hometracks’ house price index. The euro is firm, but like yesterday the band of resistance in the $1.2850-$1.2875 may prove sufficient to check upticks ahead of tomorrow’s US employment report. The dollar remains pinned near recent lows against the yen, but the momentum remains stalled. Range trading between JPY83.50 and JPY85 looks set to continue. Emerging market currencies are generally firmer as the recent string of data—especially yesterday’s better than expected China’s (especially the increase in new orders) and US purchasing managers reports.

The strong US equity advance yesterday helped underpin Asian markets today. The MSCI Asia-Pacific Index’s 1.1% advance lifted the benchmark to a new two week high. The Philippine’s market led the way with a 2% advance to reach its best level since December 2007. News that Chinese auto sales rose 59% in August, 3-times July’s pace, helped the auto shares in the region. Foreigners were mostly net sellers of Asian shares during last month’s down draft, but appear to have returned to the buy side. European bourses are narrowly mixed after posting the biggest gain in more than three months yesterday. The raw material and technology sectors are generally stronger, largely offsetting the losses in telecom and health care.

The decline in pessimism over the global economic outlook is sparking a backing up in bond yields. European bonds yields are mostly 3-5 bp higher. The new supply from Italy, France and the UK was absorbed with out much problem and most peripheral spreads are coming in a couple of basis points, though Greece is an exception. Sweden’s Riksbank hiked the repo rate 25 bp to 0.75%. Surveys favored a hike by roughly 3 to 1, but the krona has marginally extended yesterday’s gains against both the dollar and euro.