Growth In Australia and China Lifts Sentiment

The US dollar is broadly lower to start September as stronger data, especially from Australia and China encourage new risk taking. Yet this has not seen the yen and Swiss franc, beneficiaries of risk aversion, lose ground against the greenback, though they are under-performing on the crosses. This, coupled with the fact that some countries like the UK, Norway and Sweden, which have reported disappointing PMIs, have also seen their currencies raise against the dollar today, provides a sense that in addition to the risk-on story, there is a weak dollar bias. Given the over-stretched short-term technical studies, the risk is that if the US data disappoints (ADP and ISM), the price action could be reversed.

Global equities are rallying as the new month gets underway. The commodity sector helped lead the MSCI Asia-Pacific Index 1.1% advance. Stronger than expected Australian Q2 GDP (1.2% vs 0.9% consensus) helped lift the S&P/ASX 200 by a bit more than 2%. News that continued growth in Korea’s exports saw the Kospi rise 1.25%, and the helped lift the won by a sharp 1.2% against the dollar. Foreign investors were net sellers of both Taiwanese and Koran shares last month, but may return. European bourses are also fully participating in the rally with most major indices up 1%-1.5% near midday in London. Basic materials and consumer services and goods are leading the way, but all major sectors are advancing. US indices are called a bit more than 1% higher, though the ADP data will be out before the open of the NYSE.

The general increase in the risk appetite is also being reflected in the sovereign bond markets. Bond yields are mostly 4-6 bp higher in the core Europe. This includes the UK and Sweden where the PMI was considerable weaker than expected. Peripheral bonds are outperforming the core resulting in a modest narrowing of spreads, a little less in Ireland and Portugal and a little more in Italy and Spain.