Four Points on Hump Day

The US dollar narrowly mixed.  It rallied in Asia, extending yesterday's gains against the euro, but has had the gains pared a bit Europe. Immediate resistance for the euro is seen near $1.2880.  A move through there could spark another half cent move.  The real take away though is that the euro is range-bound, with the $1.28 area marking the lower end and the $1.30 area denoting the upper end.  

Sterling is straddling the $1.60 area, consolidating in a narrow band at the lower end of yesterday's range. It has been a month since sterling has traded below $1.60.   The dollar is also enjoying an inside day against the yen.  The range thus far today has been less than 20 ticks.  The Australian dollar held yesterday's NY lows and has resurfaced the $1.02 level.  Australia reports employment figures tomorrow and this is understood as a key factor in market perceptions of the likelihood of back-to-back rate cuts.   The Australian dollar has spent this week so far within last Friday's range.  The upper end comes in near $1.0270-80 and a test seems likely. 

There are four observations we'd like to share today.

First, several European countries (France, Italy,. Greece and Sweden) all reported stronger than expected industrial production figures for August.   Economists of course were influenced by the weak PMI readings.  The upside surprises suggest a potential important divergence between sentiment and real data.  Over time, the PMIs seem to do a fairly good job tracking European GDP.    

Second, the Dow Jones Stoxx 600 is about a third below its 2007 high.  The US S&P 500 is within a few percentage points.  Some asset managers have been talking up the relative value of the European markets here at the start of Q4.   Although in broad terms, the divergence is understandable given that the US economy is producing more goods and services than ever before, while European output is still a few percentage points below its peak.  

There was a fork in the road.  The US went for the growth route and has exacerbated a fiscal problem by some magnitude.  Europe went for austerity--not just forced upon it, but through free elections chose as well.  It has a growth problem and unresolved deficit/debt problems. 

In any event, several European bourses are at multi-week lows, declining each session this week.  The DAX is testing what appears to be a neck line of a distributional top near 7200.   It has lost about 200 index points since last Friday's close.  It comes as evidence mounts that it has lost its momentum.  Today German think tanks cut growth forecasts.  This year's forecast cuts seem to largely an accounting function, but next year's growth projections have been halved to 1%. 

Third, Chinese shares bucked the regional trend that saw MSCI Asia-Pacific Index lose about 0.8%, after the slide in the US markets yesterday.  The Shanghai Composite rose 0.2%.  The PBOC continues to inject generous amounts of cash to the financial system.  The size of the provisions is more than PBOC-watchers expected and this has seen a sharp drop in the 7-day repo rate (-60 bp to 3.16%).  Some observers are suggesting this is more than the post-holiday, but it seems unreasonable to expect the PBOC to cut reserve requirements or interest rates ahead the key CCP Congress and transition of power starting in early November.  Separately, there are local press reports suggesting the government is considering new subsidies to boost consumer spending, rural subsidies for vehicles and appliances. 

Fourth, Brazil's central bank meets today and the market seems divided on the outlook and until the last few days the market leaned against a cut in the 7.5% Selic rate.  Despite the talk of currency wars in light of Fed and ECB actions, the dollar has been stable in a BRL2.0 to BRL2.05 range since early July with very few and shallow violation.  South Korea central bank meets tomorrow and a rate cut (to 2.75%).  Australia reports its jobs figures tomorrow and many see it as key factor determining whether the RBA can cut rates at back-to-back meetings.