Fragile Markets Trying to Stabilize Ahead of Weekend

A somewhat calmer tone has emerged in the global capital markets, encouraged more, it appears, by position adjusting ahead of the weekend, rather new fundamental developments. China did inject a reported CNY50 bln via reverse repos that did help reverse most of yesterday's spike in rates. The Dollar Index is trading within yesterday's range, as is the euro, yen, Australian and Canadian dollars. Early strength in sterling and Swiss franc, that lifted them through yesterday's best levels, faded and are back into yesterday's ranges as well.

The Nikkei rose 1.6% and is the only major bourse to post gains for the week (~4.3%). However, outside of Tokyo, other equity markets in Asia were dragged lower. European bourses are mostly marginally higher on the day, with the Dow Jones Stoxx 600 up about 0.6% near midday in London for a loss of about 2% on the week.

Bond markets are mixed Asia-Pacific bond markets remained under pressure, following the slide in US Treasuries yesterday. The European bond story is more complicated. The strains in the Greek coalition, exacerbated by the government's handling of the state television issue, and the one week deadline given by the Troika on a priority list of measures, including the dismissal of 12.5k civil servants and a property tax bill has seen 10-year Greek bond yields rise above 11% for the first time since early May. Spanish and Italian bond yields are 5-7 bp lower, perhaps encouraged by yesterday's Eurogroup decision to use as much as 60 bln euros from the ESM to help recaptialize banks, with retroactive use agreed, though on a case-by-case basis.

The combination of the FOMC and developments in China (poor HSBC PMI and liquidity crunch) has not only disrupted the global capital markets in terms of volatility, but we note that Brazil companies pulled IPOs, Romania rejected all the bids at an auction, South Korea raised less than 10% of the intended funds in a inflation-linked bond auction and Russia cancelled a local currency bond auction.

There are no US economic reports today, though Canada reports May CPI and retail sales figures. Expectations center around a 0.4% increase in the headline rate for CPI and a 0.3% core increase. Canadian price pressures weak. These expected month-over-month increases would translate into a 0.9% and 1.2% year-over-year rates for the headline and core respectively. Retail sales are expected to have risen by 0.2%, though excluding autos may be flat.

Market participants seem content to quietly go into the weekend and reassess.

Overshadowed by the dramatic price developments, yesterday was an anniversary that should not go unobserved. It was the 65th anniversary of the unification of the Western part of Germany that created the Deutschemark. The old currency was invalidated the following day, accept for coins (at 1/1 0 of the value) to help facilitate small transactions. It is noteworthy that when the old regime's paper money system broke down, it was not replaced by gold, as some who suggest gold is a default money, would have it. Gold after all is an awkward form of money for transactions. Cigarettes were the money of choice. It illustrates society's pragmatism.