Dollar Holds on to Bulk of Gains, but Markets Quiet into Week and Month End

The US dollar remains firm, though is seeing little net movement since late yesterday.  The fragile stability in emerging markets that was seen yesterday carried into today's activity.  The MSCI Emerging Market equity index is up about 0.6%.  

We note that although reports show a continued exodus from emerging markets, both Taiwan and Korea experienced net inflows of foreign equity purchases this week.  Taiwan reported net foreign purchases of about $400 of local shares.  Korea reported $1.1 bln inflow into its equities and this brought the month-to-date figure to almost $2 bln. 

Also the Shanghai Composite rose 2% over the past week, which may not sound like much, but it is the best weekly performance since March.   Chinese shares and the Dim Sum bond market (bond market for off shore yuan) have bit a of a safe haven during this recent turmoil in emerging markets.

On the other hand, the major equity markets are not faring as well.  After opening higher, the Nikkei reversed to close with about a 0.5% loss.  European bourses are matching suit and the Dow Jones Stoxx 600 is off about the same, with no sector posting gains.  Bond markets are narrowly mixed, with the exception of Portugal, where bonds have sold off following news that the Constitutional Court again has reject part of the government's austerity plans.  This creates a 4.7 bln euro gap in the 2014 budget plans on the eve of the Troika's review of the country's progress.  

The UK parliament refusal to sanction an attack on Syria has thrown greater uncertainty into the mix.  With Russia and China's veto power in the Security Council, UN sanction of a strike in retaliation for the use of chemical weapons also does not look likely.  This puts Obama Administration in a difficult position, though France's Hollande promises to support it.  

The UN's investigation into the chemical attack is expected to be finished today or tomorrow.  It is possible that who sanctioned the attack will not be discovered.  What seemed imminent at the start of the week appears much less imminent now.   The price of gold has fallen nearly 2% from yesterday's highs.   The political implication for the UK government of its embarrassing parliamentary defeat is not immediately clear, but it does not appear to be a mortal blow.   

Japan's data dump was generally favorably, but this in term underscores the likelihood that the retail sales tax hike is implemented and this is what seemed to have weighed on equities.  The manufacturing PMI rose to 52.2 in August form 50.7 in July.  July's 3.2% increase in industrial output offset in full the 3.1% decline in June.  The consensus had expected a 3.6% increase.  Unemployment ticked down to 3.8% from 3.9%, while overall household spending rose 0.9%, nearly twice what the market had expected.  Household spending fell 2% in June.  

Separately, Japan reported price pressures continue to pick up with the core rate rising 0.7%  after 0.4% in June.   The headline rate also rose to 0.7%.    The increase appears to be owed to fresh food.  Indeed, the Abe government appears to be increasingly frustrated with the lack of wage increases, which arguably are necessary if the 2% inflation target is to be achieved.  Economics Minister Amari has called for talks between the government, business and labor next month to discuss wages.  

European economic news included the increase in sentiment readings and disappointing German retail sales (-1.4% in July after a 1.5% fall in June).   Perhaps the most important data was the flash CPI reading of 1.3% down from 1.6% in July.  This follows on the heels of the weakness in money supply growth and a continued contraction in private sector lending.  This comes amid some speculation that next week the ECB will recognize the economic recovery and modify its forward guidance.  Previously it has indicated that rats will remain the same or lower for an extended period.  Speculation was that it could drop the "or lower", but we see no advantage for the ECB to do so.  

The North American session features the US July personal income and consumption data.  Both are expected to have slowed from June.  Participants will also be interested in the core PCE deflator.  It is expected to have ticked up to 1.3% from 1.2%.  Recall that in the Q2 GDP revision the core PCE deflator stood at 0.8%.   Separately, the Milwaukee and Chicago PMI readings are due and expected to show modest gains from the July readings.  

Canada reports June monthly GDP figures and Q2 GDP as well.  The Canadian economy appears to have contracted slightly in June, for the first time this year, while Q2 GDP is expected to have slowed to 1.6% pace from 2.5% in Q1.  The Bank of Canada meets next week and no change in rates or in the longer term tightening bias.