Dollar Remains Bid, Equities Heavy

Today feels a lot like yesterday in the global capital markets. 

A UN vote to sanction a strike on Syria is likely in the next day or two. The dollar remains bid, though unlike yesterday, it is recording upticks against the yen. The rout in emerging market equities and currencies remain under pressures. The MSCI Emerging Markets equity index fell to new seven week lows. US Treasuries are trading heavily, after stringing together the best three-day advance since June 2012.

The news stream is rather light. Poor Australian construction data (-0.3% n Q2 compared with expectations for a 1.6% recovery after a 1.9% decline in Q1) provided yet more fodder for the Aussie bears. The three year low set earlier this month just below $0.8850 is coming back into view. Expectations for a rate cut next month remain low due to the election on September 7. We still anticipate a rate cut in Q4.

The UK distributive trends survey was particularly strong. The third monthly gain, lifted the August reading to 27, the highest since late last year. Moreover, the expectation for next month doubled. Under different circumstances, this would have helped bolster sterling. However, month end demand for euro-sterling and, more importantly, with Carney's speech awaited, in which he is expected to push against the rising in UK interest rates, the bears have the upper hand. Sterling is trading at new two week lows. It has not closed below its 20-day moving average since August 1. It comes in just about $1.55 today. Stronger support is not seen until the $1.5400-35 area.

Some observers had read into ECB's Asmussen's comments yesterday the possibility that the next week the ECB could modify its forward guidance. It current guidance is that interest rates will be at the present level or lower for the foreseeable future. There was some speculation that in recognition of the economic recovery that Draghi would play down the "or lower" part. 

 However, today's money supply and lending figures underscore, from the ECB's own point of view, the fragility of the recovery. M3 growth slowed to 2.2% from 2.3% and on the more important 3-month view, the pace slowed to 2.5% from 2.8%. The pace of contraction in private lending has not slowed, but has accelerated. The 1.9% decline is the largest on record and eclipsing last month's previous record. Private lending has been contracting for fifteen months.

Italy's cabinet will debate the unpopular real estate tax today, while the June retail sales showed an unexpected 0.2% decline. The consensus had forecast a unchanged report after the 0.1% rise in May. The year-over-year rate slumps to 3.0% from 1.2%. 

 The center-right wants to abolish the tax altogether. The center-left wants to abolish it for around 85% of Italian home owners, but keep in for the top 15%. The related issue is how to make up for the lost revenue. The tax is estimated to increase revenues by 4 bln euros. The center-left's strategy cuts that in half. The center-right does not appear in a compromising mood, with the vote on stripping Berlusconi from his immunity (and ban from public office) around the corner.

The North American economic calendar is light with only the US pending home sales and Canada's average weekly earnings on tap. Late today, after the markets close, Brazil's central bank is widely expected to lift the overnight Selic rate by 50 bp to 9.0%.