Markets Becalmed

Overview:  The US 10-year yield is hovering around 1.18% in Europe, while the on-the-run JGB benchmark yield is below zero for the first time this year.  Greek and Australia's 10-year bond yields are at new six-month lows. The softer yields saw the dollar fall to two-month lows against the yen, while the Swiss franc rose to the highest level since last November against the euro.  Equities appear to like the lower yields.  The S&P 500 set a closing record high yesterday, and, with the help of a more constructive tone from Beijing, all the major markets, but Tokyo, traded higher today.  The Shanghai Composite pushed back above the 200-day moving average.  The Dow Jones Stoxx 600 is at new record highs today, though US futures are softer.  The Antipodeans are the strongest of the major currencies, while the Scandis, euro, Swiss franc, and Japanese yen are posting minor losses.  Emerging market currencies are mixed. South Korea and Taiwan lead the advancers, while the Turkish lira and Philippine peso lead the decliners.  The net effect is that the JP Morgan Emerging Market Currency Index is slightly lower.  Gold is trading quietly and remains within the range set on Monday (~$1805-$1820).  September WTI is little changed after recovering from $69.20 to settle above $70.50 yesterday.  API showed another drawdown of US stocks, and the DOE is expected to report an almost 3 mln barrel decline.  It has shown one weekly build since mid-May. Copper is softer for the fourth consecutive session.  The CRB Index fell by 0.2% yesterday after falling by more than 1% in each of the previous two sessions.  

Asia Pacific

China's Caixin service PMI was stronger than expected, rising to 54.9 from 50.3. This lifted the composite to 53.1 from 50.6.  The market's focus is elsewhere.  First, China is experiencing its broadest outbreak of the virus, and lockdowns are likely to spur downward revisions to growth.  Nearly half of China's 32 provinces are reporting cases, and travel is being discouraged.  The economic impact is reinforcing expectations for additional policy support.  Second, after appearing to be like the proverbial bull in a china shop, Beijing appears to have softened rhetoric about the video game sector without backtracking on the underlying criticism.  

Japan's service PMI was revised to 47.4 from the preliminary estimate of 46.4 but remains below the 50 boom/bust level and is weaker than the 48.0 reading in June.  This puts the composite at 48.8, not 47.7, but slightly lower than June's 48.9.  Worries about the virus and the decline in US and European yields helped drag the 10-year JGB yield below zero for the first time this year. However, activity in the benchmark is uneven and low, and yesterday, it did not trade, according to reports. 

Australia's service and composite PMI were unchanged from the preliminary readings of 44.4 and 45.2, respectively.  In June, the service PMI was at 56.8, and the composite stood at 56.7.  The central bank's decision to proceed with tapering its bond purchases starting next month appears to look past the implications of the weak data, assuming a strong recovery when the lockdown is lifted, but it could last for the rest of the month at least.  Separately, New Zealand reported better than anticipated employment data.  The unemployment rate in Q2 fell to 4.0% from 4.6%, despite the small tick up in the participation rate (to 70.5% from 70.4%).  Employment rose by 1% in Q2 after a 0.6% increase in Q1.   The RBNZ meets on August 17.  The overnight index swaps imply a 25 bp hike has fully been discounted.  

The dollar is trading inside yesterday's range against the yen (~JPY108.88-JPY109.35).  Although the greenback closed above JPY109.00, it continued to straddle the level in Asia.  Assuming US Treasuries remain stable, the dollar could extend its recovery, but the JPY109.50 area, where a nearly $550 mln option expires tomorrow, may offer the nearby cap.  The Australian dollar reached its best level in nearly three weeks, around $0.7425. However, it has not closed above the 20-day moving average (~$0.7400) since mid-June.  The next target is by $0.7445.  The Chinese yuan edged higher today and snaps a three-session drift lower.  The dollar is trading comfortably in the narrow range of roughly CNY6.45 and CNY6.47.  The PBOC set the dollar's reference rate spot on expectations of CNY6.4655.  

Europe

The final eurozone service PMI was softer than expected, and this served to drag the composite below the flash estimate.  The aggregate service PMI stands at 59.8, still strong but not as strong as the preliminary estimate of 60.4.  It was at 58.3 in June.  The final German and French readings were below the preliminary estimate, while Italy and Spain were weaker than projected.  The composite EMU PMI stands at 60.2 rather than 60.6, a modest improvement from June's 59.5.  Separately, the eurozone reported June retail sales rose by 1.5%, slightly less than expected, and June's 4.6% rise was shaved to 4.1%.  The June data is less important now that Q2 GDP has been reported.  Still, the takeaway is that the eurozone recovery has gathered strength and is broadening and deepening.

Meanwhile, the latest poll (Forsa) has Germany's CDU/CSU leading with 26% support to hold on to its lead over the Greens (205).  The SPD is drawing about 16% support, while the FDP is at 13%.  Predictit.Org gives Laschet almost a 90% chance of replacing Merkel as Chancellor next month.  On another front, Merkel is sending a frigate to the South China Sea for a seven-month deployment, joining the UK and India with a beefed-up presence.  It is the first such German deployment in two decades. 

The UK's final PMI was stronger than expected.  The service PMI final reading rose to 59.6 from the 57.8 estimate and pared the loss from the 62.4 reading in June.  The composite PMI stands at 59.2, better than the flash 57.7 estimate but still lower than the 62.2 in June.  It is the second consecutive decline in the composite PMI, which peaked in May at 62.9.  The BOE meets tomorrow, and although officials appear more confident in the recovery, there is no need to rush ahead of the expiration of the furlough program. However, the market has begun boosting the chances of a hike in the middle of next year rather than the end.  

The euro slipped to test a four-day low near $1.1840 earlier today.  It is also the third session of lower highs.  It has not been able to resurface above $1.19 after briefly trading above it ahead of last weekend.  Without fresh incentives, it may languish for another day or two.  Consider an option for nearly 825 mln euros at $1.1855 that expires today and more than 3 bln euros in options that expire tomorrow between $1.1850 and $1.1860. Sterling traded at a three-day high near $1.3950. Although it is firm, it is not going anywhere quickly.  Recall, last week's high was slightly above $1.3980, and support is about a cent lower.  Intermittent support is seen in the $1.3900-$1.3910 area.  

America

The US sees the final PMI readings, ISM services, and the ADP's private-sector job estimate.  Earlier this week, the market put more emphasis on the ISM manufacturing report than the final manufacturing PMI.  The same may be true today of services.  The initial reading showed the services PMI slowed for the second consecutive month to 59.8 from 64.4 in June and 70.4 in May.  The flash composite fell to 59.7, returning to the level last seen in March.  The risk is that the ISM services point in the other direction.  After retreating to 60.1 in June from 64.0 in May, ISM services are expected to have edged up to 60.5.  The ADP private-sector jobs estimate is expected to be around 683k, a little lower than the June estimate.  Year-to-date, ADP has estimated that US private-sector jobs growth has averaged 515k this year.  The official nonfarm payroll data shows an average monthly gain of 479k private-sector jobs.  

Canada reports building permits today ahead of trade figures tomorrow.  The economic data highlight remains the July jobs data on Friday.  Politics moves to center stage today as Huawei's CFO Meng's extraction procedure enters its last phase.  A final decision is expected on August 20.  There is said to be a strong presumption in favor of extradition.  She is accused by the US of defrauding HSBC by lying about the company's business dealings with Iran. Some suggest a scenario by which the US is granted extradition by the Canadian court, and then a political compromise is struck.  Canada is in a difficult spot.  Critics say that it is not clear that Weng could have a fair trial in the US, but the problem is Ottawa will not be able to please both the US and China and could face retaliation for either outcome.  

Brazil reported that industrial output stagnated in June and FIPE CPI ticked up more than expected (July 1.02% vs 0.81% in June).  Today, the final PMI will be released, but the focus is on the central bank.  After raising rates three times this year by 75 bp each and unable to stem the rise of prices, the central bank is expected to hike the Selic rate by 100 bp and signal that it is not done. As a result, the market appears to be discounting another 400-450 bp of tightening over the next 12 months.  

The US dollar extended its recovery against the Canadian dollar for the third session yesterday, rising to about CAD1.2575, just shy of the 200-day moving average (~CAD1.2590).  It is trading quietly now, oscillating around the CAD1.2535 area.  There is an option for a little more than $1bln at CAD1.2550 that expires tomorrow.  Initial support is seen near CAD1.2515, but it takes a break of CAD1.2500 to be anything notable.  The dollar continues to trade sideways against the Mexican peso.  It is the fifth session that the MXN19.80 to MXN19.93 range may prevail.  Friday's US jobs data may inject more volatility.  

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