Overview: Speaker Pelosi's visit to Taiwan has added to the risk-off mood of the capital markets today. Most of the large Asia Pacific equities sold off, with Australia and India being notable exceptions. Europe's Stoxx 600 is off for the second consecutive session, and by the most (~0.60%) since mid-July. US futures are also weaker. Benchmark 10-year rates are lower. The 10-year Treasury is off a couple of basis points to below 2.55%, while European yields are mostly 5-6 bp lower, though Italy is lagging. The dollar is trading higher against all the majors but the Japanese yen, where the squeeze continued. The greenback traded at two-month lows near JPY130.40. The Australian dollar has been hit by profit-taking after the central bank hiked 50 bp. Most emerging market currencies are lower too. The Mexican peso's 0.4% decline leads the way. Gold reached $1780, its best level in nearly a month. It is the fifth consecutive advancing session. After falling 4.8% yesterday, September WTI remains trapped near the lows, mostly below $94.00. US natgas is off a little more than 2% to offset the gains of the past two sessions. Europe’s benchmark is up 3.5% after a 2.5% gain yesterday. Iron ore is slipping lower for the third declining session. Copper’s six-session advance ended yesterday with a loss of less than 1%. It is off around the same amount today. September wheat is off 2.2%, a little more than it has shed in the past two sessions.
Asia Pacific
The US Speaker of the House will
reportedly visit Taiwan later today. Reports suggest in last week's telephone call President Biden
explained to China's Xi that Congress is an independent branch of the
government and that Speaker Pelosi makes her own decisions. It hardly is a
satisfying answer to Beijing, who is worried that it is the US that is
unilaterally changing the relationship. Pelosi is the third highest ranking US
government official, and the highest US ranking official to visit in a quarter
of a century. The US plays the divided government card when it suits. At the
same time, consider how many times the White House has "walked back"
or corrected Biden's comments about Taiwan since January 2021. All of Biden's
"lapses" were in the same direction of breaking for the strategic
ambiguity.
Moreover, if the context was
different, Beijing's response may be different, but consider that the new $52
bln bill to boost US semiconductor production, promises assistance provided
recipients agrees not to boost advanced (slippery definition) chips in
China. By simply
announcing her intention on visiting Taiwan, Pelosi set off a chain of
reactions that have taken a life on of their own. Any wavering was seen as
being soft on China. Last year, we
suggested that one recourse for China, and seemingly more in
consistent with how Beijing operates, is not to attack Taiwan but to take over
the Pratas Island that has a small Taiwanese garrison. Beijing has indicated it
would respond and if it doesn't it will lose face. Yesterday, several UK
members of parliament said that they would visit Taiwan as well. Over the
weekend, there were some reports suggesting that civilian ferries, often used
by the PLA to move troops and equipment, were far off their normal courses.
The Reserve Bank of
Australia delivered its third 50 bp hike in a row, lifting the cash rate to
1.85%. While there is no
doubt that the RBA will hike further Governor Lowe indicated there was no
pre-set path. This was interpreted, like Fed's Powell was last week, to secure
greater operational flexibility going forward and moderating the pace of
tightening. However, the RBA seems intent on bringing the policy rate to a
restrictive setting and it is not even at neutral yet, which it sees around
2.5%. The cash rate futures expect a year-end rate of 3%, which is essentially
unchanged from the end of last week, and down about 50 bp from its recent peak.
Two- and three-year yields increased, but rates eased for longer maturities,
and the Aussie appeared to be hit with "buy the rumor, sell the fact"
type of trading. At the end of the week, the RBA delivers its monetary policy
statement.
The dramatic dollar
correction against the yen continued today, its fifth consecutive decline. The move began near JPY137.50 and today
reached almost JPY130.40. The 100-day moving average is near JPY130.25, and the
(38.2%) retracement of this year's rally is around JPY129.50. Not
coincidentally, the US 10-year yield is also lower for the fifth consecutive
session, approaching 2.51%. Five sessions ago, it was near 2.80%. That said,
the dollar has spent the entire session below the lower Bollinger Band
(~JPY132) after closing below it the past two sessions. The proximity of the
psychologically important JPY130 and the stretched technical reading cautions
against selling the greenback now. The Australian dollar peaked yesterday, a
little shy of the $0.7050 level. The profit-taking after the central bank
move and the risk-off moment have pushed the Aussie to almost $0.6915, which is
around the lows from last week. The (38.2%) retracement of its rebound from two-year
low in mid-July (~$0.6680) is found near $0.6880. The intraday momentum
indicators are stretched. Initial resistance is seen by $0.6740. The US
dollar initially traded at three-month highs against the Chinese yuan, briefly
poking above CNY6.7825. However, it retreated to around CNY6.7565 and looks
poised to fall a little further, with CNY6.74 area a reasonable near-term
target. The PBOC set the dollar's reference rate at CNY6.7462 compared with
expectations (Bloomberg survey) for CNY6.7449. Lastly, we note that the Hong
Kong Monetary Authority continues to intervene to defend the HK dollar peg. It
is sold more than $1 bln today.
Europe
The Brothers of Italy are
running neck-to-neck with the centrist Democrats in the Ipsos Italia poll at a
little more than 23%. However,
the center-right coalition is ahead about 46%-33%. The League is polling around
13.5% and Forza Italia is at 9%. The Five-Star Movement is slipping and is at
11%. However, as we saw last week with the failed attempt by Salvini and
Berlusconi (League and Forza Italia heads) to see if they could do an end run
around Meloni (Brothers of Italy), the coalition is fraught with tensions, and
it is not clear the extent of the common ground.
Meloni is an advocate of
NATO and is hostile to Russia. Meloni
promises to continue with the aid to Ukraine. Meloni has also promised to
adhere to the EU budget rules that allow Italy to get more than any other
member of the Recovery Funds, provided certain reforms are enacted. The
Brothers of Italy have shifted like Le Pen in France. The market seems to
recognize this and Italy's premium over Germany narrowed for the third
consecutive session yesterday for a cumulative of more than 25 bp and near 211
bp is the narrowest since before the Draghi government collapsed. The spread is
a couple of basis points wider today. The two-year premium has fell by more
than 30 bp over the past two sessions and is about one basis point wider now. It
is below 100 bp, the least in a little bit more than two weeks. In absolute
terms, the Italian 10-year yield broke below 300 bp for the first time since
the end of May and is now near 2.95%. The two-year yield has dropped from 2.07%
on July 21 and is below 1.20% today.
Switzerland's July
manufacturing PMI held in better than expected, slipping to 58.0 from 59.1. The median forecast in Bloomberg's survey
was for 56.2. Tomorrow, the July CPI is due. The market looks for an unchanged
year-over-year rate of 3.4%. What puts Switzerland on the radar screen is that
the central bank put the market on notice last week that it could raise rates
between meetings, if necessary. Central bank, of course, reserve that right,
and it seems to go without saying. However, making it explicit drew attention. The
euro fell to eight-year lows against the franc last week (~CHF0.9700). It
remains in its trough, rising to almost CHF0.9765 today. The euro has lost
around 7% against the franc since the mid-June SNB hike.
The euro initially extended
its gains to almost $1.03, its best level in nearly a month, but has reversed
lower. It approached
yesterday's low (~$1.0215) in early European turnover. The $1.0250 nemesis may
offer the nearby cap again. Despite flirting with it on an intraday basis, the
euro has been unable to close above $1.0280. If it does, the $1.0350 area would
offer the next target. On the other hand, if the market gives up after the
repeated efforts, it could return to the $1.01 area is the bottom of the recent
range. Sterling is trading inside yesterday's range. It reached
almost $1.2295 yesterday and has come off a cent. Yesterday's low was near
$1.2155. The market may be hesitant to sell sterling aggressive ahead of
Thursday BOE meeting. The swaps market is pricing in a little less than an 85%
chance of a 50 bp hike. A Reuters poll found 46 of 65 economists expect a 50 bp
hike, leaving 19 favoring a 25 bp move.
America
The US has been haranguing
OPEC+ to boost output. OPEC+
holds a video conference tomorrow to set the new production caps after today's
technical meeting. Yet, as is well appreciated now, the cartel's output is well
below the production limits. In fact, it is estimated to be around 2.8 mln
barrels a day below their collective target. However, based on seaborne
shipments, Saudi Arabia appears to have boost its exports last month to the
most since April 2020. The estimated 7.5 mln barrels per day is almost a
million more than it shipped in June. Shipments to China and India appear to
have increased while shipments to the US and Japan may have fallen.
Weaker manufacturing PMIs,
including China, and a recovery in Libyan output weighed on oil prices. From the pre-weekend high near $101.90 to
yesterday's low around $92.40, September WTI fell by more than 10%. In the
middle of last month, the contract fell to a four-month low of almost $88.25.
The 200-day moving average is found a little above that low now. Note that the
30-day correlation between the changes in WTI and the US 10-year breakeven has
been trending higher since the end of June when it briefly was inverted. It
stands near 0.54. The three-month high is closer to 0.60. Meanwhile, June
13 was the last day that the average retail price of gasoline in the US peaked
(~$5.02 a gallon). It has fallen by about 16% since then to almost $4.20. The
average in nearly 20 states is below $4.
The US Treasury announced it
would borrow about $444 bln here in Q3, about $262 bln more than it previously
indicated. There are two
drivers. First, its earlier estimated did not include the redemptions by the
Federal Reserve, which had not begun. It projects a $120 bln in redemption in
the July-September period and almost $140 bln in Q4. Second, it noted that it
anticipates revenues to slow and expenditures to increase. Lastly, it also
expects higher cash levels at the end of September and the end of December. Tomorrow,
Treasury will announce the quarterly refunding, and many expect it to reduce
the size for the fourth consecutive quarterly, scaling back on the 20-year
bond, and possibly the seven-year note. Separately, the Fed's senior loan
officer survey found that banks are tightening lending standards, especially
for commercial and industry loans.
The US reports JOLTS and
July auto sales. Job openings
are expected to have fallen and this seems to be the latest grist for former
Treasury Secretary Summers persistent criticism of the Federal Reserve. Waller,
among the most hawkish governors, argued in a recent paper that vacancies can
normalize without a jump in the jobless rates. Summers (and Blanchard) are
unconvinced and essentially accuse Waller of factual and judgmental errors.
July auto sales are expected to have picked up to 13.4 mln (saar). It they do
rise (from 13.0 mln in June), it would be the first back-to-back increase since
March/April 2021. Still, at 13.4 mln, it would be almost 10% below the sales
from July 2021. Canada sees the July manufacturing PMI, which tends not to be
much of a market mover. Mexico report June leading economic indicators and
Brazil reports June industrial output figures (likely softer).
The greenback reversed
higher after falling to nearly CAD1.2765 yesterday, its lowest level since
mid-June. Follow-through
buying today has lifted the US dollar to almost CAD1.2880. Recall that the US
dollar peaked in mid-July around CAD1.3275. That move looks over. The initial
retracement (38.2%) objective is found near CAD1.2940. Penetrating CAD1.2900
would target that retracement. Meanwhile, the US dollar has overcome the
200-day moving average against the Mexican peso (~MXN20.4350), which stalled it
for the past two sessions. The first target is now around MXN20.53 and then
MXN20.63.
Disclaimer
Reviewed by Marc Chandler
on
August 02, 2022
Rating:
