Overview: Today may be the calm ahead of a
tomorrow's US CPI and rate decisions by the Fed, ECB, BOJ, and PBOC over the
next few days. Most large bourses in the Asia Pacific region rose and Europe's
Stoxx 600 is snapping a three-day decline. US index futures are trading higher.
US 10-year yield is slightly firmer as are core European benchmark yields. The
dollar is under broad pressure and is weaker against the G10 currencies. Against
emerging market currencies, it is also mostly softer, but there are a few
notable exceptions. They include Turkey, China, and Mexico. Gold is a range of
a little more than $5 on either side of $1960.
July WTI is soft and its
inability to recover after what appeared to be supportive developments adds to
the bearish tone. It
was denied by both sides that a US-Iranian deal was near, which would
ostensibly make Iranian oil available (supply). The US has begun refilling its
strategic reserves (demand) could have supported prices. The US announced it
bought 3 mln barrels of oil for the SPR at an average price of $73 and the
Department of Energy announced plans to purchases another 3 mln barrels. The
contracts will be awarded by the end of the month for September delivery. September
WTI is trading near $70. The low for the year was set in early May near $64.20.
The US sold the crude at an average price of about $95 a barrel. July WTI is
off nearly 2.8% near $68.25. It fell by around 3.2% in the last two sessions.
It has been down to almost $67.65 today and the low set in late May was closer
to $67.00.
Asia Pacific
While US press report have
played up China becoming the world's largest exporter of autos (with the help
of foreign brands), another achievement has not yet gotten the attention it
will. China's Comac
has flown its first domestically built commercial airplane. It is a
single-aisle jet, whose dimensions are unsurprisingly like an Airbus model, but
with 2/3 of the range. The C919 flew 174 passengers from Shanghai to Beijing,
and reports claim it has orders for 670 planes. In a broader context, this
import-substitution effort is also about what is fashionable to call de-risking
in the US and Europe. Yet, with the C919, it is still far from complete. An
estimated 40% of the parts, including the engine, are imported from France's
Safran and the America's General Electric.
Separately, we note that the
US has added two more Chinese companies (and their subsidiaries) to its
"entity" list, for work in Xinjiang helping to facility forced labor
identified by the UN. They
are the first additions under American legislation passed last year. Meanwhile,
Italy is expected to formally withdraw from the Belt Road Initiative later this
month. Also, Pirelli is expected to limit the ownership rights of Sinochem,
which is the largest owner with 37% of the shares. Sinochem will be barred from
key decisions, appointments, and access to strategic technology. Reports
suggest the Dutch government is preparing legislation that will effectively bar
Chinese students from higher education programs on technologies like
semiconductors and defense. Lastly, after seemingly denying that the existence
of a Chinese listening post in Cuba last week, the White House has acknowledged
that it exists, and that the presence began during the previous administration
and that Beijing is expanding them. Apparently, the Biden administration is
saying that its initial push back was over the idea that it was a new
development.
Despite the slightly firmer
US rates, the dollar is trading with a heavier bias against the Japanese yen. It is inside the pre-weekend range
(~JPY138.75-JPY139.75) and pressing on the 20-day moving average (~JPY139.15)
in the European morning. It has not closed below this moving averaging in
nearly a month. Still, we look for dollar to hold above JPY139.00 and work its
way back toward JPY139.50-60. The Australian dollar is extending its
recovery. At the end of May, the Aussie had fallen slightly through
$0.6460 to record the low for the year. It has traded higher every day but one
this month so far and approached the $0.6775 area. It recorded a three-month
high on May 10 near $0.6815. The intraday momentum indicators are stretched,
and the Australian dollar is pushing beyond the upper Bollinger Band
(~$0.6770). Caution about chasing it higher seems prudent. Despite the
broader weakness, the dollar gapped higher against the Chinese yuan and reached
nearly CNY7.1360. The high from the end of last week was about CNY7.1320. Today's
low was slightly below CNY7.1360. There seems to be greater recognition of the
risks that the PBOC cuts the one-year medium-term lending facility rate this
Thursday, which would allow lower prime rate next week. The PBOC set the
dollar's reference rate tightly to expectations (CNY7.1212 vs CNY7.1219).
Europe
UK Prime Minister Sunak,
with a new Atlantic Declaration in hand, well shy of a promise of a free trade,
faced an immediate party crisis on his return. Former Prime Minister Johnson resigned as
a member of parliament, claiming he was being chased out by a "kangaroo
court." Johnson is charged with lying to parliament about parities in
2020-2021, for which he (and Sunak) has already paid fines. There is a
three-part process. An investigation was conducted by the Privileges Committee
(Tory majority). It can only recommend a penalty, which was that Johnson should
be suspended for more than 10 days. The second step is a vote in the House of
Commons (Tory majority). Johnson quit before a vote could be held. Even if the
MPs supported his suspension, Johnson would not have been driven from office.
That requires his constituents to demand a byelection. There will be a
byelection of his seat now, and he had carried it in 2019 with a slim majority
(~7k votes). Two other Tory MPs resigned for different reasons, and
byelections are necessary there too.
A standard definition of ESG
has yet to emerge, and the idiosyncratic approach can generate unexpected
results. Germany's
only state led by the Green Party, Baden Wurttemberg, adopted law similar to
the German state of Schleswig-Holstein that puts ESG considerations on par with
the traditional criteria of liquidity and profitability. The fact that the US
has not ratified international treaties in areas such as human rights and
controversial weapons, classifies it for these purposes as an ESG laggard. This
means that US Treasuries are not approved investments. Brandenburg Hesse and
North Rhine-Westphalia use indices that also exclude ESG laggards. Significant
sums are not involved, and other countries judged to be ESG laggards include
Greece, Latvia, and Finland.
The euro's high from last
week was slightly shy of $1.0790. It traded there in Europe today after slipping through the
pre-weekend low (~$1.0745) to almost $1.0730 in Asia Pacific turnover. The
intraday momentum indicators are stretched. That said, a close above the
$1.0790 area today would constitute a bullish outside up day and sets the state
for a possible crossing of the five-day moving average above the 20-day. It had
crossed below on May 10, where the euro was a little below $1.10. Sterling
recorded a low last week near $1.2370 and it has approached $1.2600 in Europe
today. The high for the year was set on May 10 near $1.2680. We noted last week
that the five-day moving average crossed above the 20-day moving average. It is
probing the upper Bollinger Band (~$1.2590) and the intrasession momentum
indicators are stretched. Initial support is seen around $1.2560.
America
There is widespread
recognition that once the debt ceiling drama was resolved, the US Treasury
would sell a large amount of T-bills. It began last week and intensified this week with new
regular six-week cash management bill joins the mix. Then there are nearly $100
bln in coupons that will be sold this week and the corporate tax date. The net
effect is some tightening of financial conditions. On the other hand, what the
media has covered less is the return of deposits. Deposits have flowed back
into banks for the last three weeks of May for a cumulative $160 bln. That is
nearly a quarter of what left out this year.
The weaker than expected
Canadian May jobs report, which should a loss of full-time positions for the
second consecutive month and a 0.2% rise in the unemployment rate to 5.2%
helped the US dollar hold above CAD1.3300 level ahead of the weekend. The greenback has not traded below there
since mid-February. The swaps market turned a bit less aggressive after the
central bank surprised with a quarter-point hike last week. It continues to
price in a strong chance (~90%) of a hike in Q3. However, the market is less
enthusiastic about a hike in Q4. Initially, after the Bank of Canada's move,
the swaps market discounted more than a 55% chance of a second hike late in the
year. After the disappointing jobs report, the odds were scaled back to less
than 33%.
After the CAD1.3300 held
(the low was slightly below CAD1.3315), the US dollar traded up to around
CAD1.3355 in the North American afternoon ahead of the weekend. The knee-jerk high on the jobs report was
closer to CAD1.3370, which is to say that the greenback's low, the Canadian
dollar high, was set a couple of hours after the employment data. The CAD1.3400
area, which had provided support now offers resistance. A move above there
could see a return to the CAD1.3440-80 area. On the downside, the USD low for
the year was set in early February near CAD1.3260. Note that are options for
around $485 mln that expire today at CAD1.3300. The seemingly
irrepressible Mexican peso reached a new high since 2016 ahead of the weekend,
with the dollar falling near MXN17.26. There seems to be little in the
way of a push toward MXN17.00. While the plump interest rate premium attracts
interest, Mexico is the vortex of favorable macroeconomic forces
(friend-shoring), a strong external position, where worker remittances more
than cover the trade deficit. Mexico's Bolsa is among the best performers in
the region this year (~12.5%) and has easily outperformed the MSCI Emerging
Market equity index (~4.8%). Once again, after the dollar fell to new lows,
there was what appears to be a short-covering profit-taking bounce that is
sold. The pre-weekend dollar high was near MXN17.39. A break, perhaps on
position squaring ahead of the FOMC, could see a squeeze into the
MXN17.50-MXN17.57 area.
Reviewed by Marc Chandler
on
June 12, 2023
Rating:
