Overview: The new week, which features the BRICS
meeting and the Jackson Hold symposium is off to a quiet start. The failure of
Chinese banks to pass through last week's 15 bp cut fully into the lending
prime rates was a major disappointment and it is not yet clear the logic. While
the yuan and yen are softer, as are more local Asian currencies, while most of
the G10 currencies are posting small gains against the greenback. Gold is
trading little changed after falling for extending its losing streak for the
fourth consecutive week.
Asia Pacific equities were
mixed. Japan and South Korea, whose officials meeting with US President Biden
at the end of last week, saw gains in equities, while China and Hong Kong the
declines. Europe's Stoxx 600 is snapping a four-day slide and is up about 0.8%
in late morning turnover. US index futures are posting modest gains. The adjust
of long-term interest rates continues. Most European 10-year yields are 2-3 bp
higher, with flat Gilts and Swiss bonds being the exception. The 10-year US
Treasury yield is up nearly four basis points to knock on 4.30%. The 10-year
Chinese government bond yield slipped below 2.54%, a new low. September WTI is
extending the recovery from the slide that took it from around $85 (August 10)
to $78.95 (August 17). It reached $82.15 today, roughly the 50% retracement. Lastly,
we note that the threat of an Australian strike is helping lift European
natural gas prices. Since the end of July, the Dutch benchmark has risen by
nearly 50%, even though European inventories are running well ahead of schedule.
Asia Pacific
China surprised. Following last week's 15 bp cut in the
benchmark one-year Medium-Term Lending rate, it seems obvious that the 18 banks
that set the loan prime rate would pass through the 15 bp cut in the one- and
five-rate rates. They did not. The one-year loan prime rate was reduced by 10
bp (to 3.45%) and the five-year loan prime rate was held steady (4.2%). The
market is confused. One set of interpretations is that Beijing is caught
between trying to provide economic stimulus and not wanting to squeeze banks
through lower interest rate margin. Another set of interpretations center
around the possibility that more direct aid to the property sector will be
forthcoming. Still. the divergence between the medium-term lending facility
(MLF) and the loan prime rates is not unprecedented. Last August, the MLF was
cut by 10 bp but the one-year loan prime rate was cut by only five basis points
and the five-year loan prime rate was cut by 15 bp.
The dollar peaked last
Thursday near JPY146.55 and before the weekend flirted with JPY145.00. It settled below the five-day moving
average for the first time since August 7. The dollar is holding above
JPY145.15 today and tested last Friday's North American high near JPY145.80 in
the European morning. A push above there could see JPY146.20-40. Still, the
intrasession momentum indicators are stretched and initial support may be in
the JPY145.20 area. The JPY144.65 area is the (38.2%) retracement of that the
leg up since August 7 low (~JPY141.50). The Australian dollar has
fallen for eight of the past ten sessions and has not had a winning week since
mid-July (five weeks). It bottomed last Thursday as well and the range
that day (~$0.6365-$0.6450) still dominates. It also has not closed above its
five-day moving average since August 7 and is found near $0.6420 today. Even if
there is some intraday penetration, the Aussie needs to close above to
stabilize the technical tone. If the Chinese yuan were a freely traded currency,
we would note the potential key reversal last Thursday. The dollar had
gapped higher to a new high for the year, then reversed lower and closed below
the previous session's low. The following day, press reports said officials
wanted the state banks to boost their dollar sales. That this rumored discrete
practice made it into the public space, we suspect was no accident or fluke. The
dollar has not closed below its five-day moving average against the yuan since
August 4. It is found near CNY7.2915 today. Still, after the disappointment
with the loan prime rates and the pullback in the yen, the Chinese yuan is
softer. The dollar approached but held below last week's high near CNY7.3175. The
PBOC set the dollar's reference rate at CNY7.1987. The average of nine forecast
in Bloomberg's survey was for CNY7.2867.
Europe
Last week, the German
government indicated it was on track to adopt the global minimum tax by the end
of the year, as required by the EU. The finance ministry estimates that the OECD-led tax reform, could
be worth between 1.9 bln and 2.2 bln euros a year 2024-2026. The report
recognizes the cat-and-mouse nature of corporate tax regimes and warned that
the revenue could be lower if multinational companies restructure to no longer
be subject to the minimum tax. While the Biden administration helped negotiate
the global deal, it hangs like a chad on an old ballot. It is not just that
Congress has not taken any action yet, but there is active opposition. The US
corporate tax schedule rate is 21%, but the 15% minimum tax applies to the
profit that is recorded on the financial statements, which is often different
than taxable income. Unless legislation is taken may be two economic
consequences. First, foreign countries may levy a tax on US company for whom
qualify for the reform but under-pay in the US. This could make for some tense
confrontations and works against efforts to enhance cooperation. Second, it may
lower US tax revenues, as foreign tax payments increase. This is especially
unhelpful given the fiscal state.
The euro recorded a low
ahead of the weekend near $1.0845, a little ahead of last month's low
(~$1.0835). It
consolidated and managed to eke out the smallest of gains to snap a five-day
fall before the weekend. Moreover, of the past six sessions, the euro has held risen above Friday's high (~$1.0895). The euro rose through a little through $1.09, where there are
options for nearly 1.8 bln euros that expire today. The five-day moving average
is near $1.0885, and the euro has not closed above it since August 7. Sterling
tested the upper end of its $1.26-$1.28-range last week but the broad
resilience of the dollar helped it hold. It pulled back to about $1.2690 before
consolidating ahead of the weekend. It is in a narrow range to start the week
(~$1.2710-$1.2750) inside last Friday's range. A close above the 20-day moving
average (~$1.2760), which sterling has not managed to do since July 26 might
signal another attempt at the top of the range.
America
Something has to give. On the one hand, the string of strong US
economic data. Even if the Atlanta Fed's GDP tracker looking for 5.8% as of
August 16 for Q3 growth is 50% too high, which seems like a large discount,
then Q3 GDP would still be better than Q1 and Q2. On the other hand, the
futures market implies about a 10% chance of a September rate hike. Now that
the Fed has policy in restrictive territory and inflation is trending lower,
there may be little interest in back-to-back hikes. Since the Fed hiked in
July, they can afford to wait six weeks until the November 1 meeting. This is
where to look for a resolution of the apparent contradiction. The futures
market implies about a 33% chance of a hike then while a survey by Action
Economics found nearly half of the economists also expect a hike.
The US dollar rose to a new
two-month high against the Canadian dollar around CAD1.3575 at the end of last
week. This met the
(61.8%) retracement of the pullback after recording the year's high on March 10
(~CAD1.3860). The US dollar is trading lower and has taken out the previous
session's low for the first time since August 10. The greenback has not closed
below its five-day moving average this month (14 sessions). It is near
CAD1.3530 today. There are options for almost $480 mln that expire today at
CAD1.3510. In the face of the dollar's broad rally, the Mexican peso has
largely held its own. The greenback finished Q2 near MXN17.1250 and settled
last week around MXN17.0560. It is one of a few currencies that can boast of a
small gain here in Q3. It is flat so far to start the week. The dollar slipped
to MXN17.0180 and has held below MXN17.0680. Last week's high was around
MXN17.2080.
Reviewed by Marc Chandler
on
August 21, 2023
Rating:
