Overview: The dollar and US rates remain firm. The
greenback rose to new highs for the year against the Japanese yen and
Australian dollar before steadying. Outside of the Swedish krona, which is off
nearly 0.5%, the G10 currencies are nursing small losses late in the European
morning, mostly less than 0.1%. Most emerging market currencies are also lower. The Chinese
yuan gapped lower for the second consecutive session and is also approaching
this year's low amid property market and wealth management woes. Gold is pinned
near last week's lows (~$1910). It has not closed once this month above its
five-day moving average (~$1916). September WTI reversed lows last Thursday
after reaching almost $84.90. It fell to a four-day low today a couple of cents
below $82.00 and has recovered back to $83.00.
Nearly all the large equity
markets in the Asia Pacific regions sold off. The Nikkei, Hong Kong, and Taiwan fell by more than 1%. India is bucking the regional move to post minor gains.
After opening lower, Europe's Stoxx 600 has recovered and is up about 0.25% in
late morning turnover. US index futures also recovered from earlier losses and
up slightly. Rising global yields tugged Japanese 10-year yields higher. The
10-year yield settled near 0.58% before the long holiday weekend and rose to
0.62% today, a three-day high. The 10-year US Treasury yield is slightly above
4.15%. It reached 4.18% earlier today, which is the high since August 4 when it
saw 4.20%. European benchmark 10-year yields are mostly softer, with the 2-3 bp
decline in Italy and Greek yields leading the way. UK 10-year Gilt yield are
steady to slightly firmer.
Asia Pacific
After a year of dripping
feeding measures to support the property market, Chinese officials are facing a
new challenge as one of the biggest developers, Country Garden, suspended
almost a dozen of its onshore bonds today. This follows Country Garden Holdings
failing to make a coupon payment last week and a 14% drop in share prices
before the weekend (in HK) and another 19% today. It has a 30-day grace period
on two dollar bonds and is now seeking to extend a maturing bond (yuan payment
due September 2). Adding to the tension, one of China's largest private wealth
managers missed a payment on an investment product. The CSI 300 has nearly unwound
all the gains since last month's Politburo meeting, and nearly all of stocks
(80) on the Hang Seng Index were lower.
China could cut its
benchmark 1-year Medium-Term Lending Facility rate tomorrow, but it is
unlikely. And even
the PBOC were to cut the 2.65% rate, it might not have much impact. Since the
end of 2021, the rate has been cut three times, each by 10 bp. It is more a
signaling device than material in and of itself. Many outside economists argue
that the only way to boost China's economic performance is to address
longstanding "structural issues." We suspect that may prove to
be more wishful thinking that pragmatic analysis. Xi is going nowhere and he
will continue to roll-out more measures until something works within confines
of Xi-thought, which shares with the views in some parts of the political
spectrum among high income countries that sees "welfare" or
"entitlements" fostering laziness. It is like Churchill said about
the Americans, that they will do the right thing after exhausting the
alternatives. China has not exhausted its alternatives. We suspect that that
recent July data, and more to come tomorrow (industrial output, retail sales,
fixed asset investment, residential property sales, and the survey jobless
rate), is old news in the sense that officials have already taken on-board the
disappointing economic performance. The pressure on the yuan is coming from the
policy divergence and the dollar's broad uptrend since the middle of last month.
Japan's markets were closed
for "Mountain Day" last Friday, but full liquidity may not return for
the next several days amid Obon period that runs through Wednesday, which is
the customary mid-summer break. During the period, equity market turnover tends to be light than
usual. The greenback settled slight below JPY145 before the weekend and traded
a little above JPY145.20 today for a new high for the year. Since the high was
recorded, the low has been about JPY144.65. The Australian dollar
trades poorly and settled last week below $0.6500 for the first time since last
November. Follow-through selling too it to a marginal new low for the
year a little below $0.6460. It is recovered to test the $0.6500 area. Resistance
is seen in the $0.6520-30 area. The Aussie peaked at $0.6900 in both June and
July. A low of $0.6600 was seen between the two peaks The potential double top
has a measuring objective about $0.6300. The greenback gapped higher
before the weekend against the Chinese yuan and gapped higher again today. Friday's
high was about CNY7.2395. Today's low was close to CNY7.2485. Domestic woes and
the US dollar's broad gains warns of a test the high for the year set at the
end of June slightly below CNY7.2690. The dollar rose to CNH7.2815 to approach
the year's high set at the end of June against the offshore yuan near CNY7.2855.
The PBOC set the dollar's reference rate at CNY7.1686. The median forecast in
Bloomberg's survey was for CNY7.2354.
Europe
The week is off to a quiet
start in Europe. Tomorrow
is a different story. Germany's August ZEW investor survey is due. It is hard
not to imagine continued deterioration in the assessment of the current
situation and expectations. This month the DAX is giving back three-quarters of
the gains recorded in June and July. The benchmark 10-year Bund yield is up
nearly 15 bp so far here in August. The euro is off 3% since peaking in the
middle of last month. The economy stagnated in Q2 after contracting the
previous two quarters. June retail sales were off more than twice the 0.3%
decline expected. Exports grew less than expected while imports fell more than
projected. June industrial output tumbled 1.5%, three times more than the
median forecast in Bloomberg survey.
The UK will issue its
employment report tomorrow. We know from the end of last week that the UK economy was more
resilient than expected in Q2. The economy grew by 0.2% whereas the median
forecast was for a flat quarter following the 0.1% expansion in Q1. However, it
is not because of strong growth in the labor market. In fact, the number of
people on payrolls rose by an average of 10.8k a month in Q2, the least since
Q4 20. Moreover, the number actually fell in June and likely fell in July. In
the current environment, the market will likely be more sensitive to the
earnings data and here a new acceleration is likely. The median forecast in
Bloomberg's survey is that average weekly earnings rose by 7.4% (three-months
year-over-year), which is up from 6.9% in May. It would be a new high since
mid-2021. Last June, it stood at 5.1%. It would be the fourth consecutive
increase. Short-term interest rates look vulnerable to such report. The swaps
market no longer has a quarter-point hike next month fully discounted. The
swing of the pendulum back favoring a more hawkish BOE could also help lift
sterling.
The euro came off sharply
from the US CPI-inspired knee-jerk bounce to $1.1065 last Thursday and posted a
six-session closing low around $1.0950 before the weekend. The losses were extended to almost $1.0925
today. This month's low is closer to $1.0910. A break of it may
target $1.0880 and then and last month's low near $1.0835. There are options
for about 1.55 bln euros that expire today and another set of almost 1.2 bln
euros tomorrow at $1.10. Sterling recorded a bearish outside down day
last Thursday, but stronger-than-expected GDP figures on Friday minimized the
follow-through selling to a few hundredths of a penny. It is holding
the lows from last week today and is probing the $1.2700 area in quiet European
turnover. Given that the speculative market (futures) still is long, we suspect
the burden is for the bulls, who led a 13.5-cent rally from the early March
lows to the mid-July high, to demonstrate that they are still in control. That
may require a move above $1.2825-50. Otherwise, a break of $1.2600 will look
ugly.
America
The sentiment has moved it
seems in contradictory directions. On the one hand, the market thinks the Fed is done hiking rates.
There is a residual chance in the futures market of about 25% of a hike this
year and better than a 50% chance of a cut in Q1 24. On the
other hand, many economists have now capitulated on a recession. The dramatic
swing in market sentiment is illustrated by the new buzz that the economy is
re-accelerating. The Atlanta Fed's GDP tracker says Q3 is coming in at 4.1% as
of August 8. Next month when the Fed meets, it will update is economic
projections. In June, the median forecast was for the economy to expand by 1%
this year. It will likely rise with the new projections. However, blunting
this, maybe a lower inflation forecast. In June, the median forecast was for
3.2%. It stood at 3.0% in June. Although it likely rose in July (like CPI), is
likely to slip below 3% later this year.
A spokesperson for the
National Security Council argued that President Biden comments last week that
China's economy was a "ticking time bomb" did not represent a new
escalation of rhetoric. Biden says that the Communist Party leaders were "bad
folks" and that the Belt-Road Initiative was a "debt and noose."
These are arguably judgment calls and there was not attempt by the spokesperson
to correct factual mistake of the president's remarks. Biden said the Chinese
economy was growing close to 2% year. China targets 5% growth this year and the
median forecast in Blomberg's survey and IMF sees it growing by 5.2%. It is the
US economy that is not seen growing 2% this year. Biden also said that there
are more retirement age people in China than working age. This was "off by
hundreds of millions of people," according to Bloomberg.
The US dollar has a
four-week rally in tow against the Canadian dollar. Indeed, it has risen for six of the past
seven weeks. Last week's high was set near CAD1.35, which it has not seen since
June 1. The US dollar recorded a high of about CAD1.3470 today before slipping
back to CAD1.3440 in Europe. WTI has moved higher for the past seven weeks,
which appears not to have done much for the Loonie. The correlation between
changes in the exchange rate and WTI has eased to about 0.40 over the past 60
sessions, the in three months. We suspect the main driver of the Canadian
dollar's weakness is the greenback's broad strength. Falling inflation,
a central bank maintaining its 11.25% overnight, and stronger-than-expected
June industrial production (0.6% vs. median forecast in Bloomberg's survey for
a 0.1% gain) helped push the dollar below MXN17.00 last Thursday and
Friday. The greenback continues to straddle the MXN17.00-level
today. However, the greenback as not closed below its since August 1. Last
week's intrasession low was around MXN16.9120. Last week, Brazil reported the
first rise in the IPCA CPI (to 3.99% from 3.16%) since June 2022. Separately,
June retail sales were also stronger than expected. Still the real has fallen
out of favor. Last week's 2/3 of a percent decline came after the nearly 3%
loss the previous week, the largest weekly decline this year. US dollar support
is seen around BRL4.84. The BRL4.94 area capped the greenback last week and
last month. A move above BRL4.96 could signal a return to the BRL5.00-BRL5.03
area and possibly a test on the 200-day moving average (~BRL5.0780). Lastly,
note that in Argentina, the populist outsider congressman, Javier Milei
unexpectedly won yesterday's primary. Investors may respond negatively to the
political development. Milei has made several controversial economic proposals,
including dollarizing the economy. The uncertainty ahead of the October 22
election may also weigh on sentiment.
Reviewed by Marc Chandler
on
August 14, 2023
Rating:
