Market Preview: Treasuries as Safe Haven; Dollar and Equities Mixed
This comes via the BBH Currency Strategy Team.
US dollar is mixed on the day vs. the majors, as markets search for direction ahead of Friday’s stress test results being released. The euro made a marginal new high for the cycle vs. the dollar at 1.3029 but lack of any follow-through has led to a move back to 1.29 as the North American session starts off. Euro is being helped by successful European bond auctions today (see below), but we repeat our warning that while the dollar is likely to remain under pressure due to recent technical damage and the weaker US economic outlook, the euro is feeling a little heavy right now. The yen was mixed, while the Swiss franc was mostly firmer. EM FX was mixed too, while we continue to see heightened risks for the weaker EM credits as risk appetite remains very choppy. Biggest gainers on the day so far vs. USD are AUD, NZD, KRW, MYR, and ZAR, while biggest losers vs. USD so far are HUF, PLN, INR, CZK, and RON. AUD is outperforming after RBA minutes suggested that the tightening cycle is not yet over. Official China comments continue to cautious, leading markets to pare back CNY appreciation views (see below).
Asian markets were mostly higher, as MSCI Asia rose almost 1% today to recoup most of Monday’s losses. China outperformed again, with the CSI 300 up over 2% on the day. Thailand, India, and the Philippines underperformed and ended down on the day, as did Japan. European markets are lower so far today, with Euro Stoxx 50 down over 1%. Futures markets are currently pointing to a down open for US equity markets today.
US bond market is likely to continue benefiting from safe haven flows as concerns about weak US growth remain in play. Japan bond market was lower, with 10-year yields up 1 bp, while European bond markets are mostly higher as 10-year yields in UK, France, and Germany are down 1 bp, 2 bp, and 1 bp, respectively. Greek 10-year yields are down 4 bp, Portugal down 3 bp, Ireland down 10 bp, Italy down 5 bp, and Spain down 4 bp. Peripheral bond auctions went well today amidst heavy supply (see below).
It was a heavy debt issuance day for peripheral Europe, and went quite smoothly. Spain was able to sell EUR6 bln of 12- and 18-month T-bills today at lower yields than the last auction on June 15. Sentiment on Spain has turned positive in recent sessions, allowing Spanish bond markets to outperform the rest of the periphery over the past week. While many expect the Spanish cajas to fare poorly in the stress tests, the rest of the country’s banking sector is regarded as fairly strong. Why? Ironically, Spain’s heavy exposure to Emerging Markets (mostly Latin America) has helped Spanish banks cope with all the problems developing in its own back yard. July bond redemptions are the highest month in H2 for Spain, so the improved sentiment couldn’t have come at a better time. Ireland also placed paper successfully today, and even Greece is benefiting, today selling EUR1.95 bln of 13-week T-bills at a bid-cover of almost 4. Still, Greece had to pay a higher rate of 4.05% vs. 3.65% at the last auction in April. On the other hand, Hungary had trouble placing paper today, selling only HUF35 bln of 3-month T-bills vs. HUF45 bln on offer. Yields still rose to 5.47% from 5.28% last week and so Hungary is paying the price for its stubbornness regarding fiscal targets with the IMF. We remain bearish on HUF, and expect further losses and a test of the 300 level in EUR/HUF in the coming days. UK gilt auction also suffered today, with bid-cover of just 1.38. Wider than expected budget deficit was reported for June at GBP14.5 bln ( vs. GBP 13 bln expected and GBP14.7 bln a year ago).
The Asia growth story remains in flux, but regional equity markets rebounded today even as concerns about China simmer. Taiwan export orders rose a slightly stronger than expected 22.5% y/y in June, though down from 34% y/y in May. Export orders to China and Hong Kong total rose 15.54% y/y vs. 34.3% y/y in May, while orders from the US rose 17.4% y/y vs. 20.3% y/y in May. A slowdown in y/y rates is to be expected as the year progresses due in large part to base effects rolling off, but markets remain nervous about the growth profile in Asia after weaker than expected mainland China economic data for June. Adding a bit to the doubts, PBOC today set its yuan reference rate at 6.7812, a two-week low. 12-month NDFs are now pricing in 1.4% appreciation, and is the lowest since the June depegging of the yuan. China officials also warned that its export outlook remains “complicated and difficult” due to tightening in Brazil and India, which are adding to headwinds from Europe. Lastly, state researcher argued against monetary tightening in a published article, saying inflation won’t top 3% and that money and loan growth are returning to more normal levels. All in all, official comments seem to have turned more cautious in recent days, and that has fed into concerns about China growth and expectations that CNY appreciation may be muted. There are a lot of things that worry us right now, but China isn’t even in the top three. The economy will continue to grow close to 10% in both 2010 and 2011, but we believe China (like the rest of us) remains concerned about the US and Europe.
Bank of Canada meets today and is widely expected to continue the tightening cycle with another 25 bp hike to 0.75%. We note that since the June 1 hike, Canada reported incredibly strong jobs data for June (+93.2k) that was more than 4 times what the market expected. Canada appears to be the first G7 country to completely recoup the jobs lost due the economic downturn, and Canada became the first G7 country to raise rates last month. The December Banker Acceptance futures contract is trading at 98.78, or an implied rate of 1.22% vs. 0.5% currently. The overnight index swaps shows the market expects the Bank of Canada to tighten the most of the G7 over the next 12 months as 105 bp are currently priced in. In the short-term this is supportive of the Canadian dollar, but it also reveals a certain vulnerability. If negative news prevails and the slowing of the economic momentum turns more acute or the risk of a double dip escalate, the Canadian dollar is particular vulnerable to an unwinding of tightening expectations. As the Canadian BAs rallied (rates eased) the Canadian dollar weakened. CAD is vulnerable to market concerns about a US slowdown, though not as vulnerable as MXN is.
Upcoming Economic Releases
Poland core CPI for June due out at 8:00 EST/12:00 GMT and is expected to ease to 1.5% y/y. Brazil IPCA inflation for mid-July due out at 8:00 EST/12:00 GMT and is expected to come in flat m/m vs. +0.2% m/m in mid-June. US housing starts/building permits for June due out 8:30 EST/12:30 GMT. Starts are expected to fall -2.8% m/m, permits to rise 0.2% m/m. US housing data have been weaker than expected lately and so the risk here is tilted towards the downside. Bank of Canada decision expected at 9:00 EST/13:00 GMT, with markets looking for a 25 bp hike to 0.75%. Fed’s Tarullo testifies at 10:00 EST/14:00 GMT, while Fed’s Roseman testifies at 14:30 EST/18:30 GMT.