Highlights
The US dollar is generally firmer against most of the major and emerging market currencies to start the new week. It has staged a reversal of sorts before the weekend and there has been follow through today. The euro ran out of steam after poking through $1.27. Support near $1.2550 has been tested in Europe and a break could signal losses toward last week’s low near $1.2480. Weighed down by poor GDP details and dismal current account figures, sterling has broken below $1.50 for the first time since 1 July. Despite poor electoral results for the ruling DPJ, which would seem to weaken the fiscal austerity efforts, the yen is little changed against the dollar, but firmer on the crosses. Short-term momentum indicators warn that it may be difficult to sustain the dollar’s upside momentum in North America today.
Asian shares were mostly higher, but European bourses have struggled to maintain early gains. Declines in Japan and Taiwan offset gains elsewhere and the MSCI Asia-Pacific Index slipped 0.2%. Of note, while the Topix shed 0.4%, the index of bank shares lost 2% today. Rising commodity prices helped the basic materials and oil and gas sectors in the region. The Shanghai Composite continued its recovery, posting gains for the 4th time in 5 sessions, with technology and consumer services leading the way. European bourses are narrowly mixed, though the Spanish market is off around 1.4%. Telecoms, consumer services and financials are suffering the most.
A safe haven bid has returned to the core bond markets, with 10-year German bund yields off 5 bp and US 10-year Treasury yield 3 bp lower. The 10-year yield in Japan fell 3 bp as equity market weakness appeared to offset policy uncertainty after the election results. European supply this week will draw attention. Of note, Greece is trying to sell 1.25 bln euros of 26-week T-bills tomorrow. After a bill auction today, Italy comes to market with 30-year bonds tomorrow and 5-year on Wed. Portugal will sell 1.5 bln euros of 2– and 9-year paper midweek and Spain looks to sell 15 year bonds on Thursday. At the same time, the ECB’s liquidity provisions will be scrutinized after its recent draining operations and firmer money market rates.
Currency Markets
It is not clear if the firm dollar tone that has emerged at the end of last week and today is more than corrective in nature. It does not appear to have been associated with a clear fundamental development. There is some concern that about European bank stress tests and also some interest in the press reports that the BIS may have provided liquidity to a European bank via a gold swap. The Eurogroup of euro zone finance ministers meet ahead of tomorrow’s ecofin meeting and there is interesting in more details about the stress tests. The general political climate in the big 3 euro zone countries has deteriorated. Italy is poised to hold a vote of confidence around mid-week, with problems in the center-right coalition more important that the nipping by the opposition. French President Sarkozy’s support is crumbling. Two junior ministers have already resigned and the campaign financing scandal is diverting attention and energy away from vital economic issues. German Chancellor Merkel’s support continues to flounder.
The Japanese governing coalition failed to secure a majority in the upper house elections held yesterday. The DPJ appear to have won 44 seats, though Prime Minister Kan had set the goal at 54 of the 126 seats at stake. Kan will not resign, but is vulnerable to a challenge at the September leadership contest. The government still has a 60% majority in the more powerful lower house. The rating agencies were cautious, suggesting Japan’s rating could be downgraded if there political situation hampers fiscal consolidation. No action by the three major rating agencies is likely in the near-term, but of the G7, Japan seems the most vulnerable to a downgrade later this year. The yen itself is little changed as the main driver for the yen appears to be the general appetite for risk, which seems to overwhelm purely domestic factors.
After delaying the revised Q1 10 GDP data, the UK reported it today with little fanfare. It was unchanged at 0.3%. The ONS did reveal, however, that the UK contraction from peak to trough was closer to 6.4% rather than 6.1% as previously reported. On balance, the data would seem to suggest that the UK has spare capacity. There have been some reports that cast doubt on the extent of the UK’s spare capacity and some economists have linked the resilience of UK inflation to ideas that more capacity was destroyed in the economic contraction. The UK reports June CPI tomorrow. The consensus falls for a flat month-over-month report, with the year-over-year rate easing to 3.1% from 3.4%. The UK economy is expected to have picked up in Q2. Last week, NISER indicated growth may have doubled to 0.7% when it is reported on 23 July. Arguably, more concerning than the GDP figures, was a dramatic deterioration of the UK’s current account position. The GBP9.6 bln shortfall was more than twice the consensus forecast of a GBP4.5-GBP4.7 bln deficit and it follows the GBP1.7 bln in Q4 09. Sterling has traded below its 20-day moving average today for the first time since 9th June. It is jut below $1.50 today. A convincing break of $1.4950 signals a test on the $1.4875 low from 1 July. And a move below there could signal another 1-2 cent decline.
China released a slew of economic data that offered something for every one. Reserves appeared to rise at their slowest pace in a decade, rising $7.2 bln. The June trade surplus rose more than expected. The $20 bln surplus compares with expectations for a $13.8 bln surplus after a $19.5 bln in May. Exports rose almost 44% above year ago levels, down from 48.5% in May, but well above expectations. Imports rose 34.1% a little more than expected, but slows than the 48.3% increase in May. Of note, exports to Europe helped up well, rising 27.2% year-over-year compared with almost 26% in May. Meanwhile, money supply growth continued to slow. M2 slowed for the 7th consecutive month to stand at 18.5%, down from 21% in May. Bank lending growth slowed as well. On balance, the data points to a modest slowing of the Chinese economy, but nothing dramatic. Second quarter GDP figures are due out later this week and the consensus forecast is for a 10.5% expansion down from the 11.9% pace in Q1. With money supply and bank loans slowing, a firm June CPI reading is not likely to trigger a policy response. The consensus expected the June CPI to come in near 3.3% after the 3.1% reading in May. Separately, note that indicative pricing of the 1-year NFDP rose 0.1% to now imply a 1.7% appreciation over the next 12-months, which still seems quite modest.
Upcoming Economic Releases
There is no US economic data on tap for today but several Fed officials speak today; beginning with Lacker at 9:00 EST/13:00 GMT and Bernanke at 10:00 EST/14:00 GMT. US Q2 earnings season kicks off today. AT 10:30 EST/14:30 GMT,