Monday, July 10, 2023

Capital Markets: "The Greenback Stabilizes After Pre-Weekend Drop" (plus China)

 From Marc to Market:

Overview: The US dollar is mostly firmer after selling off hard before the weekend in response to the jobs data. Ranges are mostly narrow, but the Australian and New Zealand dollars are the heaviest following news of China's deflation. Emerging market currencies are mixed, but of note the liquid, freely accessible currencies, South African rand, Hungarian forint, and Mexican peso are atop the leader board. Despite repeatedly lower US dollar fixes by the PBOC, the yuan continues to trade softly.

Asia Pacific equities were mixed. Many of the large markets fell, including Japan, South Korea, Taiwan, Australia, and New Zealand. On the other hand, China, Hong Kong, India, and many smaller equity markets rose. Europe's Stoxx 600 is hovering around little changed levels. US index futures are trading mostly lower after pulling back before the weekend. Benchmark 10-year yields are mostly firmer, and Japan's 10-year yield is edging closer to the 0.50% cap. European yields are 2-3 bp higher. The 10-year Treasury yield is little changed, holding slightly above 4%, while the two-year yield is off a couple of basis points to 4.91%. It was turned back from over 5% on the back of the employment report. Gold is trading quietly (~$1919-$1927) within Friday's range. August WTI traded at $74 for the first time since early June but has returned to the $73 area in slow turnover.

Asia Pacific
US Treasury Secretary Yellen reportedly met for 5 hours with China's Vice Premier He.
The length of time is supposed to signal the seriousness of talks. Secretary of State Blinken previously met with his counterpart Foreign Minister Qin and that talks were also said to have last five hours. Yellen also met with Pan Gongsheng, who is expected to be the next governor of the PBOC. Conventional wisdom is that it is better to talk than not, and Yellen herself suggested that the goal was to revive engagement by which she appears to mean more talks. Climate envoy Kerry is going to China shortly. The tensions do not arise because the two sides do not understand the other's redlines. What is most desired is not talk for talks sake and reiterating well known positions but a change in behavior. Indeed, the rapid succession of senior US officials visiting Beijing is taking place at the same time that tensions are escalating. China, claiming national security concerns, announced on the eve of Yellen's visit new export licensing requirements for germanium and gallium and not a retaliation for US-led semiconductor chip and equipment ban. More US actions are expected shortly, including limits on American investment in China.

Meanwhile, unlike other major economies, rising prices are not a problem for China....