Capital Markets: "A Dog Day of Summer"

From Marc to Market:

Last week's dollar losses were initially extended in Asia before it came back bid. The euro briefly poked through $1.1650 for the first time in three weeks. However, the gains were sold into, and the euro finished the Asian session near $1.16, where there is a 782 mln euro option expiring, and 2.4 bln euros struck at $1.1625. Even the first gain in the German IFO in nine months failed to recover its traction in the European morning.

The rise in the assessment of the Germany business climate to 103.8 in August from 101.7 in July is the first increase since last November and puts it at its best level since February. The current assessment rose to 106.4 from 105.4, and the expectations component rose to 101.2 from 98.2. This coupled with the improving PMI suggest Europe's biggest economy is finding its stride and growth around 0.5% is projected for Q3.

Italy and the EU are headed for a confrontation. The Italian government's threatened to withhold payment to the EU unless it shares the migrant burden that the front-line states, like Italy, Greece, and now Spain must contend due to rules that make the first EU country of entry responsible. Now the threat has morphed into the possibility a broader obstructionist role, including blocking the EU budget.

Italian stocks are underperforming, but the debt market is holding its own. The 10-year yield flat, while core yields are up around two basis points and the periphery bonds are edging higher. In the stock market, Milan is underperforming. It is slightly lower while most markets are higher. The Dow Jones Stoxx 600 is up around 0.25% in late morning dealings, while the London market is closed for a bank holiday. Last week, the benchmark rose 0.65% to snap a three-week slide.

China re-introduced a "counter-cyclical" component to set the yuan's reference rate at the end of last week, and the yuan rallied on the news It was another signal that Chinese officials had not weaponized the yuan and efforts to arrest its decline was being escalated. The PBOC strengthened the yuan's reference rate today by about 0.25%, which was a bit stronger than anticipated. However, after surging the most in two-year ahead of the weekend, the onshore yuan slipped 0.2%, and the offshore yuan eased half as much,

Asian equities rallied today. The MSCI Asia Pacific Index gained 1.2%, its biggest gain since early July and has now advanced for six of the past seven sessions. The Shanghai Composite gained almost 1.9% and has moved higher in five of the past six sessions. A move above 2800 would solidify ideas that a low is in place. The Nikkei and Topix gapped higher in Japan. Japan's Nikkei rose 0.9% and extended its winning streak to a fifth consecutive session. The Topix gained 1.15% and nearly retraced 61.8% of this month's drop. With the US Secretary of State's trip to North Korea postponed, it is not surprising that Korean shares underperformed (Kospi +0.25%), but what may be surprising is that foreign investors bought nearly $250 mln of Korean shares today, the most in two weeks....MORE