Capital Markets: "Dollar on Back Foot as Equities Slide"

From Marc to Market:

Overview: Profit-taking continues to weigh on global equities earnings concerns saw the biggest drop in the S&P 500 in three weeks. The MSCI Asia Pacific Index fell for the fourth consecutive session. The Nikkei gapped lower for the second straight session and has now retraced half of the gains scored since early June. The Shanghai Composite is at its lowest level in a month. Led by information technology, industrials, and energy, the Dow Jones Stoxx 600 is off by around 0.5% near midday in Europe. US shares are trading lower. We see risk back into the 2943-2963 area. Benchmark 10-year bond yields are lower across the world. Rate cuts in South Korea and Indonesia and a disappointing Australian jobs report saw yields fall 3-7 bp in the region, while European yields are 1-3 bp lower. The US dollar is struggling. It is weaker against nearly all the major currencies and most emerging market currencies, including against the South Korean won and the Indonesian rupiah. South Africa is expected to announce a 25 bp rate cut shortly.

Asia Pacific
South Korea and Indonesia cut benchmark seven-day repo rates by 25 bp earlier today. The former was somewhat more surprising than the latter. South Korea's rate now stands at 1.5%. The central bank also cut this year's growth GDP forecast to 2% from 2.5%. There is scope for another rate cut before the end of the year. Indonesia's rate cut had been more convincingly telegraphed. The 25 bp cut brings the seven-day repo rate to 5.75%. The central bank was dovish, and further rate cuts are expected in the coming months. ...

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...Europe
The UK is the main focus in Europe today. Reports suggest that EC negotiator Barnier may be open to an alternative to the currently negotiated backstop. It is not clear what he has in mind or whether this is a rhetorical ploy. Both Johnson and Hunt have said they want to get rid of the backstop altogether. The House of Lords backed an amendment yesterday that seeks to block the suspension of Parliament to pursue a no-deal exit. That said, there is speculation that some of May's cabinet will resign shortly.

Separately, they say what one will about the UK economy, but consumers are continuing to shop. UK retail sales jumped by 0.9% (excluding petrol). Economists in the Bloomberg survey had expected a decline. The year-over-year pace of 3.6% compares with 3.0% at the end of last year. Food sales edged (0.2%) higher, while household goods rose 1.9%. It was the first increase in retail sales in Q2 but was sufficient to offset the 0.4% decline in both April and May.

Sterling had been sold to new lows for the year yesterday near $1.2380 before recovering, and it is extending those gains today. It pushed briefly through $1.2480 in the European morning but appears to be running out of steam in front of $1.25 where a roughly GBP465 mln option has been struck that will expire today. The euro has also steadied after testing $1.12 yesterday.The upside may be deterred by the 3. 3 bln euro in options between $1.1225 and $1.1235.

America
US earnings season is in full swing. The miss by Netflix and lower sales forecast by CSX casts a pall over the market, even though IBM and eBay, for example, beat expectations. Before the opening of US equity trading, Morgan Stanley, Honeywell, Blackstone, Philip Morris, and PPG report among others. After the close, the highlights include Microsoft and E-Trade report....MUCH MORE