From Marc to Market:
Overview: The confrontation in Hong Kong and the fallout from the Argentine primary over the weekend join concerns the conflict between the two largest economies and slower growth to force the animal spirits into hibernation. Global equities remain under pressure. Japan's Topix joined several other markets in the region to have given up its year-to-date gain. The MSCI Emerging Markets equity index is not from doing the same. European shares are faring better, and with today's roughly 0.6% loss, the Dow Jones Stoxx 600 is up almost 9.2% this year. US shares are trading lower, which if sustained, would leave the S&P 500 up just shy of 15%. Bond yields are lower, and several European sovereign bond yields are at new record lows. The first European corporate 10-year bond (Nestle) yield slipped into negative territory. Italy's vote of confidence looks more likely for next week, and this is allowing Italian bonds to stabilize after yields surged in recent days. China's 10-year yield briefly dipped below 3% for the first time in three years. The US 30-year yield is slipping closer to the record low near 2.08%. The US dollar is firm against most of the world's currencies, with the notable exception of the yen and Australian dollar.
Asia Pacific
Chinese officials continue to moderate the pace of the yuan's decline. The dollar fix was set at CNY7.0326, while the models projected CNY7.0357. This means that the discretionary element in setting the reference rate was for a slightly stronger yuan. Yesterday's report of slowing aggregate social financing seems to have set off two impulses. First, there is greater concern about the outlook for the Chinese economy as the slower lending is seen asphyxiating the economy, even though the linkages between lending and growth have become attenuated. Second, there seems to be greater confidence that the PBOC will ease policy. A cut in required reserves is the most common expectation, but there is also the risk of a rate cut.
Developments in Singapore, a regional entrepot, often reflect regional forces and today's disappointing Q2 GDP weighs on sentiment. The Strait Times equity index gapped lower and is up about 2.25% year-to-date. Q2 GDP contracted by 3.3% at an annualized rate, worse than the 2.9% decline expected and it is the second contraction in the past three quarters. Arguably more important is the government's pessimism. It now expects the economy to expand 0-1% this year down from 1.5%-2.5% forecast in May and weaker than the IMF's recently minted forecast of 2%. Singapore reports non-oil export figures for July on Thursday, and there is some hope that the pace of declines will begin moderating....
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