Overview: The escalation of the economic conflict between the world's two largest economies is dominating the capital markets. The US cited China as a currency manipulator after the North American markets closed, ensuring the troubled start to Asian trading after the US equities and yields plummeted on Monday. The VIX surged to 25%, doubling in the past week. The dollar sold off not just because of the aggressive easing the market now judges will be necessary, but many fear that the next step in the escalation ladder could be US intervention. The combination of the stronger than expected CNY fix and a recovery in German factory orders is helping the capital markets stabilize today. Asia Pacific shares still mostly fell, but the closes in Japan, China, Taiwan, and Hong Kong were near session highs. The positive momentum has carried into Europe, where several of the major bourses opened firmer, and US shares are higher. Benchmark yields are mixed, but of note, the 10-year German Bund yield is at a new low near minus 53 bp, while the 10-year US Treasury yield is bouncing back by five basis points to about 1.76% after falling about 14 bp yesterday. The Swiss, German, and Dutch 30-year bond yields are below zero. The dollar is mostly softer, but the Swiss franc and yen are seeing yesterday's gains pared. Emerging market currencies, led by the South African rand, Turkish lira, and Russian rouble, are leading the way. Indian shares and rupee are lower ahead of a rate cut that the central bank is widely expected to deliver tomorrow. Gold is seeing yesterday's strong gains pared. Oil is slightly higher with September WTI near $55.....MUCH MORE
Asia Pacific
China did not escalate tensions today. The PBOC fix was set at CNY6.9683. This was higher than Monday's CNY6.90 fix but was below the CNY6.9870 median forecast in the Bloomberg survey. It also announced a sale of CNH30 bln bills in Hong Kong next week (August 14), which drains liquidity. The offshore yuan is snapping a four-day drop and clawing back about 0.5% after falling 1.75% yesterday. The US dollar had strengthened to almost HKD7.85 yesterday the upper-end of its band but came back offered today and pulled back toward HKD7.83. The irony of the US accusation of currency manipulation is that it is predicated on China reluctance to resist market forces yesterday. US Treasury Secretary Mnuchin had warned, according to reports, in June that China could be cited as a manipulator if it stopped intervening to support its currency.
The Reserve Bank of Australia kept rates steady as widely expected after delivering cuts in both June and July. However, the accompanying statement was more constructive than anticipated. The RBA could deliver another reduction in the cash rate (1.0%) if needed, but it sounded almost upbeat and cited preliminary signs of recovery in the housing market. Separately, Australia reported a larger than expected trade surplus (June is a record A$8.04 bln surplus after A$6.17 bln in May). Exports rose one percent while imports fell three percent on the month. Record Chinese steel production and iron ore supply disruptions abroad flattered Australia's report. The Reserve Bank of New Zealand will announce its decision first thing tomorrow in Wellington, and a rate cut is widely expected. The dovishness of the RBNZ may be tempered by today's employment report that saw the unemployment rate fall to 3.9% (from 4.2%), which is an 11-year low. Wage growth was also stronger than expected.
Japan reported somewhat better than expected income and consumption data. Household spending rose 2.7% year-over-year in June. While this is softer than the 4% reported in May, it held up better than anticipated. The median forecast in the Bloomberg survey was for a 1.1% gain. Cash earnings rose 0.4% in the through June. They had been expected to fall by 0.6%. However, the anticipated weakness was pushed into May, where the initial 0.2% decline was revised to -0.5%.
The dollar initially extended its losses against the yen, falling to nearly JPY105.50 before recovering.....
Additionally, Mr. Chandler on Bloomberg video:
"Cool Video: The implication of CNY7.0+ "
