Capital Markets: "The Euro is Knocked Back Further"

From Marc to Market:

Overview: The late sell-off in US stocks yesterday has not prevented gains in Asia and Europe. Most of the equity markets, including the re-opening of China, gain more than 1%. Australia was a notable exception, falling about 0.4%, and Taiwan was virtually flat. European bourses opened higher but made little headway before some profit-taking set in, while US shares are trading higher. Benchmark 10-year yields are firmer, and the US Treasury yield is near 67 bp and is approaching the upper end of its recent range. The yield has not closed above here since April 14. Despite the German court ruling yesterday, peripheral European bonds are not under pressure, and in fact, the Italian premium has narrowed a little. The dollar remains firm against most of the major currencies. The yen is resilient and Japanese markets re-open tomorrow. The dollar bloc is little changed, but the euro and sterling are under heavy. The euro slipped below $1.08 in the European morning, and sterling was sold below $1.24. Among emerging markets, the South Korean won is the strongest, though foreigners were net sellers of its equities today. The South African rand was resisting the dollar's tug but has since turned weaker. On the other hand, South African bonds continued yesterday's recovery. Despite the recent downgrades and being dropped from the FTSE World Government Index, foreign investors have returned to South Africa's bond market, and its bond sales yesterday were oversubscribed. Gold is hovering a little above $1700. June WTI, which traded near $10 a barrel early last week, briefly poked above $26 today before setting back to $24 and is now near the middle of the session's range.

Asia Pacific
China's mainland markets re-opened from the May Day holiday. When the local markets were shut on April 30, the dollar was at about CNY7.0635. The offshore yuan had weakened in the meantime. The US dollar rose from around CNH7.0815 on April 30 to close yesterday near CNH7.1225. The PBOC set the dollar's reference rate against the yuan at CNY7.0690, which was a bit weaker than the CNY7.0720 that the models projected. The dollar fell to CNH7.10, as three-day low before recovering. There is little evidence that Chinese officials are seeking to express their frustration with the escalation of US rhetoric over the virus or Taiwan through the exchange rate. On the other hand, the dramatic decline in energy prices is another hurdle to China fulfilling the trade agreement with the US, which seemed to have been a stretch under normal circumstances.

Australia appears to have reported an 8.5% surge in March retail sales, as households stockpiled. However, prices jumped in Q1, and when retail sales are adjusted for price changes, the Q1 performance is not impressive. In real terms, retail sales rose by 0.7% in Q1 after a 0.5% increase in Q4 19. The median forecast in the Bloomberg survey expected a 1.8% increase. Separately, New Zealand reported the jobless rate rose to 4.2% in Q1 from 4.0% in Q4 19. Employment rose 0.7% in the quarter while economists had expected a 0.2% decline. Private wage growth slows.....

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