Capital Markets: "Markets Pull Back after Flirting with Breakouts"

From Marc to market:

Overview: New two and a half month highs in the S&P 500 yesterday failed to have much sway in the Asia Pacific region and Europe today as US-China tensions escalate and profit-taking set in. Perhaps it is a bit of "buy the rumor sell the fact" type of activity on the back of upticks in the preliminary PMI reading and hesitancy about pushing for what appeared to be breakouts.

The MSCI Asia Pacific Index snapped a four-day advance, although India and Taiwanese shares were bought. Europe has been chopping back and forth since surging 4%+ on Monday. It is off almost 0.65% in late morning turnover in Europe. US shares are heavy, and the early call sees the S&P 500 giving back a little more than half of yesterday's nearly 1.7% gain.

Benchmark yields are mixed, and the US 10-year is in its well-worn range around 66 bp. The dollar is higher against all the majors, while the emerging market currencies are mixed. South Africa and Turkey, which are expected to deliver 50 bp rate cuts, are seeing their currencies trade with a heavier bias. Gold is weaker amid some profit-taking after unable to close above $1750 for the past four sessions. Support is seen near $1725. Meanwhile, July WTI is extending its rally for the sixth consecutive session as it pushes above $34 a barrel. It finished last week near $29.50.

Asia Pacific
The Japanese and Australian preliminary PMIs showed a nascent recovery in services while manufacturing remained under pressure. And this seemed to also be picked up by weakness in the latest Japanese and South Korean export figures.

First, the PMIs. In Japan, manufacturing slipped to 38.4 from 41.9, while services rose to 25.3 form 21.5. This translated into a 27.4 composite from 25.8. In Australia, the manufacturing PMI eased to 42.8 from 44.1. Services rose to 25.5 from 19.5. The composite rose to 26.4 from 21.7.

Let's look at the trade figures next. April exports from Japan fell 21.9% year-over-year. This was in line with expectations after an 11.7% decline in March. Imports fell 7%, which was shallower than expected after a 5% decline in March. Japan recorded a JPY930 bln deficit. It is the fifth deficit in the past six months. South Korea's trade figures have begun improving. In the first 20 days of May, exports fell 20.3%, moderating from a 24.3% decline in April. Exports of semiconductor chips from 13.4%, while autos were off 58.6%, mobile devices fell 11.2%, and oil products were down almost 69%. In terms of destinations, exports to the US were off 27.9% and 18.4% to the EU and down 22.4% to Japan. Exports to China were off only 1.7% from a year ago....

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