Capital Markets: "Are Risk Appetites Satiated, or Simply Taking the Day Off?"

From Marc to Market:

Overview: Many observers are attributing the sell-off in risk assets today to the Federal Reserve's pessimistic outlook, yet, as we note below, the Fed's median GDP forecast this year is better than many international agency forecasts, including the OECD's that was issued yesterday. Moreover, some near-term trends were already in place.

 Although the MSCI Asia Pacific Index snapped its longest advance in three years today, Europe's Dow Jones Stoxx 600 is lower for the fourth consecutive session, and the S&P 500 will likely fall today for the third successive session. Both of these streaks are the longest since the first half of March. Bond yields are tumbling. The US 10-year yield, which had been flirting with 90 bp at the end of last week, is struggling now to hold above 70 bp. European benchmark yields are 2-5 bp lower after the Australian and New Zealand yields fell 8-9 bp. The dollar itself is mixed against the majors. The recently high-flying dollar-bloc and Scandis are down the most, while the Swiss franc and yen are higher. The euro is holding its own, while sterling is in the high beta camp of weaker currencies today. Led by the liquid and accessible currencies, like the Mexican peso, Russian rouble, and the South African rand, the JP Morgan Emerging Market Currency Index is off for the third consecutive session. Meanwhile, gold is consolidating is gains that carried it to almost $1740 yesterday, and July WTI is unwinding its recent gains to return to where it settled last week (~$38.20).

Asia Pacific
The Abe government is considering extending its cash payment of JPY100k (~$940) to Japanese citizens living abroad. It would be funded out of the second supplemental budget. The requirement is the person would have to be on the resident register as of late April. The latest figures available showed 1.39 mln Japanese were on the register at the end of 2018. It raises the question of whose economy will be stimulated by the measures: the Japanese economy as the payment is in yen or will it boost spending in the current locale of the ex-pat.

Separately, Japan reported that last week, investors bought more than JPY1.06 trillion of foreign bonds. This was the most since the first week of March. We are reluctant to read much into it. The buying seems to be seasonal at the start of the quarter. For their part, foreign investors sold almost JPY740 bln of Japanese bonds. This is the largest weekly divestment since late March and offsets the purchases of the past three weeks in full. Equity transactions were unremarkable.

Hong Kong Monetary Authorities appear to have continued to intervene to prevent the US dollar from falling through the lower band. The recent inflows appear drawn to the new IPOs. This demand is likely to ease over the next week. The greenback initially extended its loss against the Chinese yuan, falling to about CNY7.0560, the lowest since the end of April, before bouncing to CNY7.0750 and running out of steam. The reference rate was set a little above CNY7.06, which was a bit firmer for the dollar than the models suggested.

The US dollar extended its losses against the yen to about JPY106.80. It is the fourth consecutive session the greenback is moving lower after peaking at the end of last week shy of JPY110. While the JPY106.45 may offer some support, the next important level is near JPY106.00. The JPY107.30 area now maybe resistance. The Australian dollar's seven-rally ended Tuesday, and it has been consolidating, albeit choppily, since. Today's setback saw it approach the week's low (~$0.6900), and recover toward the middle of the roughly one-cent range today or around $0.6955 in the European morning. It settled last week near $0.6970.

Europe
European finance ministers meet again today to try to see if a meeting of the minds is possible ahead of next week's heads of state summit to ideally agree on a European Recovery Fund. It seems as if some of the objections were largely negotiating tactics. Denmark, for example, has indicated that while it is still skeptical of the subsidy component (grants), its priority is that it maintains its EU budget rebate. Austria suggested a similar approach is possible. There are still some principled objections for others, including Eastern and Central Europe. Note too that Eurogroup (finance ministers of the eurozone) head Centeno term ends next month, and he has indicated he will step down. Spain's finance minister Nadia Calvino seems to be the early favorite.

The US threatened tariffs on European autos if it did not cut the tariffs on US lobsters recently, but that may be a sideshow to the coming clash over the digital tax of several European countries....

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