Capital Markets: "Fade the Dollar Gains"

From Marc to Market:

Overview: The S&P 500 rallied 1.6% yesterday to extend the streak to a fifth consecutive session, and the longest of the year and completed the negation of a bearish technical pattern. However, the main feature today is a wave of profit-taking on risk assets. Most equity markets moved lower in the Asia Pacific region. Chinese markets were a notable exception. The Shanghai edged about 0.35% higher, while the Shenzhen tacked on 1.7%. European shares are struggling, and the Dow Jones Stoxx 600 is giving back a bit more than half of yesterday's 1.6% gain. US shares are trading heavily, setting up for around a 1.0% early loss in the S&P 500. While Asia Pacific yields mostly eased, European 10-year benchmark yields are a little firmer. The US 10-year yield is practically flat at 67 bp. The dollar itself is firmer against all the major currencies, led by the Antipodeans and Norwegian krone. Emerging market currencies are also mostly weaker, with the JP Morgan Emerging Market Currency Index off around 0.4% late in the European morning. Gold is consolidating at lower levels. Initial support is seen ahead of $1770. Similarly, oil has slipped lower and WTI for August delivery is testing support near $40 a barrel level after briefly poking above $41 yesterday.

Asia Pacific
The dollar fell sharply (~0.70-0.75%) against onshore and offshore yuan yesterday but stabilized today but only after dipping below CNH7.0. It remained below the 200-day moving average of both for the first time in three months. The inclusion of Chinese financial assets into global benchmarks has drawn almost $600 bln as of the end of Q1 20. These are still modest sums given the size of Chinese assets. Nevertheless, many fund managers appeared underweight China, and the recent surge has caught many wrongfooted. At the same time, investors, Chinese bonds have underperformed, as there seems to be a portfolio shift among domestic investors from bonds to stocks. Separately, China reported that the value of its reserve holding rose by about $10.6 bln to $3.112 trillion in June. It was the third consecutive monthly increase that puts the reserve holdings about $4.5 bln above the December 2019 levels.

China's 10-year bond yield surged 12 bp yesterday to pop above the 3.0% level for the first time since January and edged a little higher today. The lack of new liquidity measures over the weekend and a deluge of anticipated supply offered fresh fodder for a move underway since the end of April. Since then, the yield has risen by a little more than 50 bp. For comparison, the US 10-year yield has edged up by about 5 bp. The rising yield is not desirable, and a policy response may be likely if elevated yields persist, such a cut in required reserves.

The Reserve Bank of Australia kept its cash rate target unchanged at 0.25%. That also remains its target for three-year money. Even as Melbourne, Australia's second-largest city re-entered lockdown mode (six weeks), the RBA sees a less severe hit to the economy that it feared earlier. It continued to emphasize the uncertain economic outlook. If more support is needed, it will extend its bond-buying efforts....

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