Capital Markets: "Consolidation Featured Ahead of the Weekend"

From Marc to Market:

Overview: The equity rally is stalling ahead of the weekend. Most markets in the Asia Pacific region eased, though China and Australia advanced. Japanese shares were mixed. The Nikkei, though advanced for the fourth consecutive session, while the Topis slipped. European stocks are off more, and once again, the 200-day moving averaging is capping the Dow Jones Stoxx 600. Its 1.6% loss through the European morning, leaves the benchmark up about 0.8% for the week.

US shares are trading lower, and the S&P 500's 0.6% gain for the week coming into today may be at risk. After the Treasury's sloppy reception of the 30-year bond sale yesterday, the benchmark 10-year yield is pulling back after poking through 70 bp. 
 The rise in US yields seemed to drag Asia Pacific yields higher. In Europe, yields are a little firmer today. The dollar is mixed. The Scandis are leading the weaker currencies as this week's are pared. Sterling and the yen are posting small gains, while the euro is straddling unchanged levels. Emerging market currencies are mostly lower, and the Turkish lira remains under pressure. The JP Morgan Emerging Market Currency Index is snapping a three-day advance. Gold has stabilized and is trading in a $12 range on either side of $1950, but its nine-week advance has ended. Oil remains firm but within well-worn ranges. The September WTI contract is higher for the second week, but the price action remains largely confined to a $41-$43 range.

Asia Pacific
China's July data missed expectations, suggesting the recovery may be stalling. Industrial production rose 4.8% year-over-year. This is the same pace as June, and economists had forecast an advance. The more troubling miss was retail sales. Economists had projected a small gain. Instead, retail sales fell 1.1% year-over-year after a 1.8% loss in June. Consumption continues to lag behind output, it would seem. The improvement of fixed asset investment also suggests progress on the supply side, while demand struggles. This proxy for capex fell 1.6% year-over-year, about half of June's 3.1% decline.

Governor Lowe of the Reserve Bank of Australia acknowledged that although he would prefer a weaker currency, he is not prepared to intervene and recognizes that the Australian dollar is not overvalued. While refusing to rule out negative policy rates, Lowe continued to suggest it was unlikely. Meanwhile, fresh outbreaks of the virus and beyond Auckland warns that New Zealand is likely to decide next week to postpone the September national election. The Prime Minister's Labour Party government is running well ahead in the polls.

Japan's June tertiary index rose more than expected. The 7.9% increase was above the median forecast in the Bloomberg survey for a 6.4% gain. The May figure was revised down to a 2.9% decline instead of 2.1%. Japan is one of the last major countries to report Q2 GDP. It will do so at the start of next week. It is expected to report a 7.5% quarter-over-quarter contraction.

For the third consecutive session, the dollar met sellers as it poked above JPY107. Initial support now is seen near JPY106.45 and then JPY106.00. The greenback's five-day rally is at risk today. The Australian dollar has been unable to resurface above $0.7200 as its recent gains are consolidated. Although support near $0.7130 is holding, the risk may still be on the downside. There is a A$712 mln option at $0.7100 that expires today. The dollar edged higher against the Chinese yuan for the second day after the PBOC set the reference rate at CNY6.9405, a little softer than the bank models implied. Despite the dollar's gains today, it is finishing lower for the sixth week in the past seven.

Europe
Press stories highlight how an increasing part of Russia-China trade was being settled in euros. On the one hand, this illustrates the success in seeking alternatives to the US dollar. The use of the euro has preceded the EU Recovery Fund, and joint bonds that many have argued will enhance the euro's international role. However, it also shows that Russia and China's first alternative, using their own currencies, has largely gone nowhere.

Germany has reported the most new cases of the virus since early May, and France's head of its Health Agency warned that the situation is deteriorating there. The UK said it will require travelers from France and the Netherlands, as well as four other countries to quarantine. Travel and related stocks were sold....

....MUCH MORE