Monday, July 19, 2021

Capital Markets: "Delta Variant Saps Risk Taking Appetites, Sending the Greenback Higher even as Rates Fall"

 From Marc to Market:

Overview: Concerns that the Delta mutation will slow or even reverse the recovery efforts appear to be sapping risk-taking appetites. Equities are under pressure. Nearly all the markets in the Asia Pacific region and Europe are lower. The MSCI Asia Pacific is paring last week's 1.4% advance, while the Dow Jones Stoxx 600 in Europe is off for the fourth consecutive session at six-week lows. Only the consumer staples and health care sectors are posting small gains. The S&P 500 futures are off nearly 0.5%. The Dow futures are off more, while the NASDAQ futures are down a little less. Bonds are bid, and the US 10-year yield is around three basis points lows near 1.26%. Core European benchmark yields are softer, and most are trading at new three-month lows today. Peripheral bonds have come under pressure as the European morning progressed. The dollar rides high, with the Scandis and dollar-bloc currencies off leading the move with losses of mostly 0.3%-0.7%, with the Canadian dollar being tagged for more than 1%. The yen is the notable exception, and it is posting modest gains. Emerging market currencies are all lower, led by the Czech koruna and South Korean won. Gold, which had been flirting with $1835 a couple of sessions ago, is testing the $1800 area. The OPEC+ agreement is pushing oil lower. September WTI is trading below $70. The next technical target is seen in the $66.80-$68.60 area. Copper is off for the fifth session in the past six.

Asia Pacific
OPEC+ struck a deal yesterday that had been rumored last week.
The output will increase by 400k barrels a day next month. Gradually, the 5.8 mln barrels a day that have been shuttered will come back to the market. The key to the deal was the baseline of not just the protesting UAE, but others will be adjusted higher. The UAE's baseline from where cuts will be measured was boosted to 3.5 mln barrels a day from 3.17 mln, and not quite what it had initially sought (3.8 mln). Saudi Arabia and Russia saw their baselines increase by 500k barrels to11.5 mln. September WTI fell 3% last week, the most in three months. It was the second weekly decline after a nine-of-ten-week advance (~21%). While the political compromise resolves the immediate crisis, there are fissures with the bloc and, for many, the baseline may be than a little embellished.

The surge of the Delta virus and reports of a "Delta plus" mutation gaining ground is emerging as a powerful economic and political factor. The Reserve Bank of Australia meets on August 3, and there are already forecasts that it will take back its recent decision to taper (from A$5 bln a week to A$4 bln). The governing coalition is slipping in the polls, and the opposition Labour is now six percentage points ahead. According to Newspoll, satisfaction with the vaccine rollout has fallen to 40% from 53% in April. Meanwhile, two polls show support for the Japanese cabinet is continuing to decline, and the pre-Olympic build-up is marred with new covid cases among athletes. The Kyodo poll showed support for the cabinet falling more than eight percentage points to 35.9%. A Mainichi Shimbun poll had the support rating falling four points to 30....