From Marc to Market:
Overview: The dramatic move in the capital markets continues. The US dollar is soaring as yields and equities slide. The US 10-year yield has fallen below 1.30 to 1.26% European benchmark yields are 1-4 bp lower, while Australia and New Zealand have seen a 7-9 bp drop today. Signals that the PBOC may provide more monetary support helped drive China's 10-year bond yield below 3% for the first time since last August. Those currencies levered for growth, namely the dollar-bloc and the Norwegian krone, are bearing the burden today with a 0.50%-0.75% slide. The Japanese yen and Swiss franc are doing best, while the euro tries to stabilize around $1.1800. Emerging market currencies are under pressure, though a few eastern European currencies are holding their own. The JP Morgan Emerging Market Currency Index is off for the tenth session in the past 11 and is back to mid-April levels. Equities are under pressure. MSCI's Asia Pacific Index is off for the third consecutive session and seven of the past eight. While Taiwan, Australia, and New Zealand managed to eke out minor gains, Hong Kong led the move lower with a 3% decline. Europe's Dow Jones Stoxx 600 is off around 1.2% near midday in Europe, the largest fall in almost three weeks. US futures indices are off around 1%. Gold is firm above $1800 and flirted with the recent high near $1815. Oil prices are lower for the fourth consecutive session, leaving August WTI near $71.00, even though API estimated the US oil inventories fell another 8 mln barrels. The CRB Index fell for the second consecutive session yesterday following an 11-day rally ended.
Asia Pacific
In a surprise development, China's State Council appeared to signal a shift in the PBOC's stance, suggesting that more monetary support may be provided. Most recently, the PBOC has been rather tight with liquidity provisions. However, the economy appears to have lost some momentum. China reports Q2 GDP next week. Although the quarter-over-quarter pace may double to 1.2%, the year-over-year pace is expected to have cooled to around 8% from over 18% in Q1. Tomorrow, China is expected to report June inflation figures, and there is some thought that price pressures have peaked. The State Council specifically mentioned a reduction in reserve requirements could be used as well. Separately, note that without providing specifics, Chinese officials have also signaled the intention to provide more base metals from state stockpiles after completing its first round of sales earlier this week. It provided 20k tons of copper, 30k tons of zinc, and 50k tons of aluminum.
A new formal emergency has been declared in Tokyo, and it is expected to run through August 22 as covid cases reached a two-month high yesterday. The Olympics are expected to proceed but with even more limited spectators. Top Japanese officials have appeared more concerned about the fallout from canceling the Olympics than hosting a disastrous spectacle. These Olympics have been marred by scandals, cost-overruns, delays, and the resignation of volunteers. Tokyo's emergency was lifted last month, though officials were cautioned that the low levels of vaccinations could lead to a surge of cases, which is now being experienced....... America
The dollar's surge and the sharp drop in long-end yields may reflect the same short-covering forces. The speculative market, judging from the Commitment of Traders, was short the dollar and Treasuries in a big way. The short dollar position was evident across several major currencies pairs, while the speculative position in the 10-year note fell from nearly 175k net long contracts a month ago, the most in four years, to a net short position before the US employment data of nearly 60k contracts. The next interesting yield level is near 1.23%, the 200-day moving average. The 10-year yield has not been below the 200-day moving average since the election last November....
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