From Marc to Market:
Overview: The capital markets are in flux. The powerful short-covering rally of the yen and unwinding of carry trades continues. For the second time this week, the PBOC has surprised by cutting interest rates. The dramatic sell-off of equities continues. The unexpected contraction of South Korea's Q2 GSP (-0.2%) is seen as confirmation of broader economic weakness Speculation of a more aggressive Federal Reserve is gaining ground. It is not that the odds of a cut next week have improved much (~10%), but the derivative markets are pricing in about 25% chance of a 50 bp cut in September. The US 2-10-year yield curve is the least inverted in two years (~-13 bp), while 2-30-year curve is positive sloped by the most in two years (+14 bp). The dollar-bloc currencies and Scandis are bearing the brunt of the downside adjustment among the G10 currencies.
Equities are a sea of red after the sharp losses in the US yesterday. The Nikkei was of nearly 3.3% today and most of the bourses, with the notable exception of India were off more than 1%. Taiwan's market remains closed due to the typhoon. Europe's Stoxx 600 is off about 1.5%, which, if sustained, would be the largest loss in three months. US index futures are sporting a softer profile. However, bonds are rallying. European benchmark 10-year yields are more 1-4 bp lower and periphery-core premiums are widening. The 10-year US Treasury yield is off nearly six basis points to a little below 4.23%. The two-year yield is off about seven basis points to slightly below 4.36%. Gold is extending is retreat. It set a record a week ago near $2484 and is now about $110 lower. Nearby support is seen near $2350. September WTI is under pressure. It approached $76 earlier today, its lowest level since early June. Its recent peak was on July 5 around $83.60....
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