Firmer Bonds and Stocks, but the Dollar Presses Ahead
<div><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjKJOq_rDTht9b4bACRYL4RFvBSbw6NRUxDDFNDiZJm2yH07i6hS84UPsoW_P74CftvsNLjSfXyK8OSTDCLCz738ZzEKZeBuKuiawGSJVzBSw-YFU0MXcK20mRvhnXNZ7-UtIp6xHS2YzwEXbFwtg_FzUgLrtXVpOueTODsB5IaYIpNFMPMtnhga3BdX7B1/s312/cog%202.jpg"><img alt="" border="0" data-original-height="206" data-original-width="312" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjKJOq_rDTht9b4bACRYL4RFvBSbw6NRUxDDFNDiZJm2yH07i6hS84UPsoW_P74CftvsNLjSfXyK8OSTDCLCz738ZzEKZeBuKuiawGSJVzBSw-YFU0MXcK20mRvhnXNZ7-UtIp6xHS2YzwEXbFwtg_FzUgLrtXVpOueTODsB5IaYIpNFMPMtnhga3BdX7B1/s400/cog%202.jpg" width="400" /></a></div><p><b><span>Overview: </span></b><span>The S&P 500 hit three-month lows
yesterday, while the Conference Board's measure of consumer confidence fell to
a four-month low. New home sales fell to their lowest level in five years. The
US federal government appears headed for a partial shutdown on October 1. Still,
the greenback rides high. It is extending its gains against several G10
currencies, including the euro and sterling. The Swiss franc is moving lower
for the 12th consecutive session. The beleaguered yen and yuan are
consolidating near their recent lows. Most emerging market currencies are also
softer. Gold has been sold below $1900 for the first time this month. <o:p></o:p></span></p><p><span>Despite yesterday's sharp
losses in the US, equities are trading higher today. Aside from Australia and
New Zealand, the large bourses in Asia rose, and the MSCI Asia Pacific Index
rose for the first time this week and only the second time since September 15. The
same is true of Europe's Stoxx 600. It is posting a small gain through the
European morning. US index futures are also trading with a firmer bias. The
sell-off in bonds is stabilizing today. European benchmark yields are mostly
2-4 bp lower. The 10-year US Treasury yield is four basis points lower to hover
around 4.50%. The US two-year yield, which was near 5.20% last week, is near
5.05% now (20-day moving average is ~5.02%). Lastly, November WTI recovered
smartly from a pullback to $88.20 and settled near $90.40. It has approached
$91.60 today and the high for the year, set last week, was slightly shy of
$92.45. </span><span> </span></p><p><b><span>Asia Pacific</span></b><span></span><o:p></o:p></p><p><b><span>News is light from Japan and
China today, where intervention watch is on high alert. </span></b><span>Japanese officials have warned that they
are ready to take appropriate action if necessary and Chinese officials
continue to use the fix to signal their concerns, after using both soft and
hard power tools to discourage yuan selling. The dollar has rallied from nearly
JPY147.30 last Thursday to almost JPY149.20 yesterday and a little higher in Europe today. Over the same time, the
10-year US Treasury yield has risen from about 4.40% to 4.56%. After the dollar
reached almost CNY7.35 on September 8, it backed off to about CNY7.2465 a week
later. It poked slightly above CNY7.3125 on Monday and consolidated yesterday.
China's PMI is now scheduled to be released over the weekend. The numerous
modest measures announced to support the economy are expected to begin being
reflected in the data. However, concerns about the property market continue to
weigh on sentiment and blunt better cyclical readings.<o:p></o:p></span></p><p><b><span>Australia's monthly CPI
report was lifted by rising energy prices. </span></b><span>It stands at 5.2%, as expected, after 4.9%
in July. Except for April (and now August), Australia's monthly CPI has trended
lower this year after peaking at 8.4% at the end of last year. The market
expects the new central bank governor Bullock to stand pat in Q4 but sees a
strong chance of a hike in Q1 24. The RBA meets on October 3 and the cash rate
is at 4.10%.<o:p></o:p></span></p><p><b><span>The market appears to be
turning more cautious as the JPY150 level is approached, which is a testament
to its psychological importance. </span></b><span>Last year, Japan spent around $60 bln to support the yen. It does
not seem to be in particular hurry to do it again. Officials have been using
the word cues, like watching with a "sense of urgency" that has
signaled imminent intervention in the past. Still, with US yields still rising,
an intervention led drop in the dollar will likely simply provide a better
buying opportunity. Meanwhile, without intervention, the dollar may be
supported near JPY148.60-70. <b>The Australian dollar settled yesterday
slightly below $0.6400, its lowest close in about 2 1/2 weeks. </b>There
is little standing in the way of a test on the year's low set earlier this
month near $0.6355. It reached almost $0.6370 today. On the upside, sellers
emerged in front of $0.6410. <b>Chinese officials have tried several
measures to stem the yuan's slide. </b>The cost of borrowing the offshore
yuan (CNH) is near the highest for the year and this is intended to make it
less attractive to short. However, macro considerations, like China's largest
discount to US 10-year Treasuries since 2007, and near 185 bp is about a third
larger since mid-July. Watch CNH relatively to CNY. Because the offshore yuan
is somewhat freer than the onshore yuan, it has led the sell-off. When the CNH
begins to trade higher against the dollar than CNY, it is worth paying closer attention.
The PBOC set the dollar's reference rate at CNY7.1717 and the gap with the
average in the Bloomberg survey (CNY7.3071) remains stark. The rhetoric also
appears to be intensifying. Still, and even with a recovery in industrial
profits (17.2% year-over-year in August after -6.7% in July), which points to
the possibility manufacturing is bottoming out, the yuan cannot sustain even
modest upticks. The dollar rebounded from about CNY7.2915 back above CNY7.31. <o:p></o:p></span></p><p><b><span>Europe</span></b><span></span><o:p></o:p></p><p><b><span>Rising interest rates is
beginning to strain core-periphery spreads. </span></b><span>Italy's 10-year premium over Germany is
near 190 bp, the most since mid-May. The low for the year was set in mid-June
around 155 bp. Similarly, Spain's premium has risen to almost 110 bp, which is
also the most since mid-May. The year's low was set in mid-June a little above
90 bp. Italy's two-year premium over Germany reached a new high for the year
around 78 bp yesterday. The low for the year was set in mid-January near 27 bp.
Spain's two-year premium over Germany is about 35 bp. At the start of the year,
Spain's premium was less than 15 bp.<o:p></o:p></span></p><p><b><span>Amid the capital strike
against the UK last September, the UK 10-year premium over Germany reached
almost 230 bp. </span></b><span>That
appears to be the most at least 30 years. It fell to around 86 bp in early
February but climbed back above 200 bp in June-August, peaking at 205 bp in
mid-August. It has fallen back to around 150 bp to probe the 200-day moving
average. The UK's two-year premium over Germany approached 265 bp last
September. It briefly traded at a 45 bp premium in early March but climbed back
to 220 bp in July and made a marginal new high earlier this month. The premium
has since pulled back to around 155 bp. The 200-day moving average is slightly
below 135 bp.<o:p></o:p></span></p><p><b><span>Since breaking below $1.06,
the euro has not traded above $1.0610. </span></b><span>The lower Bollinger Band is near $1.0550 today, and the
euro has approached it. While $1.05 may offer psychological support, the next
important technical target is around $1.04. Note that without resurfacing above
the $1.0655 area at the end of the week, the euro's slump will extend to the
11th consecutive week. <b>For its part, the Swiss franc comes into today
with an 11-session losing streak, its longest since 1975. </b>That means
it was already selling off before the Swiss National Bank surprised many by not
hiking rates at the September 21 meeting. Through late July, when the franc
peaked, it had risen by more than 7% to lead the G10 currencies. In the two
months since the peak, the franc has fallen by 6.1% against the greenback,
hobbled by similar considerations as the yen and yuan. The Swiss deposit rate
is set at 1.75%, compared with 5.5% in the US and 4.0% in the eurozone. <b>Sterling
cannot get out of its own way. </b>It convincingly took out $1.26 in early
September, then $1.24 in the middle of the month, and in recent days, has
pushed through $1.2200. It reached almost $1.2135 today. The lower Bollinger
Band is around $1.2125. There are options for about GBP1.2 bln that expire
tomorrow at $1.20. There are also GBP1.4 bln of options struck at $1.22 that
expire tomorrow, and we suspect some of the selling pressure yesterday involved
neutralizing them.<o:p></o:p></span></p><p><b><span>America</span></b><span></span><o:p></o:p></p><p><b><span>Weaker Boeing orders likely
dragged durable goods orders in August lower for the second consecutive month.</span></b><span> Boeing orders surged by 304 in June
and fell to 52 in July and 45 in August. The three-month moving average in Q1
was 40. What is notable about August's orders was nearly 29% were domestic
orders after practically none since January. Deliveries are less volatile than
orders and the three-month average was 43 in Q1 and 46 average in the three
months through August. Excluding transportation orders, durable goods orders
may have risen by 0.2% after a 0.4% gain in July. The shipment of non-defense
orders, excluding transportation are expected to have been flat in August and
have not risen since May.<o:p></o:p></span></p><p><b><span>Mexico reports August trade
figures today. </span></b><span>Through
July, Mexico's exports have risen by 3.8% in dollar terms from a year ago. Over
the same time, imports are nearly flat (~0.2%). Through July, Mexico has
recorded $7.22 bln trade deficit this year. In the first seven months of last
year, Mexico's trade deficit was $19 bln. As we will be reminded next week,
Mexico's worker remittances more than cover the trade shortfall. Through July,
worker remittances back into Mexico totaled near $36 bln, almost 10% more than
the year ago period. The central bank meets tomorrow. It has already signaled
its intention to leave the overnight target rate at 11.25%. The Fed's
higher-for-longer signal dovetails with the swaps market pushing the first cut
by Banxico toward the middle of next year.<o:p></o:p></span></p><p><b><span>Although the swaps market
favors Bank of Canada rate hike in Q4, the Canadian dollar is no match for the
greenback. </span></b><span>The US
dollar rose to around CAD1.3525 yesterday and is testing the lower end of the CAD1.3540-75 band that is the next
technical objective. The CAD1.3500 area now offers support. <b>The
risk-off sentiment and strong US dollar has taken a toll on the Mexican
peso. </b>The US dollar, which traded briefly below MXN17.00 a week ago,
settled above MXN17.50 yesterday.<b> </b>The dollar has been confined to a
narrow range near yesterday's highs today in a somewhat better risk mood, though it remains fragile. The high from earlier this month was near
MXN17.7080. Above there is the 200-day moving average (~MXN17.86).
The greenback has not traded above this moving average since last
September. <o:p></o:p></span></p><p>
<o:p>
<o:p>
<o:p>
</o:p></o:p></o:p></p><p><o:p> </o:p></p><p><span><br /></span></p><p><a href="http://www.marctomarket.com/p/disclaimer_28.html" target="_blank"><span>Disclaimer</span></a></p>
Leave a Comment