- Global equities are firmer.
- Bond markets are mostly lower, though Greece and Portugal are building on the pre-weekend corrective upticks.
- The dollar and yen are slightly softer.
The US dollar and Japanese yen have softer biases today at the start of the week. After a quiet Asian session, German banks reportedly were among the featured euro buyers, lifting the single currency to $1.3640 before running out of steam. Last week's highs set nearer to $1.3650 is believed to contain offers. Sterling is quiet ahead of tomorrow's inflation figures. It is moving sideways against the euro, consolidating its 5% advance recorded in Q2.
Firmer US Treasury yields and Japanese shares snapping a five-day losing streak appears to be weighing on the yen, against which the dollar is extending its pre-weekend recovery, after testing the JPY101.00 area. European bonds are also mostly softer today, but Portugal and Greek bonds are extending the recovery seen at the end of last week. Global equities are mostly firmer. The MSCI Asia Pacific Index is up 0.4%. Of note, the continued foreign interest in Hong Kong shares lifted the Hang Seng about 0.5% to put it back into positive territory on the year. European shares are mostly moving higher, though Spain and Italy are underperforming. The Dow Jones Stoxx 600 is up about 0.6% near mid-day in London, led by Consumer Staples and Materials. US shares are trading higher as well.
The news stream is light today, but picks up starting tomorrow. Both Japan and the euro area reported May industrial production figures. Japan revised its initial estimate from 0.5% to 0.7%, but this should not obscure the likelihood that the BOJ revises down its GDP estimate at tomorrow's conclusion of its two-day meeting.
Separately, we note that support for the Japanese government continues to erode. The latest NHK poll shows the lowest approval rating since Abe was elected in December 2012. It fell 5 percentage points in the latest month to 47%. The disapproval rating rose 6 percentage points to 38%.
Disappointing national industrial production figures prepared investors for the dismal euro area industrial production figure. The 1.1% decline (seasonally adjusted month-over-month figure) more than offset the 0.7% rise in April (was initially 0.8%), and is the second decline in three months. The rise is that economists revised down Q2 GDP forecasts.
A German magazine reported over the weekend that Merkel is unlikely to complete her term as Chancellor and that Defense Minister Van der Layen is emerging as the front-runner to replace her. Although some observers seemed to play this up, the market impact is minimal. First, it has long been suspect that Merkel will not complete her term. This mostly has grown out of her criticism of her once patron Helmut Kohl, who, she says, stayed too long. Second, the timing of this is still far from clear. We are likely still talking a few years out. Third, the time and uncertainty makes it too early to be confident in any of her possible successors.
There is also a Wall Street Journal article that seems to play up the debate at the Federal Reserve about tightening due to the recent jobs data. Yet, the Fed's tapering is not complete, and there has not been a single dissent in favor of expediting the tapering, let alone for a rate hike. There are clearly some regional presidents that are inclined to raise rates sooner rather than later. The key is that they do not form a majority. That said, it is important for investors to appreciate that when Yellen testifies before Congress this week, she represents the Federal Reserve and not simply her views as the chair. That means that she might sound somewhat less dovish.
Stevens, the Governor of the Reserve Bank of Australia, pressed his case over the weekend that investors are under-estimating the risk of a material decline in the Australian dollar at some point. For its part, the Australian dollar barely reacted to what some observers see as an escalation of the rhetoric. The minutes from the July central bank meeting will be released the first thing in Sydney tomorrow. Stevens hints that there may be a change in the RBA's forward guidance that has recently indicated that a period of stability in rates was needed after the easing cycle.
In recent weeks, in responding to macro-economic data, the market appears to have begun pricing in another rate cut, though previously it was pricing in a hike. Australian rates are still relatively high, especially in a world of low returns and low volatility. This is true not only at the short end but the long end as well. Its 10-year bond yield at 3.43% today has fallen 34 bp over the past month, and the yield is still attractive for an AAA paper.
There are no US or Canadian data for release today, and no Fed officials are scheduled to speak. The Bank of Canada meets Wednesday. Interest rate policy will most likely be unchanged. There is some risk that the BOC shifts its forward guidance a little to recognize that the downside risks to inflation have eased somewhat.
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