Dollar Comes Back Bid, as First Republic Taken Over (Mostly) by JP Morgan
Most markets are closed for the May Day holiday. News that JP Morgan will acquire most of First Republic assets will be a relief for the markets. US equity futures are slightly firmer, and the 10-year Treasury yield is around three basis points higher, slightly above 3.45%. Recall that before the weekend, it has fallen from almost 3.55% to 3.42%. The market has more than a 90% chance of a quarter-point hike discounted for Wednesday. The year-end rate is still seen near 4.50%, but the market now recognizes about a 15% chance of a hike at the next meeting (June 14). Japan, Australia, and New Zealand markets were open. The first two equity market rose, while New Zealand slipped. The weakness of the yen helped lift the Topix by 1%. Europe’s Stoxx 600 is edging slightly high after finishing last week with the first back-to-back gains since April 13-14.
The dollar is mostly firmer. The Australian dollar and Swiss franc are the notable exceptions. The Dollar Index is slightly higher for the third consecutive session. If sustained, it would be the longest advance since late February. Eastern and central European currencies are softer, while the Mexican peso is about 0.2% better. Gold is mired in the pre-weekend trading range and is a little softer, as one might expected given the greenback’s upside bias and the higher US yields. The yellow metal is inside the range set last Thursday ($1974-$2003). It may be the second session that gold holds below $2000. June WTI rallied 2.7% before the weekend but has given that mostly back today with a 2.05% loss bringing to back to almost $75. Last week’s low was slightly below $74.
China’s April PMI disappointed. The manufacturing reading fell below the 50 boom/bust level for the first time since December (49.2 vs. 51.9). Weakness was also seen in new orders, export orders, and employment. Non-manufacturing continued to expand, though slower (56.4 vs. 58.2). Consumption and construction remain strong. The composite PMI eased to 54.4 from 57.0. Given the public holidays in April and May, a clean read may only be possible next month. Separately, China reported that home sales rose for a third month in April. The value of new home sales, reported by the 100 largest developers, rose by slightly more than 31.5% from a year ago (to ~CNY566 bln or ~$82 bln). China’s markets are closed through Wednesday for the extended Labor Day holiday. The early indications suggest the holiday is off to a strong start, with internal tourism rising sharply not just compared with last year but with 2019 as well.
The dollar extended its post-BOJ gains today, reaching almost JPY137.00 in the holiday-thinned markets. The 200-day moving average there and above it is the high for the year, set March 8 near JPY137.30. A break of that could signal a test on the JPY139.60, which is corresponds to the (50%) retracement of the dollar’s fall from the multi-year high set last October (~JPY152). The Australian dollar recovered from the pre-weekend low (~$0.6575) to $0.6645 today to rise marginally above Friday’s high. The RBA meets tomorrow, and the market has all but given up any lingering idea of a rate hike. Initial support is seen near $0.6630, while a move above $0.6650 could spur a move into the $.0.6675-$0.6700 area. Tomorrow, options for around A$520 mln expire at $0.6705. With the mainland closed, the offshore yuan slipped following the disappointing PMI and mostly firmer US dollar. The greenback approached last week’s high set last Tuesday a little shy of CNH6.9510. It is approaching the 200-day moving average (~CNH6.9540), which it has not traded above since mid-March. The high for the year was set on March 8 near CNH6.9970.
There are three developments in Europe to note. First, before the weekend, Fitch cut France’s sovereign rating to AA- from AA. The outlook is stable. It noted that France’s deficits are running well above other AA-rated countries. S&P and Moody’s have France at AA or its equivalent (Aa2). Fitch’s move is more embarrassing for the Macron government than substantive. Fitch warned that President Macon’s fight over pension reform may have sapped fiscal reform efforts. “Political deadlock and (sometimes violent) social movement pose a risk to Macron’s reform agenda and could create pressures for more expansionary fiscal policy or a reversal of previous reforms.” Fitch expects France to record a budget deficit of 5% of GDP this year, up from 4.7%.
Second, Italy’s 0.5% Q1 growth, better than Germany and France combined, can give the Meloni government more fiscal space. After a snafu last Thursday, when there were not sufficient votes in parliament (many absent ahead of the long holiday weekend), a bill backing additional borrowing was approved Friday. Today’s cabinet meeting will likely endorse labor reforms, making short-term contracts more acceptable and reducing the “tax wedge” (the gap between pre-tax wages and take-home pay). The 2019 “citizen wage” to ease poverty will likely be abolished at the beginning of next year. Organized labor opposes these changes and is all the more incensed by the government doing it on Labor Day. Finance Minister Giorgetti suggested in a weekend interview that more assistance for businesses and families being squeezed by higher inflation could be considered. He also intimated that the stalled EU funds will likely be disbursed in the coming days.
Third, before the weekend, the GMB union accepted the UK government’s latest proposal (56%-44%). However, the Royal College of Nurses and the Unite union rejected it (52%-48%). They will hold another day strike while the ambulance drivers are striking today and tomorrow (strike activity is entering its sixth month). Tomorrow, the NHS Staff Council, an umbrella labor body, meets, but it is not clear it will be able to resolve the impasse. The UK holds local elections on Thursday, and Tory Party leaders have warned of a repeat of the 2019 contests when it lost around 1000 council seats.
The euro is trading quietly inside the pre-weekend range (~$1.0965-$1.1045). There is a set of options at $1.0950 for nearly 1 bln euros that expire today. It has drifted lower to slip briefly through $1.0990 but is finding some bids before the North American open. Before the weekend, it held the 20-day moving average, a break which, we suggested would be a preliminary sign of a correction after setting a new 12-month high last week near $1.11. The 20-day moving average is about $1.0970 today. Sterling reached about $1.2585 before the weekend, a new high since last June but has come back softer today, falling to $1.2515. It that does not hold, nearby support is seen closer to $1.2500. A move back above $1.2550 lifts the tone.
JP Morgan will acquire the bulk of First Republic Bank assets. This includes all deposits, $173 bln in loans and around $30 bln in securities. There are approximately $92 bln in deposits, including $30 bln of large bank deposits. The FDIC will provide some loss sharing agreement covering residential and commercial mortgages, and a five-year $50 bln fixed rate loan. JP Morgan will not take on First Republic’s corporate debt or preferred shares. JP Morgan stock is trading higher in pre-market activity.
Of note, last week, the KBW regional bank index was essentially flat last week, while the large bank index fell by almost 2%. The banking system took in $21 bln in deposits after a sharp $76.2 bln outflow the previous week. Emergency borrowing from the Fed’s facilities increased for the second consecutive week (~$155.2 bln vs. $143.9 bln). There seem to be two camps. The first sees this as a slow-moving banking crisis, largely fueled by the speed of the Fed’s tightening. It sees this as the key force that will lead to a historically quick reversal of this week’s rate hike (by the end of Q3). The second camp sees the banking stress largely contained to the names that were quickly identified last month when SVB and Signature problems reached a crescendo.
Mexico and Brazil reported stronger-than-expected growth figures before the weekend. Brazil reported a 3.32% increase in economic activity in February, nearly three times more than the median forecast in Bloomberg’s survey. The central bank meets Wednesday and is expected to keep the Selic rate steady at 13.75%. Price pressures have been easing for nearly a year, and the early April read was at 4.16%, the lowest since 2020. Mexico’s economy expanded by 1.1% in Q1, besting forecasts for 0.8%. The year-over-year pace was 3.9% rather than the 3.3% expected by economists. The service sector was particularly strong, with a 4.4% increase in output. Manufacturing output rose by 2.7%, and agriculture activity increased by 2.4%. Recall that last week, Mexico reported record exports for March. While the central banks of Brazil, Peru, and Chile are on hold, Colombia hiked 25 bp last on a split decision (four supported the hike, two wanted to pause, and one favored a 50 bp hike). The Colombian peso fell last week after the market-friendly finance minister was sacked (Ocampo). Mexico was expected to match this week’s Fed hike when the central bank meets on May 11), but the governor was quoted indicating a pause will be discussed.
The US dollar posted a big reversal against the Canadian dollar before the weekend. It made a new high for the move (~CAD1.3670) before selling off to around CAD1.3535 and settling below the previous day’s low. There has been no follow-through US dollar selling and it has come back firmer. The US dollar is approaching CAD1.3580. Nearby resistance may be found in the CAD1.3585-CAD1.3600 area. The Mexican peso is trading with a firmer bias. The US dollar had looked poised for an upside correction, but it stalled last week in the MXN18.18-MXN18.20 area. So far today, it is holding above MXN17.96. Last week’s low was near MXN17.9520. The multi-year low was set on March 9 slightly below MXN17.90.
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