• Investor sentiment has soured on the back of the sharp drop in US consumer confidence, the collapse of Kabul, spreading Delta variant and weaker than expected Chinese data.
• The dollar and the other funding currencies (Japanese yen and Swiss franc) are firmer while the dollar-bloc currencies and Scandis move lower.
• Japan’s economy managed to grow slightly in Q2. Consumption was stronger than expected as was business spending.
• Disappointing Chinese July data fans speculation of further easing by the PBOC.
• Rising covid cases in Germany is seeing support for the CDU/CSU slip and the possibility of a SPD/Green/FDP government is beginning to emerge.
• As widely tipped, Canada’s Trudeau has called snap elections for September 20. The polls suggest that its too close to say whether the Liberals will regain a majority.
Overview: The spreading virus, the disappointing Chinese data, and the news that the Taliban have captured Kabul has dampened risk appetites. Equities have moved lower. Nearly all the major markets in the Asia Pacific region fell, but India, perhaps encouraged by a large infrastructure initiative unveiling yesterday. Note that South Korea’s markets were closed, and the Kospi will have a seven-day losing streak in tow when it reopens tomorrow. Taiwan’s Taiex fell for the eighth consecutive session today. Europe’s Dow Jones Stoxx 600 is snapping a 10-day advance, while US futures indices are sporting small losses. US bonds rallied after the shockingly poor consumer confidence reported before the weekend, and this helped ease Asia Pacific yields. European yields have firmed after a soft start, while the US 10-year yield that peaked near 1.38% last week is nearly flat, around 1.27% today near midday in Europe. The dollar is the fulcrum today, with the growth/risk-sensitive dollar bloc currencies and Scandis trading heavily and the funding/safe-haven currencies (Swiss franc and Japanese yen) firmer. Emerging market currencies are mixed, leaving the JP Morgan Emerging Market Currency Index slightly higher before Latam opens. Gold edged a little higher initially to almost $1783. Although it has not sustained its early momentum, it looks like it has not given up on a retest of the $1800 area. Oil has slipped lower, but September WTI bounced off the $66.80 in Europe to test $68. Key support is at $65. Copper gained 1% last week but has given it all back plus more today with a 1.6% loss through the European morning.
An unexpected pick-up in consumption helped lift the Japanese economy by 0.3% in Q2. Consumption was expected to have been flat but instead rose by 0.8%. As a result, the Q1 decline was revised to -1.0% from -1.5%. Strength, as expected, came from business spending. It rose by 1.7% on the quarter, better than expected, though the Q1 contraction was widened to -1.3% from -1.2%. Inventory liquidation shaved 0.2% off Q2 GDP, a bit more than expected after it contributed 0.4 % to Q1 GDP. Although exports rose, imports rose faster, and the net export function shaved 0.3% off GDP, more than the 0.2% compression in Q1. Separately, revision to June industrial output figures (6.5%, month-over-month rather than 6.2% initially reported) suggests some momentum as the quarter ended. Lastly, we note that the GDP deflator was -0.7% after -0.2% in Q1. It is the largest drop since Q1 13.
With the Olympics over, Japan’s Prime Minister Suga’s attention turns to politics as if it ever left. His term as the head of the LDP ends next month. For all practical purposes, Japan remains a one-party state, with the LDP dominating. There are other parties, but rarely have they acquired power. Suga is not very popular. A poll by Asashi last week showed his support may have fallen below 30%, the perceived threshold of winning the next election. Yet, the LDP rules favor the status quo and require any challenger to Suga to get the backing of 20 other members. The LDP leadership is trying to discourage other potential candidates. Yesterday, Suga avoided the controversial Yasukuni Shrine (but did send a religious offering) and marked the end of WWII with a somber address. He followed the new precedent of his predecessor Abe in not apologizing for its aggression. Japanese prime ministers issued apologies for a couple of decades, but still not to the satisfaction of South Korea and China. We have noted that Japan has recently seemingly elevated its commitment to defend Taiwan should it be attacked by China. Besides providing the latest excuse for the aerial harassment of Taiwan, given Beijing’s modus operandi, some “punishment” of Japan seems likely.
China’s July data disappointed, and the resurging virus warns of further weakness this month, which has seen a large port shut and regulatory pressures weighing on steel output. Retail sales, industrial production, investment in both fixed assets and property slowed. The “surveyed jobless rate” unexpectedly rose to 5.1% from 5.0%. Speculation of additional easing by the PBOC was already running high last week, and today’s data will encourage it more. Meanwhile, there is much interest in China’s National People’s Congress session. It is expected to force the anti-sanctions law on Hong Kong. The enforcement could further the angst of foreign companies, especially banks, operating in HK.
The dollar has been sold to nine-day lows near JPY109.30. The greenback has been streaky lately. Today is the fourth consecutive loss, which ended a five-day advance. Initial support is in the JPY109.00-JPY109.20 area, but the month’s low was set near JPY108.70. The Australian dollar is weaker but within the $0.7300-$0.7400 range that, with few exceptions, has dominated for the past month. There is an option for A$970 mln that expires tomorrow at $0.7330. The Chinese yuan strengthened slightly but remained in a narrow range. Within this narrow range, the dollar has not strengthened in a week. The dollar has traded mostly between CNY6.45 and CNY6.50 since mid-June. For the sixth session, it was confined to a tighter CNY6.4735-CNY6.4890 range. The PBOC set the dollar’s reference rate at CNY6.4717, a bit stronger than recently seen relative to expectations (CNY6.4695).
The weekly Insapol out over the weekend shows the German Social Democrats are finding some traction ahead of the late-September election. For the first time in a year, support has edged above the Greens. Support rose for the SPD by a couple of percentage points to 20, while the Greens were unchanged at 18%. On the other hand, the CDU/CSU slipped one percentage point to 25%, its lowest in three months. These poll results, as fluid as weekly polls may be, and the fact that the SPD’s Scholz is more popular than the CDU’s Laschet, suggest the possibility just emerging on the event horizon of a SPD-Green-FDP coalition.
Swiss overnight deposits rose by more than one billion francs for the second consecutive week. This suggests that the Swiss National Bank’s hand may have been behind the trough carved out by the euro near CHF1.0720. It recovered to CHF1.0840 ahead of the weekend before reversing lower and posting an outside down day. Follow-through selling today brought the cross briefly back below CHF1.0760 before stabilizing. With deeply negative yields, there is not much for the SNB to do but intervene to block currency appreciation that is not based on Swiss fundamentals. Moreover, there are insufficient domestic bonds to buy (QE), leading it to buy foreign assets, especially US shares.
The euro recovered smartly ahead of the weekend. On the back of the drop in US consumer confidence, the euro, which had found support earlier in the week just above $1.17, rallied to $1.1805 and settled just below. Today, it found sellers in the $1.1800 area and has been sold to $1.1780. There is an option for almost 500 mln euros at $1.1750 that expires today. A break of $1.1740 would re-target the $1.1700-key support area. Sterling recovered from a two-week low before the weekend but stalled near $1.3880. That area continues to block the upside. Immediate support is seen near $1.3835, and of its signals, a return to the 200-day moving average near $1.3780.
The US Treasury sold $126 bln of coupons last week. The supply was easily absorbed. In fact, on some metrics, like the low amount left in the hands of primary dealers, set records. A big concession may have helped. The yield had backed up nearly 25 bp in the five sessions before the auction. There may have been some immediate buyers remorse as yields headed higher the following day. The market took its breath near 1.38%, and the dreadful consumer University of Michigan’s consumer confidence survey (lowest in a decade) helped make the action participants happy as the 10-year yield plunged over eight basis points (to almost 1.27%), the most in three weeks. Investors will be watching the bill auctions for signs of disturbances spurred by the debt ceiling considerations. The 20-year bond auction ($27 bln) has been more challenging this year, and it may be struggling to find/create a natural constituency. The premium is not as plump, and market conditions may be thinner.
In a well-tipped and anticipated move, Canada’s Prime Minister Trudeau called for a snap federal election, two years ahead of schedule, on September 20. In the 2019 election, he lost his parliamentary majority garnered in 2015. Trudeau hopes to re-gain his majority on the coattails of a successful inoculation campaign, strong fiscal and monetary from both the US and Canada-led recovery, and an opposition that is struggling Nor is Trudeau giving the opposition much time. The 36-day campaign is the shortest permitted by law. To secure the majority, Trudeau’s Liberals need to pick up a net of 13 seats. The polls suggest it is close. Recall that in 2019, the Liberals lost every contest in Alberta and Saskatchewan in protest of Trudeau’s climate policies.
The US reports the August NY Fed manufacturing survey. It popped up from 17.4 in June to 43.0 in July, a record high. It is not expected to have sustained that momentum, and a pullback toward 28.5 is expected. Although it is typically not a market-mover, traders may be more sensitive after the University of Michigan consumer confidence report. The Treasury International Capital (TIC) report is due after the market’s close. Given the low level of intervention and the dated nature of the report (two-month lag), it tends to be discussed by analysts but rarely market moving. The week’s highlights include July retail sales tomorrow and industrial production figures Wednesday. Fed Chair Powell hosts a town hall discussion with teachers tomorrow and the FOMC minutes for last month’s meeting are due on Wednesday. While the focus in Canada is on the election, it reports exiting homes sales today, July CPI on Wednesday, and retail sales Friday.
The US dollar is trading at four-day highs against the Canadian dollar near CAD1.2550. The 200-day moving average is just shy of CAD1.2565. It closed above the 200-day moving average a couple times last month, and although it has been frayed on an intraday basis this month, it has not closed above it. Above it, resistance is seen in the CAD1.2600-CAD1.2615 band. Recall that last week, the Mexican peso had been bought before Banxico hiked rates and sold off on the fact. Follow-through selling ahead of the weekend stalled with the poor US confidence report and sent the peso to new highs for the week. The greenback is consolidating today within the pre-weekend range. In the European morning, the dollar found support near MXN19.88. Initial resistance is seen in the MXN19.92-MXN19.94 area. Meanwhile, the risk-off sentiment and domestic political issues may weigh on the Brazilian real, which has depreciated for the past four weeks and six of the past seven weeks. The dollar faces resistance in the BRL5.30 area and then the 200-day moving average around BRL5.3380.
Bannockburn Global Forex