Asia extends the run-up in equities but currencies stall below key restsnace levels


MAJOR HEADLINES – PREVIOUS SESSION

  • CA Jul. CPI out at -0.3% m/m, -0.9% y/y vs. -0.2%/-0.8% expected and +0.3%/-0.3% prior

  • CA Jul. Core CPI out at flat m/m, +1.8% y/y vs. +0.1%/+1.9% expected and flat/1.9% prior

  • CA Jul. Leading Indicators out at +0.4% m/m vs. +0.2% expected and revised flat reading prior

  • US Weekly MBA Mortgage applications out at +5.6% vs. -3.5% prior


THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

  • Swiss Trade Data (0615)

  • Norway Q2 GDP (0800)

  • UK M4 Money Supply (0830)

  • UK Public Sector Finances (0830)

  • UK Retail Sales (0830)

  • Swiss ZEW Sentiment (0900)

  • US Initial Jobless Claims (1230)

  • CA Wholesale Trade/Inventories (1230)

  • US Leading Indicators (1400)

  • US Philadelphia Fed Index (1400)

  • EU EBC’s Bini Smaghi speaks (1600)

  • US Treasury’s Geithner speaks (1730)

Market Comments:

It was another day of two halves yesterday as the US session saw a reversal of the risk-aversion theme that dominated the Asian close. Into the close, Wall St shrugged off the 4% fall in the Shanghai stock market earlier, firing ahead on the back of a surge in energy counters after latest data showed a hefty drawdown of crude oil inventories. As has become the norm, the move in equity markets dictated what currency dealers would do, and by the end of the US session the dollar gave back most of the gains it had secured in Asia and early Europe.

Even GBP, which was battered after the BOE MPC minutes showed 3 members aiming for an even larger increase in QE funds than the GBP50 bln that was eventually announced, staged a recovery and was back to early Asian levels by the close. The CAD featured in the spotlight, not because CPI in July was lower than expected and with the largest y/y drop since 1953, but rather weekly crude oil inventory data showed a massive drawdown of 8.4 bln barrels versus an expected build of 0.4 bln. Oil prices skyrocketed and USDCAD eased back to the 1.10 mark, eventually breaking through though only as far as 1.0945.

Other news supporting the USD bearish stance into the close came from comments from Warren Buffet on the NYT saying that the US economy was “out of the emergency room” courtesy of the Fed’s money but any recovery would be slow. He reiterated that the gusher of the Fed’s money and the rising US deficit would eventually undermine the dollar.

Yesterday’s late action would suggest that the market was about to test the SNB’s resolve in its commitment to not tolerate a firmer CHF announced Tuesday. EURCHF touched a 1.5140 low while USD succumbed to broader USD selling. After the close last night the Swiss government announced it was to sell its stake in UBS, worth an estimated CHF6 bln, now that agreement had been reached with the US government over account holders suspected of evading US taxes. Not much reaction in the markets as the FX implications are not clear.

Asia had a barren data slate to look forward to and so all eyes again reverted to equity markets. Notably, the Shanghai bourse opened 0.4% higher and was soon up 2.9% amid talk of official support. This led most currency pairs higher early morning to the detriment of the USD and JPY but most failed to clear nearby resistance hurdles. EURUSD stalled at 1.4255, GBPUSD at 1.6560 and AUDUSD at 0.8315. On the JPY crosses, USDJPY demand at the fix added to the upward push but 134.50 in EURJPY again proved to be a stumbling block with 78.50 the top in AUDJPY. It looks like we ran out of steam in Asia and will have to wait for any momentum from Europe.

BOJ’s Mizuno was on the wires this morning highlighting that the global recovery remains fragile and may be unsustainable without the help of governments and central banks. He cautioned that Japan’s exports recovery may slow from the autumn. The tone of his address suggests that Japan’s accommodative policy will remain in place for some time, though Mizuno admitted that they could not go on indefinitely. Nevertheless, activity remained at an extremely low level and the country’s potential growth rate may be below 1%

The UK has a relatively full data calendar – Public sector credit data and money supply accompany retail sales.
The latter risks a disappointment (expectations are for a slower 0.2% m/m growth from +1.2% prior) though it may be worth noting that more recent BRC data has been better. Into North America we see the weekly initial jobless claims with surveys suggesting the market is looking for a number close to last week’s 558k. The Philadelphia Fed index is also due and expected to improve from July. Ahead of the data, no doubt we will all be stock-watching again.