Capital Markets Overview

The US dollar is generally consolidating this week’s losses in quiet and largely uneventful turnover. The shallowness of dollar bounces warns that the downside correction is not complete.

Given the structural arguments that the euro bears drew upon to fuel the single currency’s 13%+ decline between mid-April and earlier this month, the risk seems to be that participants may anticipate the end of the correction prematurely. We suspect that the onus is now on the dollar bulls, though the market is still asymmetrically positioned. The correction should be assumed to be intact until proven otherwise.

Global equities are mixed. Although the MSCI Asia-Pacific Index edged 0.2% higher and Korea reported net foreign purchases for the sixth consecutive session, the real story was the declines. China’s Shanghai Composite slumped 1.8%, its biggest decline in three-weeks. Weakness was broad based, but especially pronounced in health care (-5.7%) and technology (-4.8%). The Nikkei was fractionally lower, but financials under performed (-1.5%). European bourses are higher and, of note, following yesterday’s Spanish bond auction, financials in the Dow Jones Stoxx 600 is the strongest sector, rising 1% compared with the overall benchmark up about 0.3%.

Spain and Italian bonds yields have fallen 5-9 bp as near-term sentiment has been boosted by yesterday’s auction results and suggests that the both country’s banks’ stress tests produced favorable results. On the week, though the Spain-German 10-year spread is about 9 bp wider, while Italy’s is 19 bp tighter. Ireland’s premium is 32 bp wider. Portugal is 38 bp wider and Greece is 111 bp wider. It would not be surprising to learn at the start of next week that the ECB reduced its bond purchases.
Capital Markets Overview Capital Markets Overview Reviewed by Marc Chandler on June 18, 2010 Rating: 5
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