Monday Macro View

The US dollar is generally softer. News that China has agreed to make its currency more flexible has captured the imagination of the market and this has been expressed in what are regarded as risk trades. Among the majors, the dollar-bloc has led the advance, with the Australian dollar the chief beneficiary. In Asia, the South Korean won and the Malaysian ringgit gained more than 2%, but the whole region advanced. There was some disappointment when China’s fixing of the yuan was at the same level as last Friday.

Global equity markets have stormed ahead. The MSCI Asia-Pacific Index rose 2.8% on top of last week’s 3.3% advance. The Nikkei rose 2.4%. The Shanghai Composite, which has been sitting on multi-month lows, rallied almost 3%. European shares are broadly higher, with most bourses up around 1.5% around midday in London. Barring a reversal late in the session, it will extend the winning streak in the Dow Jones Stoxx 600 to a ninth day. As in Asia, the basic material sector is the strongest.

The greater appetite for risk has removed a safe haven bid for US Treasuries and German bunds. Market sensitivities about China’s reserve accumulation and its currency regime also may weigh on sentiment ahead of this week’s $108 bln sale of Treasury coupons. Of note Spanish bonds continue to recover as last week’s auction continues to resonate, Portugal and Greece stand out on the periphery as weak. Ahead of tomorrow’s UK budget, gilts continue to outperform bunds.