Capital Markets Overivew

The US dollar is mixed at the start of the new week. The absence of London markets is serving to dampen turnover. The reluctance of the Bank of Japan to get ahead of market expectations saw the yen recover smartly after the greenback neared JPY86. Initial support for the dollar near JPY84.50 is likely to be tested shortly. For its part, the euro has been confined to its pre-weekend range. Three times in as many sessions, the euro was turned back from approaching $1.2780. Initial support is seen near $1.2680-$1.2700. Sterling is among the best performing of the majors, even though Hometrack house price index posted a large decline and the BCC opined the BOE is on hold until H2 2011, with the risk of a double dip. Cable faces resistance in the $1.5600-20 area. Emerging market currencies are narrowly mixed.

The recovery US share prices last Friday is helping underpin equity markets today. The MSCI Asia-Pacific Index rose a little more than 1%, led by a 2.4% gain in the Chinese Composite. This in turn may have helped the Hang Seng snap a 6-day losing streak. The Nikkei managed to rise almost 1.8%, but after being up more 3.2%, this was a bit disappointing. South Korea’s Kospi was aided by the government’s decision to ease mortgage rules. European bourses are mostly higher, but struggling to build on the initial gains. The Dow Jones 600 is up around 0.2% near midday in London, led by health care and utilities. Industrials and telecoms are drags. There is much talk of France’s Sanofi Aventis $18.5 bln cash offer for US-based Genzyme. The early call is for a marginally higher opening in the US markets.

Global bond markets are subdued after the sharp US Treasury sell-off in response to Bernanke’s comments at Jackson Hole before the weekend. Treasuries are firmer, paring some of those losses, with yields off 2-3 bp. The rise in Japan’s shares and the BOJ’s decision not to increase its rinban (bond purchases) operation from the current JPY1.8 trillion (a month) helped lift the 10-year JGB yield 3 bp to resurface above 1.00%. Core European bonds—Germany, France, Netherlands—seeing a 4-5 bp decline in 10-yuear yields. Irish bonds are fully participating in today’s rally, following last week’s successfully received auctions. Italy, more than the others stand out today, but this may simply be a function of supply, with the government selling as much as 10.5 bln euros of various maturities today. The US-German 2-year spread, which has done a reasonably good job of tracking the euro-dollar exchange rate, is continuing to narrow and now stands around 6 bp in Germany’s favor, down from a little over 25 bp at the end of July.