No Big Thoughts, but Several Smaller Observations

August has begun off with clear price action.  The US dollar is stronger against nearly all the major currencies.  Bond yields are higher.  Equities and commodities are most lower.  

However outside of the purchasing managers July manufacturing prints, these does not appear to be an overarching story today.  Investors are still trying to make sense of last week's developments, including the BOJ disappointment and the shockingly poor US GDP figures.   

The main events of the week including the Reserve Bank of Australia in early Sydney tomorrow.  Indicative prices in the derivatives market put the odds at close to 70%.  More details of Japan's fiscal plans will be announced tomorrow.  On Thursday, the Bank of England meets and the market regards a rate cut as much of a done deal as these things get.  The week ends with the US and Canadian jobs data. 

Instead of a big story, there are several modest developments that are worth noting.  

First, oil prices have given back their pre-weekend gains.  The month-end bounce did little to take the edge off the worst monthly performance (-13.9%) since July 2015 (-20.8%).  Rising US inventory alongside an increase in US output and rig count weighs on sentiment.  Slower growth in the US, EMU, and likely Japan in Q2 raises questions about demand.   

Second,  commodity prices more broadly are weakening.  Since July 15, the CRB Index has advanced only once, and that was before the weekend when it gained one percent.    From its January low near 154.85, the CRB Index rose 26% to 195.88 on June 8.  With its mounting losses, it met the 38.2% retracement objective near 180.20.  The 50% retracment is near 175.35.  

Third, European banks stocks rallied before the weekend in anticipation of the stress test results and had sold off today on what seems to be largely "buy the rumor sell the fact" type of activity.  The MSCI European bank index is off 1.75% today after rising 2.2% last Friday.    Although Italy's Monte Paschi, which has been the focus of so much attention, is holding on to the slightest of gains, Italy's banking sector is losing ground.  The 4.4% decline offsets in full the pre-weekend gains. 

Fourth, MSCI Emerging Market equity index is at new highs since last August.  Since the beginning of July, the index has fallen in six sessions.  It is up a little more than one percent today, it largest advance since July 14.  Flows into South Korea, Taiwan, Thailand and Indonesia stand out.  Flows into Brazilian and Mexican equities have also been robust since the start of July.   With a couple of exceptions, foreign investors have been sellers of eastern and central European equities.  

Fifth, UK Prime Minister May is showing a different kind of Tory from the Cameron government, and that widening differential could ultimately lead to early elections.  May has distanced her government from Osborne's fiscal rule.  She has endorsed the triple-lock on pensions, while Cameron government was looking for a way to modify it.  

May has opted to conduct her own due diligence regarding the Hinkley Point nuclear plant (for which two Chinese companies were going to provide a third of the funding).  Some observers suspect this is may be part of a broader re-think of the UK's stance toward China, which Cameron and Osborne seemed anxious foster, even at the risk of antagonizing the US (see AIIB).  

It seems clear that May is not happy with Cameron's selection of "resignation honors" which have been criticized for being too personal, but declined to block on grounds of setting a poor precedent.   As May distances her government from the previous government, pressure is likely to mount for a snap election  Snap elections are more difficult to engineer since the electoral reforms, but not impossible.    Still, the pressure at the moment does not seem particularly acute.  

Sixth, the EU and Turkey agreement on refugees, which has been fairly successful in stemming the tide across the Aegean may be at risk in about ten weeks, which set the stage for new brinkmanship.  Recall that in exchange for six billion euros, a resumption of EU accession negotiations and visa-free travel of Turkish passport holders. 

In order to grant the visa-free travel, the EU made several technical demands to Turkey's passports.  Most of these demands have been met.  The EU also required that Turkey modify its anti-terrorist laws that are too broad for the EU's sensibilities.  Erdogan is more adamant than prior to the failed coup attempt not to concede.  

Seventh, in two elections so far, Spain has failed to elect a majority government.  It economy appears to be losing some momentum.  Growth in Q2 was estimated at 0.7%.  While it is the envy of the other EMU members, it's the slowest quarterly expansion since Q4 14, and today's manufacturing PMI warns that Q3 is off to a slow start (51.0 vs. 52.2 in June).  It narrowly escaped being fined for fiscal excesses.  It 10-year yield is holding just above the 1.0% threshold.  Note that on the eve of the UK referendum the generic 10-year yields was near 1.50%.  

Eighth, although Abe-led the LDP to a victory in last month's upper house elections, support for Abenomics is weak.  Interviews with voters seemed to show that the even poorer opposition and the desire for stability led to votes for the LDP candidates.  The depth of support for Abe is not deep.  Over the weekend, Tokyo elected its first woman governor, Yuriko Koike, former defense minister, who drew more than a million votes more than her closest rival Masuda who was backed by  Abe and the LDP.  

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