Snapshot of Global Capital Markets

The US dollar remains firmer across the board. A certain degree of skepticism continues to weigh on the euro. There are suspicions that Greece may need more funds and/or that the official moves do not prevent contagion. Others recognize that even if the package for Greece does the trick, a lower euro is still the likely consequence. In the UK, a weak mortgage approval data offset the tick up in the CIPS manufacturing survey, and with a risk of a hung parliament, sterling lost another cent to almost $1.5160 before finding a decent bid. The Reserve Bank of Australia hiked rates for the 6th time since last October, but seemed to signal a pause now and this coupled more negativity surrounding the “super-tax” on resource companies has seen the liquidation of stale Australian dollar longs. Near-term risk extends to last week’s low just below $0.9140. Meanwhile, the greenback held just below the JPY95 level, where options structures are thought to have been placed. Support is pegged near JPY94.40. Emerging market currencies are generally softer.

Equity markets are mostly lower, despite the 1.3% recovery in the S&P 500 yesterday. The MSCI Asia-Pacific Index excluding Japan (which remains closed until Thursday) slipped 0.4%, with materials providing the largest drag. The Shanghai Composite fell 1.2% to a new seventh month low as the reserve requirement increase continues to take a toll. Of note the Thai market advanced 4.2% on news that an election may be called in November, which essentially doubles the year’s advance up to yesterday. Most European bourses are off more than 1%. Rumors that Fitch was to cut its AAA rating for Spain proved for naught but the Spanish stock market lost more than 3% to fall to its lowest level in nine months. Financials and health care posted the largest losses, but the decline was widespread. In the Dow Jones Stoxx 600, financials and resource companies are the weakest sectors.

Tensions in Europe remain evident in the bond market. Southern European bond markets are under pressure. Reports indicate that the credit default swap for Greece is about 29 bp higher today at 675. Portugal’s 10-year yield is 17 bp higher and Spain is 5 bp higher. Market participants, however, may be better served keeping an eye on the 2-year sector as this is where the evidence of pressure is clearer. The Greek 2-year yield is up 127 bp (1072 over Germany) and Portugal’s 2-year yield is up 37 bp and Spain is up 12 bp. Flight to the safety of German, French and US bonds is lending support to those markets.