Markets Grind into the Weekend

Overview: Friday the 13th is supposed to be ominous, but the global capital markets are mostly subdued.  China's port shutdown and anxiety since South Korea reported a decline in memory chip exports weighed on Asia Pacific equities, with the Kospi and Taiex falling more than 3% this week and sending the South Korean won to its lowest level of the year.  The Baltic Dry Index rose 2.75% yesterday to put this week's increase near 4% coming into today.  This week will be the ninth weekly advance in the last 10 weeks, and it is up nearly 44% over this span.  European stocks continue to edge higher, and the Dow Jones Stoxx 600 is posting gains for the 10th consecutive session.  US futures are firmer after the S&P 500 and Dow Industrials set new records yesterday.  The US 10-year yield is slightly softer, near 1.34%, representing a five basis point increase on the week. European bonds are narrowly mixed, though Greece's benchmark yields set a new record low near 51 bp today.  The greenback has a softer bias through the European morning.  Most major currencies are 0.1%-0.2% firmer today.  Among emerging market currencies, Asia Pacific currencies have weakened the most, while the Mexican peso, which initially weakened following yesterday's rate hike, has come back slightly better bid to lead EM. The JP Morgan Emerging Market Currency Index is slightly higher on the day and up about 0.15% for the week before Latam local currencies begin trading.  Gold has continued to recover from the flash crash at the start of the week.  Monday's high was $1765, and the yellow metal poked briefly through $1760 today.   Oil has slipped lower and is off a little more than 1% since the middle of the week. Around $69.00, September crude is up about 1% this week after dropping nearly 7.7% last week.  China's efforts to curb its steel output have seen iron ore prices tumble.  Today's 2% loss brings the weekly drop to 6.8% and the four-week plunge to 26%.   Copper prices are steady and are holding on to about a 0.5% gain this week after falling 3% last week.  

Asia Pacific

News yesterday that South Korea's memory chip exports fell last month for the first time since last April spurred a dramatic market reaction.  Flash memory chips were the culprit, with shipments off 20%, according to the trade ministry.  However, the export of RAM chips rose slightly.  This was the main weight on South Korean and Taiwanese equities and a drag on the respective currencies.  

The dissolution of Hong Kong's Professional Teachers Union, with 95k members, following a report in the Chinese state media that called it a "malignant tumor," illustrates the kind of informal pressure Beijing is bringing to bear on the Special Administrative Region.  The formal power is expected to be expressed soon, perhaps as early as next week, when Beijing will impose or get Hong Kong authorities to adopt the anti-sanctions law that makes it illegal to comply with foreign sanctions. Foreign banks in Hong Kong are seen to be particularly vulnerable, though, as usual, how the laws are enforced will be key. Yet the dilemma is clear, both Washington and Beijing cannot be satisfied simultaneously.  

Japan reports Q2 GDP first thing Monday in Toyko.  It may have eked out the slightest of growth with the help of business spending. However, private consumption looks flat, and net exports appear to have shaved growth by 0.2%, the same as in Q1.  The GDP deflator is expected to have fallen from -0.1% in Q1 to -0.9% in Q2 (year-over-year), the most deflation since the first half of 2012.  Note that the deflation is despite the large deficits and debt Japan has taken on, and the BOJ's balance sheet is well over 100% of GDP.  

The dollar reversed lower against the yen in the middle of the week after reaching JPY110.80.  Today's low near JPY110.25 is a four-day low.  The greenback is trading between two sets of expiring options.  There is one set at JPY110 for $540 mln and another at JPY110.50 for $1.25 bln. The Australian dollar is trading quietly and remains within the range set on Wednesday (~$0.7325-$0.7390).  So far today, it has been confined to about a 15-tick range below $0.7350.  It settled last week near $0.7355.  If it closes below there, it will be the sixth weekly decline in the past seven weeks.  Since the end of April, it has risen in only four of the 15 weeks.  China's yuan slipped slightly today and is virtually unchanged on the week at CNY6.4815.  The PBOC set the dollar's reference rate at CNY6.4799, tightly against expectations for CNY6.4801.  There is speculation that a rate cut could come as early as next week. 


The eurozone reported a 12.4 bln euro seasonally adjusted trade surplus in June.  It is nearly 20% larger than economists expected, and the May series was revised to show a 13.8 bln euro surplus instead of 9.4 bln.  With Q2 GDP already released, today's report has little impact.  However, it is notable that the average monthly surplus was 13.15 bln euros in Q2, a sharp drop from the 23.1 bln euro average monthly surplus in Q1.  Last year the average monthly surplus was 19.6 bln euros, only slightly better than the 18.6 bln euro monthly average in 2019

Ahead of next week's employment report, the UK's Recruitment & Employment Confederation July survey showed companies boosting wages to attract workers and reported a record number of online job postings last week.  In last week's statement, the Bank of England recognized the increase in pay settlements and upward pressures in general.  The UK also reports July inflation figures next week.  The preferred measure that includes owner-occupied housing costs (CPIH) is expected to tick up to 2.5% from 2.4%.  However, core CPI may have moderated to 2.1% from 2.3%, which would be the first decline since February.  

The euro is trading quietly in a narrow range that is inside yesterday's range, which itself was inside Wednesday's range (~$1.1705-$1.1755).  It probably takes a move above $1.1770 to take the pressure off the $1.1700 area, which, as we have noted, is roughly the low for the year set in March and the (38.2%) retracement of the big rally from the March 2020 low near $1.0635.  The euro settled a little above $1.1760 last week.  Assuming it does not close above there today, it will be the eighth weekly loss in the past 11 weeks.  Sterling is trading at new two-week lows today near $1.3790.  The 200-day moving average is a little lower, around $1.3780, which also marks the (50%) retracement objective of the recovery since the July 20 low by $1.3570.  A break could spur a move toward the next target of $1.3730.  


The US reports import and export prices today.  They typically do not move the market. However, more attention may be given to the University of Michigan's consumer confidence report and, in particular, the 5-10 year inflation outlook.  Recall that it peaked in May at 3.0%, fell to 2.8% in June where it stayed in July.  Yesterday, the US Department of Agriculture shaved its outlook for grain and cotton crops sending prices higher in the futures market.  Tight inventories and a smaller harvest could send ripples across the food chain as it boosts the price of livestock feeds, cooking oils, and fuel.  

Canada's calendar is light today.  Next week it reports July CPI and June retail sales.  The focus, however, is on reports that Prime Minister Trudeau will formally seek the dissolution of parliament and call for snap elections for September 20 on Sunday.  The combination of a strong vaccination take-up, surpassing the US and economic recovery, while the opposition seems weak, boosts Trudeau's chances of winning.  He has been leading a minority government for around two years.  Polls show Trudeau's Liberals are supported by about 36% of the voters, which given the regional fragmentation, could secure a majority.  The Liberals need to pick up 15 seats in the House of Commons to recapture a majority.  It looks to be a close call at this juncture.  

Mexico's central bank hiked its overnight target rate by 25 bp to 4.50% on a split decision that once again saw an AMLO appointed member vote to hike rates, while the other two appointments voted against it.  Banxico raised this year's inflation forecast sharply (5.7% vs. 4.8%) and lifted the core (5% vs. 3.9%).  In January, the central bank will have a new governor (Herrera), and this will likely change the thrust of monetary policy.  The market is concerned that it will be more tolerant of inflation and has shown strong interest in Mexico's inflation-linked bonds (Udibonos), which the government plans on boosting the issuance.  Separately, and arguably more surprising, was that Peru became the fourth Latam country to hike rates (joining Brazil, Mexico, and Chile).  Peru's reference rate is now at 50 bp, while Lima's inflation is near 3.8% last month.  While the Mexican peso weakened after the hike, perhaps on a buy the rumor sell the fact activity, the Peruvian sol increased slightly. Barring a setback today, it will snap a three-week decline spurred by political concerns.  

Summer doldrums are keeping the Canadian dollar in a narrow trading range.  Wednesday's range for the US dollar was roughly CAD1.2490-CAD1.2540, and the greenback is trading in the upper end of that range.  The speculation of an election announcement has been well telegraphed and was taken in stride.  The US dollar settled last week near CAD1.2555, leaving it likely with a small loss this week.   The peso is recovering from yesterday's post-rate hike decline.  The greenback reached almost MXN19.9850 in Asia before slipping back to MXN19.90 in the European morning.  It settled Wednesday near MXN19.9275 and was closer to MXN20.0430 at the end of last week.  Key support is seen near MXN19.80.  


Markets Grind into the Weekend Markets Grind into the Weekend Reviewed by Marc Chandler on August 13, 2021 Rating: 5
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