New Week, New Hope

Overview: Risk appetites have been recharged over the weekend. Equities are mostly higher as are benchmark yields, while the dollar has pulled back. Tokyo markets were on holiday, but the other large markets in the Asia Pacific region advanced by more than 1%, including China, Hong Kong, Taiwan, South Korea, Australia, and India. The MSCI Asia Pacific Index fell 2.85% last week. Europe's Stoxx 600 is up 1.4% to extend its pre-weekend gain of almost 1.8% (which pared the weekly loss to about 0.8%). The S&P 500 snapped a five-day drop before the weekend and is trading about 1% better now. The NASDAQ is nearly 1.25% better as it tries to extend its advance for the third consecutive session. The US 10-year yield is four basis points higher, near 2.96%. European yields are mostly 9-12 bp higher and the peripheral premium is mostly a little wider. The US dollar is weaker against most of the world’s currencies. The weakest of the majors are the New Zealand dollar and Swiss franc, each up about 0.2%. Sterling is leading the move, gaining about 0.9%. Among emerging market currencies, the Mexican peso’s gains (~0.9%) is setting the pace. The Turkish lira is off more than 2% amid a widening budget deficit. Gold is recovering from an 11-month low near $1700 seen last week. It is trading above $1720. September WTI is at four-day highs near $96.50. It has fallen nearly 10% over the past two weeks. US natgas is up 2.4% to a new July high. It rose 6.3% before the weekend. Europe’s natgas benchmark is 2.1% high after falling nearly 13% over the past two sessions. The Nord Stream 1 pipeline ostensibly is to come back online Thursday and is a key focus now among much skepticism. Iron ore prices tumbled 14.5% last week and snapped back 4.5% today. September copper fell nearly 8.2% last week, its sixth consecutive weekly loss. It has come back better bid and is up nearly 3%. September wheat fell every session last week, falling a cumulative 12.9%. It has begun the new week better bid and up 1.75%.

Asia Pacific

For the first time this month, the PBOC provided additional liquidity into the banking system. It injected CNY12 bln (~$1.8 bln) to create a surplus of CNY9 bln. A combination of the mortgage-boycott protest, the corporate tax payment that drained liquidity, and a new surge in Covid case generated tensions and sparked a rise in the interbank lending rate. An Emergency meeting between regulators and banks was called as home buyers are refusing to pay mortgages on stalled construction projects. Local press reports that regulators are also urging banks to support property developers. Meanwhile, S&P warns that the liquidity challenge risks insolvency if the property-sales recovery stalls. The rating agency says that at least a fifth of the rated builders may be at risk.

New Zealand's Q2 inflation rose 1.7%, lifting the year-over-year pace to 7.3% from 6.9%. The median forecast was a 1.5% quarterly increase and a 7.1% annual rate. Last week, the central bank hiked its cash target rate by 50 bp for the third consecutive time. It now stands at 2.50%. It signaled its intention to continue to hike rates at "pace", but the market is looking for the pace to accelerate. The swaps market is pricing in about 84 bp of tightening when the RBNZ meets next on August 16. It has almost 175 bp of hikes discounted before the end of the year. There are three meetings left.

With Japanese markets closed for Marine Day, the dollar has drifted lower against the yen, briefly traded below JPY138 in early European turnover. We suspect that the near-term low is in place and look for a return to the JPY138.50-60 area. Tomorrow are two large sets of option expirations. The first is at JPY138 for $2.25 bln. The second is for about $1.5 bln at JPY140. The Australian dollar is at its best level in five days, reaching almost $0.6840. The 20-day moving average is near $0.6850, and the Aussie has not traded above it for over a month. Initial support is seen in the $0.6800-20 band. The Chinese yuan traded firmer for the first time since the middle of last week. The greenback did not trade above the pre-weekend settlement level of about CNY6.7572. It traded slightly below CNY6.74. The CNY6.7200-50 may be the lower end of near-term range. The PBOC set the dollar's reference rate at CNY6.7447, somewhat weaker than that median forecast (Bloomberg's survey) of CNY6.7464.


The leadership selection process for the Tories featured a couple of debates over the weekend and continued efforts by the candidates to distinguish themselves. A new vote will be held later today and each day through Thursday when it will be down to two candidates. Most candidates seem critical of Sunak's taxes including the unpopular tax for the National Health Service. The independence of the Bank of England and its inflation mandate were easy targets given the cost-of-living squeeze and the June CPI, due out later this week, is expected to have risen closer to 10%. It seems also most surreal that Sunak accused his rivals Truss and Mordaunt of being socialists for their tax (cuts) and spending proposals. Meanwhile, the new Chancellor of the Exchequer Zahawi, whose attempt to become Prime Minister quickly ended will be delivering the Mansion House speech tomorrow that will advocate a "growth-focused" approach that reportedly is opposed by the Bank of England. Also note that some 2400 Royal Mail workers will strike over pay and job cuts for three days starting Wednesday.

Italian stocks snapped a four-day sell-off ahead of the weekend. It had been off almost 6% before rising 1.6%. Today it is up another 1%. However, the 10-year premium Italy offers over Germany is widening for the sixth consecutive session. Around 216 bp, it is the most since mid-June. There seemed to have been an outcrying of calls for Draghi to stay. There seems to be three large moving pieces. First, Five-Star Movement ostensibly triggered the crisis by abstaining in last week's confidence vote over a package of measures to help household and businesses cope with the energy shock. Over the weekend, Conte, the head of the Five-Star Movement insisted that it had not withdrawn from the coalition. Second is Draghi himself, and he may not be the innocent that is depicted in recent press accounts. Conte's insistence did not appear to satisfy Draghi, though it could have, given that Draghi survived the confidence motion. There may be something else at stake.

Draghi was named prime minister in February 2021. His was supposed to be a technocrat government, which ostensibly limits its agenda. However, now certain political decisions are essential, and priorities must need to be set. In effect, Draghi needs a new mandate of sorts. The third piece is the League and Forza Italia where Salvini and Berlusconi are using the crisis to declare the alliance broken. While it could be a negotiation ploy, it risks a broader political crisis. Many details of the election, besides a smaller parliament, have yet to be decided. Much work would have to be done by a new technocrat government, perhaps under Draghi. A general election was necessary by the end of May next year. Some talk that the election could be brought forward to late September. 

The euro is trading firmly and reached almost $1.0150, a five-day high. Last week's high was closer to $1.0185. Initial support now is seen in the $1.0100-15 area. With Italian political risks elevated, the euro's gains appear to have caught some traders wrongfooted. Still, some position adjustment ahead of the ECB meeting and in the wake of the push against a 100 bp hike by the Fed next week cannot be a total surprise. Yet, the technical damage inflicted in recent weeks has been significant. The $1.0155 area is (38.2%) retracement of this month's loss and the next retracement (50%) is near $1.0220. Sterling is a cent higher near $1.1960 in late morning turnover in London. It has yet to take out last Thursday's high a little closer to $1.1970, but a stronger band of resistance is seen in the $1.2000-50 area. If the upside momentum falters, support is at $1.19 where options for about GBP435 mln expire tomorrow.


The Federal Reserve has entered the quiet period ahead of the next week's FOMC meeting. Governor Waller pointed to last week's retail sales report and this week's housing data as key to whether he would change his view about a 75 bp hike. The Fed funds futures now put the odds at 1-in-5 of a 100 bp increase. The Atlanta Fed's GDPNow tracker stands at -1.5% after the retail sales, inventory, and industrial production reported before the weekend. It will be updated after tomorrow's housing starts data. Bloomberg's survey has also been updated. Almost 20% of its respondents forecast a contraction in Q2. The mean is 1.1%.

Although the quarterly refunding was completed last week, the Treasury's auction this week will draw attention. Last week's three- and six-month bills tailed last week, and Treasury is selling another $96 bln today. The volatility of the Treasury market (MOVE) remains at elevated levels, although it is at two weeks low slightly below 130. Recall it peaked on July 5 above 156. This was the highest since 2009; above the March 2020 peak shy of 110. It peaked near 215 in the Great Financial Crisis. Wednesday, relatively unpopular 20-year bonds will be sold. The latest 10-year note was weakly received but the 30-year saw strong demand. The 20-year tenor has struggled to win over a natural constituency. On Thursday, 10-year inflation protected securities will sold.

Amid the frenzy over the possibility that the Fed would hike 100 bp, the US dollar jumped to almost CAD1.3225 last week. It pulled back ahead of the weekend and more today. It is near CAD1.2970 in late European morning turnover to approach the 20-day moving average slightly below CAD1.2960. It has closed only once this month below that moving average (July 4). A move below CAD.2935 would likely force some momentum traders and trend followers to the sidelines. Canada begins an important week of data (featuring June CPI and May retail sales) with June housing starts but directional cues are still strongest coming from the risk appetites and equity market. Similarly, the greenback surged over MXN21.00 amid the Fed frenzy last week. It eased to almost MXN20.50 ahead of the weekend, and follow-through selling today has seen almost MXN20.3350 to take out the 20-day moving average (~MXN20.3535). The MXN20.29 area corresponds to a (61.8%) retracement objective of the dollar's advance from late June's MXN19.82 low. Mexico will report May retail sales on Thursday and CPI for the first half of the month on Friday. Banxico meets next on August 11. The market seems to be debating about whether the hike is for 75 bp or 100 bp.


New Week, New Hope New Week, New Hope Reviewed by Marc Chandler on July 18, 2022 Rating: 5
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