Dollar and Yen Surge

The world looks in turmoil, and the dollar and yen are the chief beneficiaries.  The epicenter of the tension is in Europe, and the euro has been sold to near $1.15 and sterling to $1.3200.  The dollar slumped a little through JPY108.45, its lowest level since April 23.  The dollar is higher against all the emerging market currencies, led by a 1.3% slide the South African rand.  The euro is dragging central and east European currencies lower, with Hungarian forint and Czech koruna off a little more than 1%.  

The break of $1.1550 in the euro makes the $1.1450 the next important target.  It is the 50% retracement objective of the euro’s rally from early 2017.    In sterling, we’ve been tracking the double-top pattern that projects into the $1.30-$1.31 area.  The dollar has been sold through JPY108.80 which is the 38.2% retracement of the dollar’s rally since the JPY104.55 area was seen at the end of the fiscal year.  The 50% retracement is near JPY108.  The 61.8% retracement is near JPY107.15.  The US dollar is poking through CAD1.30.  The year’s high was set in March near CAD1.3125.  Unable to break above $0.7600 last week, the Australian dollar has returned toward $0.7500.  A break of $0.7480 signals the end of the upside correction.  

Equity markets also reflect the risk-off setting.  Nearly all the Asia-Pacific markets were lower.  Despite some signs that the US-North Korean Summit may be back on the table did not help Korean shares.  The Kospi lost 0.9%, completely giving back yesterday’s gain.  Foreign investors have been net sellers this week (-$340 mln) after purchasing nearly $1 bln of Korean equities in the previous three sessions.  The Hang Seng lost 1%, while the index of H-shares fell 1.3%.   The MSCI Asia Pacific Index fell nearly 0.4%.   It fell 0.5% last week.  

European shares are getting pummeled.  The Dow Jones Stoxx 600 is off 1.6%.  Only consumer staples and real estate sectors have fallen less than 1%.  Financials are leading the rout with a nearly 3%  drop.  Italy has fallen 3% to go into the red for the year.  Spain is off 2.5%, and most of the other main markets are off by around 1.75%.  

The MSCI Emerging Markets Index is 1%, and that is prior to the open of Latam markets.  Brazil’s Bovespa fell 4.5% yesterday as the truckers strike is paralyzing the economy and the government’s compromise was summarily rejected.  The Bovespa’s losses also put it lower on the year.  

The sense of global crisis is being seen in the bond markets.  The US 10-year yield is off 8.5 bp to 2.85%.  It briefly traded below 2.80% today.  Recall that the yield poked through 3.12% on May 18. The US two-year yield traded a little below 2.38% today.  It peaked at 2.60% on May 17. The implied yield on the January 2019 Fed funds futures contract has fallen to 2.135%.  Fair value assuming two more hikes this year would be closer to 2.20%.  It had implied a 2.31% yield at mid-month.  Separately, note that the US Treasury is raising $130 bln in coupon sales today.  

Core bond yields in Europe are plummeting.  The 10-year German Bund yield is off 10 bp to yield less than 24 bp.  The yield on 10-year Gilts is off nearly 12 bp to 1.2%.   Italy’s 10-year yield is up 40 bp to 3.06%.  Portugal’s benchmark yield is up 22 bp (2.24%), and Spain is up 10 bp (1.60%).  The pressure is even more acute at the short-end.  The Italian 2-year yield has jumped 140 bp to 2.24%. That is a 207 bp increase over the past five sessions.  The two-year German yield is off 11 bp to minus 80 bp.  It has fallen nearly 18 bp over the past five sessions.  

The news stream itself is rather light.  The prime minister-designate in Italy, Cottarelli, is reportedly putting together a cabinet to present to the President.  It has little hope of winning a vote of confidence–pointing to elections as early as September.  The move by President Mattarella to reject one candidate has forced a new fissure line and inflamed old one. Claims that he has undermined democracy may be true on the one hand, but he may be strengthening it on the other hand.  It is not clear that the March election was a mandate to leave the EU and EMU, which both parties had plated down during the campaign.  Now that select a finance minister who is known for such views.  Is unreasonable to think this is a Trojan Horse? That said, neither the Five Star Movement nor the League is likely to run on an anti-EU/EMU platform.  Why should they? 

In Spain, Rajoy refuses to call early elections, leaving Ciudadanos in a bind.  If it supports a vote of no-confidence, a new government must be named.  This will strengthen the hands of the Socialists and Podemos.  Ciudadanos wants new elections.  Meanwhile, the government has nominated de Cos, to replace Linde at the helm.  Linde’s term expires in a few weeks. A vote is slated for the end of the week.  

A truckers’ strike in Brazil is disrupting the entire economy.  The government agreed to cut diesel prices for 60 days (cost of BRL9.5 bln).   The Bovespa is off around 95 since the strike began.   The government has called upon the army to clear blockades, and while many have been lifted many remain on strike.  At least eight airports are reportedly without fuel.  The oil workers federation (FUP) called for a strike Wednesday. 

The US reports March home prices (S&P CoreLogic/Case-Shiller), May’s Conference Board’s Consumer Confidence and Dallas Fed Manufacturing Survey.   These tend not to be market movers in the best of times.  The market’s focus is elsewhere, and the week’s big releases, like May jobs and April consumption and core PCE deflator, still lie ahead.   The Bank of Canada meets tomorrow and is widely expected to keep rates steady.  The odds of a July hike have eased in recent weeks, but is still above 50%, interpolating from the OIS.  



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