Dollar Mixed while Equities Recover to Start Eventful Week

<br /> Dollar Mixed while Equities Recover to Start Eventful Week – Marc to Market<br />


The US dollar is mixed
against the major currencies, and while it is firmer against the euro and yen,
it is within last week’s ranges.  
 The success of Macron’s new party in
France, and the majority is secured, was well anticipated by investors and is
having little effect on today’s activity in the capital markets.  
The start of Brexit talks
also is spurring little response in the market.
  Sterling is steady to a little firmer and holding below last week’s high just
shy of $1.2820, though a more important barrier is
seen near $1.2850, where the 20-day moving average and a retracement
objective converge.  Steps were taken
by the government, like going forward with Queen’s Speech, even though an
agreement with the DUP is not secure, and indicated a two-year parliamentary
session suggest that the election has not changed the main thrust of the Brexit
strategy.  Talk of a more business
approach flies in the face of the continued commitment to leave the single
market.  Meanwhile, some polls over the weekend suggest that many people’s
attitude toward Brexit has changed.  
The market has also shrugged
off weekend developments in Italy, where it appears that the two troubled
regional Italian banks will not get a precautionary line of credit that seemed
like the most likely scenario late last week. 
 It is
not clear exactly what is going to happen, but the fallback strategy under the
Bank Recovery and Resolution Directive (BRRD) may be to establish a good and
bad bank, and this could, in theory, avoid “bailing in” depositors
and subordinated creditors, as equity investors have already been wiped out.
 Italian bank shares fell in the second half of last week but are steady
to a little higher now.  The sovereign five-year CDS is also little
changed.  Italy’s 10-year bond yield has dropped four basis points, which
is among the biggest moves today, while the two-year yield is little changed.  
Italian equities are lagging
a bit. 
most European bourses are up closer to 1%, the FTSE Milan Index is up
around 0.25%.  The Dow Jones Stoxx 600 is up 0.8%, led by industrials and
materials, and financials. Real estate is the only losing sector by mid-morning
MSCI Asia Pacific Index
extended the pre-weekend rally and rose 0.6%.  
It has closed marginally lower for past
two weeks.  MSCI will announce its decision on whether to include China
mainland (A-shares) in its emerging market equity index.   Mainland share was up around
0.5%-0.6% today, but the H-shares (those that trade in Hong Kong) rose 1.3%,
the most since the middle of May.  Hong Kong stocks themselves rose almost
1.2%, bringing the year-to-date gain to nearly 18%.  On the other hand, there
is some hope that MSCI lifts South Korea from emerging market to its developed
market equity index.  Despite a recovery of
the technology sector, the Kospi gained a modest 0.4%.  
The recovery in the
technology space was clearly seen in
Nikkei rose about 0.6%, while the information technology and telecoms sectors
gained around 1%.  The dollar firmed in the Asia session but ran out of steam in late-turnover near JPY111.20.
 US 10-year Treasury yields are offering little new support for the dollar
against the yen.  The yield is near 2.14% after bottoming last week at
2.10%.  The dollar recovered against the yen after reaching almost
JPY108.80 last week.  A break below JPY110.50-JPY110.60 would suggest the
bounce was corrective in nature and may be complete.  
There are two main Japanese
talking points today.
  First Japan reported an unexpected
trade deficit for May.  The May balance nearly always deteriorates from
April, but it was more than expected.  The trade surplus was expected to
fall from April’s JPY481 bln surplus to about JPY43 bln.  Instead, it fell to a JPY203 bln deficit.
 Exports were strong, rising 14.9%, accelerating from 7.5% in April and
the strongest in two years.  Recovery from an earthquake helped auto
exports increase.  Steel and flat screen exports also were featured.
 Exports to the US rose 11.6% year-over-year,
and they rose only 24% to China (flat panels and equipment for semiconductor
manufacturing were highlighted). On the
other hand, imports surged 17.8% year-over-year from 15.1% in April. More
expensive oil was a major culprit. 
Second, some polls
suggest Japanese approval of Prime
Minister Abe and his cabinet has fallen sharply in the wake of several scandals
that involve favoritism.
  There is also push back against what are seen as high-handed tactics to ram
through a conspiracy crime bill.   If Abe is not able to reverse this
slide, it could undermine his efforts to implement his political agenda
(constitutional changes), and he could
face a leadership challenge next year.  
Investors have taken in
stride news that Moody’s cut the rating of the four major Australian banks,
citing exposure to the housing market.
  Rising home prices, rising household
debt, alongside weakening household
income growth pose a growing threat to
the banks.  Recall that last month S&P cut the ratings of many of
Australia’s smaller banks on similar grounds
but spared the large banks ostensibly on ideas that they would get government
support if needed.   The Australian dollar initially fell to near $0.7585
after closing last week near $0.7620.   By earlier in the European session, it had nearly recovered in full.
Aside from the French
electoral outcome (marred by the very low turnout), the Italian banking news
and the beginning of Brexit negotiations, the news
is light.
  The euro closed near the session highs before the weekend
and quickly traded to nearly $1.1215 as the market re-opened in New Zealand and
Australia for the new week.  It was not able to sustain the momentum had slipped back to almost $1.1180 before
European markets got under way.  Ranges
remain tight today.  In the broader picture, the $1.11-$1.13 range
continues to dominate.  
Neither Canada nor the US has economic data being released today.  However, after last week’s FOMC
meeting, official speeches and engagements resume. NY Fed’s Dudley speaks
before the equity market opens, while Chicago’s Evans speaks after the markets
close.  After lambasting the Federal Reserve for being too dovish, many
observers switched after last week’s rate hike and criticized the Fed for being
too hawkish.  We are more sympathetic to the Fed’s position, and
understand why it is prudent to look through some of the volatility in the high
frequency data.  The June Empire and Philly Fed surveys released last week
showed an acceleration of both new orders and prices received.   

Meanwhile, as we have noted,
 Congress is still at work and progress is being reported in various parts the economic agenda.
  The way the Senate is going about its
healthcare legislation is controversial and antagonizing Democrats, but the
Senate Majority Leader McConnell is reportedly looking to have a full Senate
vote on the bill by the Fourth of July so
to allow tax reform to move to center stage.  


Dollar Mixed while Equities Recover to Start Eventful Week
Dollar Mixed while Equities Recover to Start Eventful Week

Reviewed by Marc Chandler

June 19, 2017

Rating: 5

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