No Big Thoughts, but Several Smaller Observations

August has begun off with clear price action. 
The US dollar is stronger against nearly all the major currencies.  Bond yields are higher.  Equities and
commodities are most lower.  

However outside of the purchasing managers
July manufacturing prints, these does not appear to be an overarching story
  Investors are still trying to
make sense of last week’s developments, including the BOJ disappointment and
the shockingly poor US GDP figures.   

The main events of the week including the
Reserve Bank of Australia in early Sydney tomorrow.
  Indicative prices
in the derivatives market put the odds at
close to 70%.  More details of Japan’s fiscal plans will be announced tomorrow.  On Thursday, the
Bank of England meets and the market regards a rate cut as much of a done deal
as these things get.  The week ends
with the US and Canadian jobs data. 

Instead of
a big story, there are several modest developments that are worth

First, oil prices have given back their pre-weekend gains.  The month-end bounce
did little to take the edge off the worst monthly performance (-13.9%) since
July 2015 (-20.8%).  Rising US inventory alongside an increase in US
output and rig count weighs on sentiment.  Slower growth in the US, EMU,
and likely Japan in Q2 raises questions about demand.   

Second,  commodity prices more broadly
are weakening
.  Since July 15, the CRB Index has advanced only once, and that was before the weekend when it
gained one percent.    From its January low near 154.85, the CRB
Index rose 26% to 195.88 on June 8.  With its mounting losses, it met the
38.2% retracement objective near 180.20.  The 50% retracment is near

Third, European banks stocks rallied before
the weekend in anticipation of the stress test results
and had sold off today on what seems to
be largely “buy the rumor sell the fact” type of activity.
The MSCI European bank index is off 1.75% today after rising 2.2% last
Friday.    Although Italy’s Monte Paschi, which has been the
focus of so much attention, is holding on to the slightest of gains, Italy’s
banking sector is losing ground.  The 4.4% decline offsets in full the pre-weekend

Fourth, MSCI Emerging Market equity index is
at new highs since last August
.  Since the beginning of July, the
index has fallen in six sessions.  It is up a little more than one percent
today, it largest advance since July 14.  Flows into South Korea, Taiwan,
Thailand and Indonesia stand out.  Flows into Brazilian and Mexican
equities have also been robust since the start of July.   With a
couple of exceptions, foreign investors have been sellers of eastern and
central European equities.  

Fifth, UK Prime Minister May is showing a
different kind of Tory from the Cameron government,
and that widening differential could ultimately lead to early elections. 

May has distanced her government from
Osborne’s fiscal rule.  She has endorsed the triple-lock on pensions, while Cameron government was looking for a
way to modify it.  

May has opted to conduct her own due diligence regarding the Hinkley Point
nuclear plant (for which two Chinese companies were going to provide a third of
the funding)
.  Some observers suspect this is may be part of a broader
re-think of the UK’s stance toward China, which Cameron and Osborne seemed
anxious foster, even at the risk of antagonizing the US (see AIIB).  

It seems clear that May is not happy with
Cameron’s selection of “resignation honors” which have been
criticized for being too personal, but declined to block on grounds of setting
a poor precedent.  
As May
distances her government from the previous government, pressure is likely to
mount for a snap election  Snap elections are more difficult to engineer
since the electoral reforms, but not impossible.    Still, the pressure at the moment does not seem
particularly acute.  

Sixth, the EU and Turkey agreement on refugees, which has been fairly successful in
stemming the tide across the Aegean may be at risk in about ten weeks, which set the stage for new brinkmanship. 

Recall that in exchange for six billion euros, a resumption of EU accession
negotiations and visa-free travel of Turkish passport holders. 

In order to
grant the visa-free travel, the EU made several technical demands to Turkey’s
passports.  Most of these demands
have been met.
  The EU also
required that Turkey modify its
anti-terrorist laws that are too broad for the EU’s sensibilities. 
Erdogan is more adamant than prior to the
failed coup attempt not to concede.  

Seventh, in two elections so far, Spain has
failed to elect a majority government.
  It economy appears to be
losing some momentum.  Growth in Q2 was
at 0.7%.  While it is the envy of the other EMU members,
it’s the slowest quarterly expansion since Q4 14, and today’s manufacturing PMI
warns that Q3 is off to a slow start (51.0 vs.
52.2 in June).  It narrowly escaped being fined for fiscal excesses. 
It 10-year yield is holding just above the 1.0% threshold.  Note that on
the eve of the UK referendum the generic 10-year yields was near

Eighth, although Abe-led the LDP to a victory in last month’s upper house elections,
support for Abenomics is weak. 
Interviews with voters seemed to show
that the even poorer opposition and the desire for stability led to votes for
the LDP candidates.  The depth of support for Abe is not deep.  Over
the weekend, Tokyo elected its first woman governor, Yuriko Koike, former defense minister, who drew more
than a million votes more than her closest rival Masuda who was backed by 
Abe and the LDP.  



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