Stocks Up, Bonds Down, Dollar and Yen are Heavy

Investors favor risk assets today. 
Global stocks are moving higher in the wake of the pre-weekend US rally
that saw the S&P 500 close at record levels.  Bond yields are
mostly firmer, again with US move in response to the robust employment
report setting the tone in Asia.  European bonds participated in most of
the pre-weekend move and are consolidating today with a slightly
heavier tone.  UK Gilts are outperforming, with a new record low of 64
bp on the benchmark 10-year issue.  

The Nikkei’s 2.4% rally was the biggest in nearly a month
It gapped sharply higher, leaving a three-day island in its wake, and
closed on its highs.   All the Asian equity markets advanced.   The MSCI
Asia-Pacific Index rose 1.3%, its three consecutive advance and the
largest since July 11.  

Japan reported its June current account. 
There is a strong seasonal pattern that the balance typically
deteriorates in June from May.  The pattern held.   The surplus was
nearly halved to JPY974.4 bln from JPY1.809 trillion in May.  This comes
despite the jump in the trade surplus (to JPY763.3 bln from JPY39.9

Four other markets may be particularly interesting. 
The first is South Korea.  S&P lifted its rating to AA from AA-
before the weekend and left the outlook stable.  The Kospi advanced
0.6%, and the Korean won was the strongest of the Asian currencies,
rising 0.2% against the dollar.  In Thailand, voters backed the
military-sponsored constitution, which will pave the way for elections. 
The Thai equity market advanced 1.5%, while the baht slipped almost
0.5%.   Taiwan, which has seen strong capital inflows, reported exports
rose in July for the first time in 18 months.  The Taiwanese equity
market rose 0.6%, while the local currency was the second strongest in
Asia, rising almost 0.15%.  

China reported July reserves in line with expectations and little changed from June at just above $3.2 trillion. 
It also reported a larger than expected July trade surplus.  In dollar
terms, the surplus rose to $52.3 bln from $48.1 bln.   The driver was
not so much stronger exports as weaker imports. 

Exports fell 4.4% year-over-year in dollar terms, a touch slower than the 4.8% decline reported in June.   
In yuan terms, exports rose 2.9% year-over-year, up from 1.3% in June. 
Imports fell 12.5% in dollar terms, and 5.7% in yuan terms.  This
compares with  an 8.4% drop and a 2.3% fall respectively in June.  

Europe is quieter than Asia. 
The Dow Jones Stoxx 60 is up about 0.7% in late-morning turnover in
London.  The financials are leading the way with nearly a 2% gain.  
Insurers setting the pace with a 2.7% rise and banks up 2.1%.  Real
estate is flat-to-lower.   Italian bans shares are up 2.4% following the
pre-weekend nearly 5% advance.  It is the third consecutive advance. 

There are three developments to note. 
First, before the weekend, DBRS indicated it would review Italy’s debt
rating, with negative implications.  It gives Italy a low A-rating,
which has prevented a larger haircut using Italian bonds as collateral
for borrow at the ECB.  Ostensibly, the referendum, which Italy’s high
court is expected to give its go-ahead later today, is the trigger. 
Prime Minister Renzi has threatened to resign it if is not accepted,
which seems to be the odds-on most likely scenario.   Italy’s 10-year
bond yields is up 2 bp today, the same as Spain. 

Germany reported a 0.8% rise in June’s industrial output, and it
revised to -0.9% the May decline that was initially reported at -1.3%.
The output for investment goods offset the weaker construction and
energy output.  It follows the unexpected decline in June factory orders
(-0.4%) reported before the weekend.   Germany will report its June
trade balance surplus tomorrow.  It is expected to
widen to 23.0 bln euros from 21.0 bln in May.  The record was set in
March at 26.2 bln euros.  

Third, Switzerland reported July CPI figures. 
The national measure fell 0.4% in July for a minus 0.2% year-over-year
pace.  The EU-harmonized measures slipped 0.1% on the month, which is
the first decline since January.  Nevertheless, due to the base-effect,
the year-over-year pace rose to –0.5% from -0.6%.  This matches its
best level since March 2015.  Recall that the year-over-year pace
bottomed in January at -1.5%.  

The US dollar is softer against most of the major and emerging market currencies. 
It is largely consolidating the jobs-inspired gains.  The yen is the
weakest of the majors.  It is off 0.6%.  It is approaching the JPY102.60
area that corresponds to a 38.2% retacement of the drop since the BOJ’s
disappointment at the end of July.   Last week’s high was set near
JPY102.85 before the move toward JPY100.70, where it seemed to carve out
a shelf.    The is in less than a third of a cent range today, mostly
below $1.11 and is uninspiring.  Sterling is in a two-thirds of a cent
range, pinned near the pre-weekend lows.  In Europe, sterling is
encountering offers in the $1.3060 area.   The Australian and Canadian
dollars are firm, while the Kiwi is heavy ahead of the rate cut August

Look for a quiet North American summer session with a light economic calendar. 

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