Turn Around Tuesday Sees Firmer Dollar, Rates, and Equities

The modest gains in the S&P 500 yesterday, and the lack of new
negative developments, have spurred better activity in Asia and Europe today.
Topix snapped a four-day drown draft, to
post its second gain in the past ten sessions.   The MSCI Asia
Pacific Index eked out a small gain, its second in a row and the sixth advance
in seven sessions.  Most equities in the region rose, including Korea
despite the beginning of the annual military exercises.  

European shares are advancing as well.  The Dow Jones Stoxx 600 is
moving higher for the first time in four sessions. 
The recovery is being led by materials, healthcare, and
energy.   We note that the France CAC gapped higher and has now
filled the gain.  Since peaking in May, the CAC has surrendered nearly the
entire gain scored in the wake of Macron’s initial victory in the first round
of the French election back in late April.  

Benchmark 10-year bond yields are mostly a little firmer (around a single
basis point). 
Greek bonds are still basking in the recent upgrade by
Fitch (B- from CCC, with a positive
outlook) and the yield is off another six
bp to 5.46%.  Th other exception is Italy.  It is moving in the other
direction.  The 10-year yield is seven basis points higher at 2.09%. 
Some reports suggest that there is a focus on next week’s scheduled supply and
unwinding of carry positions ahead of
Draghi’s speech tomorrow (before going to Jackson Hole).  

There also may be interest stemming from a weekend interview with Berlusconi,
who is enjoying a bit of a revival in the Italian political scene.
supports the idea of a parallel currency,
which in itself may not be so surprising, but in the current context, it is
troublesome for many investors who see next year’s Italian election as the next
significant political risk in Europe.  

The Northern League (Lega Nord) has supported a parallel currency of
sorts as well (mini-BoT).
  It seems similar to the scrip that California experimented with several
years ago.  In any event, this is important because it highlights the
common ground of Berlusconi’s Forza
Italia and the far-right parties (anti-immigration, flat tax on income,
scrapping the already agreed upon pension reforms).  In early September, a
pact may be formalized.  Such bloc would rival the center-left PD and the Five-Star

The US dollar has recouped most of yesterday’s
  However, as we have seen over the past couple of
sessions,  the North American market appears more dollar negative than
Europe or Asia. The dollar’s rise through the European morning has left the
intraday technical indicators a bit stretched, warning that this short-term
pattern continues today. 

The euro stalled in front of the $1.1825 level today which is where a 660
mln euro option expiring today is struck.
There is a large 2.3 bln euro strike of $1.1850 also expiring today, but does
not seem to be in play.  The $1.1815 level was a retracement of the euro’s
downside correction this month.  The direction of a break of yesterday’s
near one-cent range (~$1.1730-$1.1830) will likely identify the next move.

The dollar is inside yesterday’s range against the yen as well. 
Initial resistance is seen near
There is a reasonably good chance
that the high for the day has been approached or is already in place.  A
nearly $800 mln option struck at JPY109 that expires today. 

Sterling dropped four cents from its high on August 3 near $1.3265 to a
little below $1.2850 on August 15.
  It has since chopped between
$1.2830 and $1.2920.  It is toying with the bottom of that range in the
European morning.  The intraday technical indicators suggest that even if
some extension of the range takes place, it is likely to be
minor.    There is a modest option for GBP265 mln struck at $1.28
that could be a factor.  

The dollar-bloc currencies are also heavy today.  The US dollar
met retracement levels on its recent pullback, off
which it is bouncing.  For the Canadian dollar, the level was
CAD1.2550.  There is a $550 mln option struck at CAD1.26 that is in play
now.  A move above CAD1.26 could spur a move toward CAD1.27 in the coming
days.  The Australian dollar peaked last week
$0.7965, in front of the $0.7970 retracement objective.  A
break now of $0.7870-$0.7980 would likely signal the beginning of another leg

The economic calendar remains light.  The German IFO showed
strong assessment of current conditions and easing future expectations. 
It can be filed as this is the best it
may get.  Canada reports June retail sales today.  A 0.2% rise is expected after a 0.6% gain in May. 
Canada has been reporting strong retail sales.  The monthly average in the
first five months has been 0.8%.  Last year, the average monthly increase
was 0.5%.  In comparison, through July US retail sales have risen by an
average of 0.2% a month.  Last year, they rose 0.3% on average.  The
US calendar is devoid of market moving data. 


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