- The sell-off in US shares yesterday dragged global equities lower
- The US 10-year yield is through 3.0%, pushing global yields higher, though the US 2-10 yr curve is unchanged net-net since the end of last year
- The dollar recovered from yesterday’s reversal but in the absence of fresh news, consolidation is likely ahead of tomorrow’s ECB meeting
- China boosted QDII quota for the first time in three years
The US dollar is firmer against all the major and most emerging market currencies. It made new highs against many of the majors, except sterling and the euro, but has stabilized in the European morning. Equities are lower. Companies reporting disappointing earnings are punished, but those who report strong earnings are not rewarded as it appears to have been mostly discounted. Meanwhile, yields are on the rise and the US 10-year is above 3%. German and UK 10-year yields are at multiweek highs. The MSCI Emerging Markets Index is lower for a fourth session, its longest losing streak in a month to trade at two-month lows. The Turkish lira is the strongest of the emerging market currencies, gaining about 0.6% against the dollar ahead of the central bank meeting that is expected to raise its late liquidity lending rate (from 12.75% to 13.25%) later today.
The US dollar reversed lower yesterday after US yields softened and equities tumbled. However, the greenback has bounced back and has extended its gains against the major currencies except for the euro and sterling. The on-the-run and generic US 10-year yields are edging above 3%.
Despite a soft reception to yesterday’s $32 bln sale of two-year notes, the yield is holding just below 2.50%. The 2-10 year yield curve, who’s flattening has caused consternation among investors and pundits, is at 52 bp, which is where it was at the end of last year.
Equities are heavy after yesterday’s sharp losses on Wall Street. Dow Jones Industrials were down for a fifth consecutive session, and the S&P 500 post its biggest loss in two weeks. The NASDAQ extended its losing streak to four sessions. There is some disagreement over the cause. One camp attributes the equity losses to the rise in yields. The other sees less optimistic guidance by Caterpillar and 3M yesterday as the proximate cause, and ideas that expectations for strong earnings and been largely discounted.
The MSCI Asia Pacific Index fell 0.5%. It is the third loss in the past four sessions. Technology shares continue to lead the way. The benchmark sits at a two and a half week low. One of the flow stories we have been tracking is the foreign sale of Korean shares. The selling accelerated to $791 mln today, nearly twice the pace seen in the previous two sessions. Of the $2.8 bln liquidated this year so far, $1.65 bln has taken place this week.
The Dow Jones Stoxx 600 is off 0.9% in late morning turnover in Europe. Financials, energy, materials, and industrials are all off more than 1%. Consumer staples are trying to buck the trend. Yesterday the benchmark traded at its best level since early February and today’s drop brings it back to April 17 levels.
European bond yields are being dragged higher by the rising Treasuries. Core bond yields are up 1-2 bp in Europe, and that puts the 10-year Gilt yield at two-month highs (~1.55%) and the 10-year Bund at its highest yield (65 bp) since March 12.
The news stream is light, but the lull will not persist long. Tomorrow the ECB meeting concludes and Friday the BOJ meeting ends. Several countries, including the US and UK, will report the first look at Q1 GDP ahead of the weekend.
The US dollar is slightly firmer against the Chinese yuan. With US Treasury Secretary Mnuchin reportedly headed to China shortly for trade talks, the trade tensions have eased on the margins. Meanwhile, the steady stream of announcements from Chinese officials continues. For the first time in three years, China has boosted the QDII (qualified domestic institutional investors) quota to the equivalent of $98.33 bln from $89.99 bln. Earlier this month, officials more than doubled the quota for two other programs for portfolio investment abroad.
The relaxation of limits on capital outflows suggests Chinese officials are not as worried as they were previously about the vicious cycle of capital outflows, weaker yuan, and weaker equities. Separately, Chinese data indicate that foreign investors boost their holdings of onshore bonds by CNY162 bln in Q1 and hold CNY1.4 trillion. In June, the MSCI Emerging Markets Index will include A-shares for the first time, and bond benchmarks are gradual including mainland bonds.
While Italy’s negotiations to form a new government took a new turn as the Five-Star Movement has given up on the Northern League as a partner and is now in talks with the center-left PD. The PD itself is split. A wing following Renzi, who resigned as Prime Minister when his constitutional reform lost and quit as head of the party after the election in early March, disavows the M5S, while the other wing is more pragmatic.
Japanese politics are also very much in the news. Prime Minister Abe continues to suffer in the polls, and, going home without a concession from the US did not help matters. However, it is the local scandals that continue to ensnare Abe. Today, Vice Finance Minister Fukuda resigned over sexual harassment allegations. To stem the hemorrhaging, and allow the government to return to its agenda, there has been some suggestion of a snap election for the lower house.
This seems to be an uncharacteristically dramatic move. In our reading of Japanese political tea leaves, while there may be alternatives to Abe in the wings, there does not seem to be an alternative to Abenomics. We have long seen Abenomics as traditional LDP policy–fiscal and monetary stimulus and a weaker yen bias–but on steroids. And as will likely be seen this week, the dissent from Governor Kuroda at the BOJ will come from those who want to ease more rather than as previously from those resisting the aggressive and unorthodox easing.
Neither the US nor Canada has data on tap today. The spot fx moves leaves the option expiry calendar light as well. The most notable nearby option is for 977 mln euros struck at $1.2220. There is a 4.3 bln euro option struck at $1.22 that expires tomorrow.