by Pinchas Cohen
The Big News
- China, Hong Kong markets closed
- Draghi reinforces dovishness
- Yen up on data
- Euro at risk
World Events
Asian stock markets are continuing yesterday’s low liquidity as the Hong Kong and Chinese markets remain closed for holidays, and after UK and US markets were closed for holiday weekends yesterday. With so many major markets closed trading was leaderless and lacking a coherent picture.
The euro received another beating—its fourth consecutive day following a repeated dovish delivery by ECB President Mario Draghi to the European Parliament, amid investors’ ambivalence toward the Federal Reserve's interest rate plans. Draghi's stated that the euro area still needs expansive monetary stimulus to restore stable inflation, even as the economy accelerates.
The euro had additional problems though after the German publication Bild reported that Greece may opt out of its next bailout payment if creditors cannot strike a debt relief deal. If this is true, it increases the probability of a default, which creates two overwhelming risks: the default itself and the renewed possibility of a Grexit. Furthermore, comments by former Italian Prime Minister Matteo Renzi on Sunday, favoring holding elections in September, at the same time as Germany's, brought up the possibility of an Italexit and harmed the euro.
In a rare occurrence, Japanese equities and the yen were both strengthened yesterday after the release of a robust retail sales report, even though normally a higher yen weighs heavily on equity prices. Perhaps the thin trading will allow some traders to float higher for later profit-taking, even as soon as tomorrow.
In our opinion, now is the time to back the yen. It is the only major currency to advance against the dollar, and it’s not only because of robust retail sales, but also as a result of the risk surrounding the euro. That’s why the yields on 10-year bonds are falling today, a fifth consecutive daily decline since Draghi delivered his first dovish message in Madrid on Wednesday. However, gold is the only safe haven that currently is in decline.
This leaves traders with two-layered question:
- Can global economic growth support the rising cost of borrowing – amid record high global equities alongside a rally in bond markets?
- Which region is the better bet from an economic growth standpoint? Recent European data beat American and Chinese data, yet the European central bank appears to be continuing its expansive monetary policy, while both American and European markets are fraught with political risk.
Upcoming Events
- Eurozone data on Tuesday is expected to show the highest business and consumer confidence in a decade. Compare that with the recent Moody’s credit rating cut for China, the first time in nearly a decade; China has been the economic engine that pulled the developed economies out of the Great Recession and their stock markets out of the abyss that preceded it in 2007-8. Are we witnessing a leadership change? We might get a clue when the preliminary headline European inflation rate is released on Wednesday.
- France, Germany and Spain may provide additional – focused – insight, as France will release figures on consumer confidence and economic output; Germany and Spain are set to release their reports on inflation indicators as well.
- China’s May manufacturing PMI’s, due out on Wednesday, might add support to the argument that this year’s growth has peaked.
- Lael Brainard and Robert Kaplan will speak On Tuesday and Wednesday, respectively, as the FOMC’s June 13-14 meeting nears.
- The Nonfarm Payroll release on Friday is forecast to support the case for a rate hike as early as June, with an expected job growth of 185,000 positions.
- Economists forecast that Brazil’s central bank will cut between 75 to 100 basis points from the current 11.25 percent interest rate.
Market Moves
Currencies
- The dollar index gapped up and gained as much as 0.34%, with a high of 97.776, but retreated and settled at 97.636, keeping a total gain of 0.21%.
- The Bloomberg Euro Index – a measure of the euro against a basket of leading global currencies – fell as much as 0.48% to a low of 868.12 but bounced back, paring some of the losses, to settle with a total loss of 0.29% at 869.74.
- The euro fell 0.5 percent to $1.1110 as of 3:27 p.m. in Tokyo, dropping for a fourth straight session to its lowest level since May 19.
- The British pound lost 0.2 percent.
- The yen was the only major currency to strengthen, rising 0.3 percent to 110.89 per dollar.
Stocks
- Japan’s TOPIX rose 0.2 percent after erasing an earlier decline of 0.5 percent. Data on Tuesday showed Japan’s jobless rate stayed at the lowest in more than two decades last month, but household spending remained mired in a long slump.
- Australia's benchmark gauge, the S&P/ASX 200 rose 0.2 percent.
- South Korea’s KOSPI dropped 0.3 percent, falling for a second day from a record high.
- The FTSE Straits Times Singapore slid 0.4 percent.
- S&P 500 Futures were little changed, while shares in Italy’s banks dropped as former Prime Minister Matteo Renzi raised the prospect of an early election.
Commodities
- Gold was flat at $1,267.84 an ounce.
- Oil held gains near $50 a barrel after prices swung last week following the agreement by OPEC and its allies to extend cuts by nine months.
Bonds
- The Thomson Reuters Eurozone 10-Year Government Benchmark yield bounced from its 3.46% decline to a low of 0.288 and is now up for the day 0.20% at 298 and fluctuating.
- The yield on 10-year Treasuries declined less than one basis point to 2.24 percent.
- 10-year yields in general fell two basis points to 2.40 percent.