Busy Week Starts Quietly

This is an eventful week, but the economic calendar starts slowly. The FOMC meeting, first look at Q1 US GDP and the US jobs report are the highlights. The capital markets are also off to a slow start. The US dollar is narrowly mixed. Against most of the major currencies, the greenback has been confined to about a 15 tick range.

Equity markets are mixed, but the Nikkei is trading at its best level since late January, pushing through the 15500 level. Anticipation of the earning season is reportedly a key driver. About 3/4 of the companies listed on the TOPIX will report earnings over the next two weeks. Also of note, Chinese shares rallied strongly, with the Shanghai Composite up 2.4% to new highs for the year. Reports suggest that by mid-October, officials may allow direct stock trading between Hong Kong and Shanghai. Also, a report over the weekend showed industrial profits rose 17.9% year-over-year in June vs 8.9% in May. The yuan has appreciated for five consecutive sessions, its longest advancing streak of the year.

Hong Kong's Hang Seng extended its rally to the fifth consecutive session. Foreign participation has underpinned the Hong Kong dollar and has forced the Hong Kong Monetary Authority to intervene. It bought almost $700 mln US dollars before the weekend to defend its peg. Its intervention this month is the first since late 2012.

European bourses are mixed. Among the large markets, only the FTSE and CAC 40 are showing minor gains. The other markets are off slightly. The Dow Jones STOXX 600 is off fractionally, led by weakness in the materials and consumer discretionary sector. Recall the S&P 500 gapped lower last Friday, and that gap (1984.60-1985.79) is potentially important from a technical vantage point. The longer the gap goes unfilled, the more negative the implication.

Global bonds are also narrowly mixed. US Treasuries are a bit heavier, but the US 10-Year yield is below 2.5%. Moody's upgrade to Ba1 of Portuguese debt (one step below investment grade) just before the weekend has lifted Portugal's bonds and the 10-Year yield is off 6 bp today.

After spiking to almost SEK9.40 in response to the unexpected 50 bp rate cut at the start of the month, the euro has drifted lower since against the krona. Today the euro slipped through SEK9.15 for the first time July 2. Sweden reports Q2 GDP on July 30. It is expected to have rebounded smartly from the -0.1% seen in Q1. The Bloomberg consensus calls for a 0.6% expansion. The main challenge for Sweden, however, and the key consideration behind the rate cut, in which the governor and deputy governor were outvoted, is the threat of deflation. Recall that in May the underlying CPI was at 0.4% and rose to 0.8% in June. The July report is due August 12. Trend line support, drawn off the Feb, March and June lows comes in near SEK9.06 toward the end of the week.

Russian markets are under pressure as it faces more sanctions. Both Europe and Japan appear set to move. Russian shares are off 1.5% and the 10-Year bond yield is up 8 bp at 9.23%. The ruble is off 0.6%, to give it the dubious honor of the weakest currency today. The downing of the Malaysian commercial aircraft, the immediate aftermath, and evidence that shelling of east Ukraine has taken place from Russian territory appears to be a watershed in the crisis. However, the rub is that the next stage of sanctions requires unanimity, and now it appears that Hungary ispositioning itself for an obstructionist role. It's hoped that a meeting in Brussels tomorrow will resolve the issues. Separately, the EU will reportedly consider compensation for UK and French arms exports to Russia if they drop their orders.

Note that before the weekend, India appeared to signal its intent to block a WTO “trade facilitation” agreement. A final decision is required ahead of the month-end deadline. India’s brinkmanship tactics are ostensibly to win more freedom in subsidize food production and to build greater food inventories than allowed under the agreement.

The North American session features pending home sales, the July Dallas Fed manufacturing survey and Markit services and composite PMI reports. The US auctions 2, 5 and 7-Year notes this week and a 2-year floating rate note. The conventional 2-year note is to be auctioned today.