After an ugly week, market participants have returned with strong risk appetites. Equities were rebounding, and the greenback was paring recent gains. Bond yields were firm, as were commodities. Asia Pacific equities got the ball rolling with more than 1% gains in several large markets, including Japan, China, Hong Kong, and Taiwan.
The MSCI AC Asia Pacific Index slumped 4.4% last week. Europe's Dow Jones Stoxx 600 shed 1.5% last week and was also off to a firm start (~+0.4%). US futures were around 0.3% higher.
The 10-year US benchmark yield was around 1.28%, a couple basis points higher, and European yields were 3-4 bp higher. The dollar was trading lower against most currencies, led by the Norwegian krone and Canadian dollar. Only the yen was finding it difficult to make any headway against the greenback. The JP Morgan Emerging Market Currency Index was rising for the second consecutive session, though it fell by 1.2% last week.
Gold was a little higher but within ranges seen in recent days and looked set to retest the $1800 area. October WTI recovered smartly after initially slipping below last week's lows (to ~$61.75) and was testing the pre-weekend high slightly above $64.00. Iron ore was snapping a four-day fall, while copper was extending the recovery seen at the end of last week. The September contract was at a four-day higher, near $420.
Asia Pacific
Japan's Prime Minister Suga was dealt another blow in seeking another term as LDP leader. Yokohama, a city in the prefecture that Suga represents in the Lower House, rejected his candidate and voted for a candidate supported by the opposition for mayor. Even though there were local issues in play (e.g., controversial casino), the results can only play on doubts within the LDP and invigorate the effort to replace Sugar as party head and, therefore, prime minister. Although former Prime Minister Abe has backed Suga, an ally and previously the internal affairs minister, Takaichi has already indicated she will stand for leader after the formal schedule is announced later this week. The LDP's policy chief Shimomura also has indicated his interest.
Japan's preliminary August PMI softened. The manufacturing reading eased to 52.4 from 53.0, while the services component fell to 43.5 from 47.4. The result was the composite dropped to 45.9 from 48.8. Recall it stood at 48.5 at the end of last year and 48.6 at the end of 2019. The virus also sapped Australia's PMI. Manufacturing fell to 51.7 from 56.9, and services eased to 43.3 from 44.2, leaving the composite at 43.5, down from 45.2 previously. It is the second consecutive month below the 50 boom/bust level. The composite peaked at 58.9 in April.
South Korea reported strong exports (40.9%) in the first 20-days of August. This helped ease concerns about weaker world demand. The average daily value of exports was up 31.5% year-over-year. Semiconductor exports rose 40%, and auto exports increased by 37%. Shipments to the US rose by 50%, while exports to the EU rose by nearly 43%. Even with ports disrupted in China, South Korean exports rose by a third. South Korea's central bank meets Thursday. While a rate hike is widely expected, it is seen as more likely in Q4 than this week.
The dollar was firm against the yen, pushing above JPY110 late in the European morning. However, it remained within the range set last Thursday of roughly JPY109.50 to JPY110.25. More broadly, the greenback has been largely in a JPY109-JPY111 range since the end of May.
The Australian dollar was recovering from its approach of $0.7100 at the end of last week. It traded a little above $0.7170 in Europe today. Resistance was seen in the $0.7190-$0.7205 area. The New Zealand dollar forged a shelf slightly above $0.6800 and traded to almost $0.6860 today. The nearby cap was seen closer to $0.6900.
The greenback finished last week, threatening to break higher against the Chinese yuan, settling above CNY6.50 for the first time this month, but the offshore yuan recovered ahead of the weekend, and the onshore yuan played catch-up today. The US dollar was trading a little below CNY6.49. The PBOC set the dollar's reference rate at CNY6.4969, tight to expectations of CNY6.4967.
Europe
The EMU preliminary PMI softened a little but remained near recent highs, suggesting the recovery was very much intact. An alarmist headline would say the aggregate manufacturing was at a six-month low while the aggregate services were at a two-month low. The manufacturing PMI eased to 61.5 from 62.8. The German and French preliminary manufacturing readings eased. The EMU flash service PMI slipped to 59.7 from 59.8. The German and French reports eased a bit more. The composite for the eurozone eased to 59.5 from 60.2. It was the first decline since January. The 2020 peak was 54.9 last July.
The UK's story was broadly similar. The preliminary PMI softened from July, but remained at levels consistent with continued expansion. The manufacturing PMI slipped to 60.1 from 60.4, while the services PMI eased to 55.5 from 59.2. The composite stands at 55.3, down from 59.2. The composite peaked in May at 62.9 after finishing last year at 50.4.
Politics was very much in the air. The latest polls ahead of next month's German election showed the CDU/CSU support softening. Merkel's party was polling a record low of 22% in the last survey, while support for the SPD has risen to a four-year high, neck-to-neck with the CDU/CSU. As noted last week, the polls suggest that an SPD-Green-FDP coalition was possible.
Separately, Sweden's Prime Minister Lofven, who managed to put together a new government after being the first PM of Sweden to lose a vote of confidence, unexpectedly announced he will step down in November from both the party and government. A party conference is set for early November when his successor will be picked. The front-runner is Andersson, the finance minister, who would be the first female prime minister. Lastly, the UK has called for a special G7 meeting tomorrow to discuss Afghanistan as the US steps up its evacuation efforts and considers keeping troops past the end of the month.
The euro was building on the pre-weekend recovery that took it from roughly $1.1665 to $1.1705. It was up to almost $1.1735 in Europe. This corresponded to about the halfway mark of last week's range. The next target is the $1.1750 area and then $1.1800. If today's upticks are sustained, it will be the first back-to-back gain of the single currency this month. Support was seen at around $1.1690.
Sterling held $1.3600 at the end of last week. Unlike the euro, it did not recover much before the weekend. It was a better bid today and traded $1.3665 in Europe. Resistance was seen near $1.3700. Sterling has not risen in consecutive sessions since July 28-29.
America
A month ago, in a CNBC interview, Treasury Secretary Yellen praised her successor at the helm of the Federal Reserve, Powell, but she did not endorse his re-appointment, saying that was a discussion she would have with the president. Apparently, that discussion was had, and Yellen reportedly has indicated she favors another term for Powell, whose term as chair expires early next year.
There is some thought that Biden is looking to make a decision in the coming weeks. Recall that Obama's nomination of Powell to the Board of Governors at the end of 2011 was the first time since 1988 that a president nominated a person from the other party for such a position. It was done in conjunction with Stein to garner bipartisan support. Regardless of political affiliation, there does seem to be a strong sense of continuity from Bernanke, through Yellen, to Powell.
The US sees the preliminary PMI today. Like Europe reported, the US is also expected to see slightly softer numbers, though activity remains high. The US also reports existing home sales. They have mostly been falling this year, though they did rise in June. That said, the overall pace of activity is still at its best level since before the Great Financial Crisis. The disruption with new home construction is thought to be slowing existing home sales. The focus of the week is the Jackson Hole speeches. It is now a virtual event, and Powell's speech is slated for Friday.
Canada has a light economic schedule this week as the country prepares for next month's national elections. Polls still suggest that it may be too close to call if Prime Minister Trudeau will succeed in securing a parliament majority the Liberals lost two years ago.
Mexico reports June retail sales today (expected 0.1% after 0.6% in May). The highlight of the week will be the trade balance (possibly the first deficit since March) and the minutes from the last Banxico meeting that, in a split decision, hiked rates for the second time this year.
The highlight from Brazil will be the midweek inflation report (IPCA), which is expected to rise to nearly 9.25% from almost 8.6% in July. The central bank meets on Sept. 22 and has already pre-committed to at least another 100 bp hike.
The US dollar spiked to almost CAD1.2950 before reversing lower ahead of the weekend. The bearish shooting star candlestick was confirmed by the follow-through US dollar selling today. The greenback fell to CAD1.2735 in the European morning. The next target was the CAD1.2680-CAD1.2700 band.
The greenback iwa also moving lower against the Mexican peso. It poked above MXN20.45 before the weekend and finished firm above MXN20.36. The US dollar was trading below MXN20.29 in Europe. A move below MXN20.15 was needed to support ideas that a high was in place.
The US dollar appeared to put in a potential key reversal against the Brazilian real before the weekend. Follow-though dollar selling today could target the BRL5.32-BRL5.33 area today.