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Eerie Calm Ahead Of The Weekend

Eerie Calm Ahead Of The Weekend

Perhaps the dramatic volatility seen earlier this week has sapped the market’s energy, and an eerie calm appears to be taking hold ahead of the weekend. Despite the strong showing by US equities yesterday, the spillover into the Asia Pacific was limited. Equity markets were mixed, Japan, Australia, Taiwan, and India among the strongest advancers, while China, Hong Kong, and South Korea slipped. Europe’s Dow Jones STOXX 600 was posting small gains to pare this week’s minor net loss. US futures are narrowly mixed. The US 10-year yield is hovering around 1.63%, little changed on the week, while European are mostly yields are 1-3 bp lower. The premium demanded of the periphery over Germany narrowed this week, 10-11 bp for Italy and Greece and around 7 bp for the Iberian peninsula. The dollar is generally softer against the major currencies, with the Australian dollar and Norwegian krone underperforming on the day. Sterling and the euro are up around 0.75%-0.85% on the week to lead the majors. Central and Eastern European currencies led the emerging market currencies this week but little changed today. The JP Morgan Emerging Market Currency Index is a little higher today, which would make it the fourth advancing session this week, but net-net, it up slightly this week after falling nearly 0.5% last week. Gold continues to consolidate within Wednesday’s range but is up about 1.75% this week (~$1878). Although some link it to the sell-off (and volatility of crypto), it is the third consecutive weekly gain and the sixth week in the past seven. July WTI slipped to its lowest level of the month (~$61.55) today but has recovered and has recouped about half of yesterday’s 2.2% fall. It is snapping a three-week advance with a little more than a 4% loss. The CRB Index fell yesterday for the third day to trade at new lows for May.

Asia Pacific

Japan’s news stream was generally poor today. Deflationary forces strengthen, the flash May PMI was weaker than expected, and there is talk about extending the formal emergency three weeks into June. Although the sheer number of cases is lower than in some European countries, the vaccine rollout is much smaller. April CPI fell to -0.4% from -0.2% in March. The core rate, which excludes fresh food, remained at -0.1%, while the measure that excludes fresh food and energy fell to -0.2% from 0.3%. Slowing manufacturing and a deepening slump in services dragged the composite to 48.1 from 51.0, the lowest since January.

Australia’s preliminary May PMI was mixed, but the takeaway is that the economy continues to recover. The manufacturing PMI edged up to 59.9 from 59.7. However, the servicse PMI slipped to 58.2 from 58.8. This saw the composite ease to a still-strong 58.1 from 58.9. Separately, April retail sales rose by 1.1%, twice what economists expected after a 1.3% gain in March.

South Korean trade figures for the first 20-days of May bode well for international trade and suggest strength outside of the base effect. Exports surged by 53.3% from a year ago after a nearly 41% increase in the entire month of April. Adjusted for the number of working days, average daily exports rose by almost 60%. This is about 25% above the average in April 2019. Imports rose 36% year-over-year after rising by about 39% in April.

The dollar has eased against the yen, and with today’s loss, it has unwound the mid-week gain. It is holding just above the week’s low, a little below JPY108.60. There is an option for $450 mln at JPY108.55 that expires today. Last week’s low was closer to JPY108.35. A break of the US 10-year yield below 1.60% could spur additional losses. The Australian dollar has a sawtooth pattern this week, alternating between advances and declines. Yesterday, it rallied about 0.6%, and today is off around 0.2%. Net-net, it is slightly lower on the week, having settled last Friday near $0.7770. The dollar slipped slightly against the Chinese yuan but remained within this week’s range (~CNY6.42-CNY6.4440). On the week, the dollar eased by 0.1%. It is the sixth weekly decline, albeit small, in the last seven weeks. The PBOC set the dollar’s reference rate at CNY6.43, which was a little stronger than usual compared to the median in Bloomberg’s survey (CNY6.4287). Note that China’s 10-year yield eased a couple of basis points today to around 3.06%, which is the lowest since last September.

Europe

The eurozone’s flash PMI shows a strengthening of the recovery. The manufacturing PMI slipped to 62.8 from 62.9, remaining at elevated levels. The service PMI jumped to 55.1 from 51.5. Both were stronger than expected. The composite stands at 56.9, up from 53.8 in April. Last year’s peak was 54.9. German manufacturing PMI slowed (64.0 vs. 66.2), while services improved (52.8 vs. 49.9). The composite rose to 56.2 from 55.8. The rebound in France was stronger. The manufacturing PMI rose to 59.2 from 58.9, while services jumped to 56.6 from 50.3. The composite of 57.0 (after 51.6) edged above Germany’s.

The chief takeaway from the UK is that the economy is accelerating after the contraction in Q1. Today’s most impressive news was the 9.2% surge in April retail sales, twice what economists expected and overshadowing the small downward revision in the March series to 5.1% from 5.4%, which was also well above forecasts. The flash PMI showed manufacturing was accelerating (66.1 vs. 60.9), while services strengthen (61.8 vs. 61.0). The composite rose to 62.0 from 60.7.

For the fourth consecutive session, the euro is probing the $1.2230-$1.2245 area. So far today, it is holding above $1.22, where an option for a little more than one billion euros expires today. Another option there for 920 mln euros expires on Monday. Still, the general tone is one of consolidation today, and so far, the euro is in a narrow 15-tick range on either side of $1.2225. Last week, it settled near $1.2140. Sterling is pushing above $1.42 for the second time this week. It has moved within spitting distance of the year’s high set in last February near $1.4235. There is an expiring option for around GBP300 mln at $1.4200.

America

The Biden administration has adjusted its tactics regarding a minimum corporate tax. It now proposes a global minimum tax rate of 15% to enhance the chances of a compromise. Although the US press makes it sound like these are new initiatives, the fact of the matter is that the OECD has been debating this and the idea of tax obligations in line with sales for several years. The new initiative is that change in the US position, and this is understood as a key breakthrough. The G20, which works closely with the OECD, hopes to have an agreement by the end of July. Treasury Secretary Yellen endorsed the efforts as a way to avoid the “race to the bottom” or what used to be called “ruinous competition.”  Still, even a cursory understanding draws a clear distinction between tax schedules and effective tax rates. Perhaps, it is cynical to say, but an agreement on tax schedules changes the competition to carve-outs, exemptions, and loopholes. Also, in a period that has seen more attention on income and wealth pergences, it is not immediately clear why the return on capital (profits) should be taxed at a lower rate than the return on labor (wages).

The North American economic calendar is busy ahead of the weekend. The US sees the flash PMI. Recent data has been a bit softer than expected, and the May PMI may ease from the lofty April readings but should still be consistent with an accelerating economy. April existing-home sales will also be reported. A small rise is expected after a 3.7% decline in March. The overall level remains above levels seen since 2007. Canada and Mexico report March retail sales. The data is too old to have much impact. Still, a solid 2.3% gain is expected in Canada following a 4.8% surge in February. Mexico’s retail sales are expected to have risen by 1.6% to match the previous month’s gain.

The US dollar bottomed on Tuesday near important support at CAD1.20. It bounced to about CAD1.2145 and faded. It is back around CAD1.2050 ahead as the North American session gets underway. The greenback settled a little above CAD1.21 last week. Barring a recovery today, it will be the seventh consecutive weekly US dollar decline. Indeed, here in Q2, the US dollar has only risen in one week. It rose by 0.2% in the week ending Apr. 2. The greenback is firm against the Mexican peso but consolidating at lower levels. It is the first week in four that it has not traded above MXN20.00. It fell to around MXN19.72 this week, its lowest level since late January.

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