EC Doom And Gloom Takes Toll

Overview: The capital markets have begun stabilizing after yesterday's dramatic moves. The MSCI Asia Pacific Index did, though, see follow-through selling, and the third consecutive loss saw the benchmark close below its 200-day moving average for the first time in a year. Europe's Dow Jones Stoxx 600 is posting small gains to snap a four-day drop.US futures are also trading higher. The US 10-year Treasury yield sank to 1.17% yesterday in heavy volume, 60 bp off its March peak. It finished below its 200-day moving average for the first time since early November. The 30-year bond yield fell to five-month lows. Both yields are little changed today, while European yields are 2-4 basis points lower, setting new three-month lows across the board. The yield of the Antipodean benchmarks fell 6-7 bp. The dollar remains firm against all the major currencies, with the Australian and New Zealand dollars and Norwegian krona continuing to bear the burden and are off around 0.5%. The yen continues to be resilient, while the Canadian dollar has steadied. Emerging market currencies are mixed. Eastern and Central European currencies are heavy, while most freely accessible emerging market currencies are higher. The JP Morgan EM currency index is slightly higher, continuing its sawtooth pattern of alternating gains and losses for the past week and a half. Gold recovered from the push below $1800 yesterday to approached $1820. Crude is broadly steady after the September WTI contract fell 7.3% yesterday in response to the OPEC+ deal and fears that demand may soften amid the covid surge. Copper is around 1% higher after falling 2.8% yesterday. Lumber snapped an eight-day drop yesterday.  

Asia Pacific

Japan's June CPI came in as expected. The headline rose by 0.2% year-over-year after falling 0.1% in May. The core measure, which excludes fresh food, is also 0.2% higher after a 0.1% gain in May. The BOJ targets this core measure. At last week's meeting, the forecast was lifted to 0.6% this fiscal year (through March 2022) from 0.1%. The key is energy prices. If fresh food and energy were excluded, Japan's deflationary condition was unchanged, off 0.2% year-over-year. There do not seem to be clear policy implications. 

Vietnam and the US agreed to avoid trade sanctions, though the heavy lifting had already been done. Recall that at the end of last year, the Trump administration cited Vietnam (along with Switzerland) as a currency manipulator, but the Biden administration dropped this designation a few months ago (April).In the joint statement yesterday from Vietnam after a teleconference with US Treasury Secretary Yellen, Vietnam admitted no wrongdoing while committing Hanoi to a more flexible currency regime over time while securing macroeconomic and financial stability. What is essentially a reiteration of the G20 position is sufficient to give the Yellen sufficient ammo to close the probe of Hanoi's trade practices without resorting to tariffs. The US is Vietnam's largest export market. Vietnam's bilateral goods trade surplus is growing quickly, partly due to the new regional division of labor in Asia, which itself is being shaped by the US sanctions and tariffs on Chinese-produced goods. The US goods deficit with Vietnam was almost $56 bln in 2019 and swelled to nearly $63.5 bln last year. Through May, the 2021 shortfall was slightly more than $44.5 bln. Despite the growing trade surplus, Vietnam is a poor country, where GDP per capita of about $2715 is 1/24 of that in the US. While seeking to block "unreasonable and restrictive" acts that harm American business interests, if the Biden administration wants to re-assert leadership and check China, it needs to find ways to mend fences. This is one such way. Consider the policies of the US or Europe when its per capita income was the same as Vietnam's.  

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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