Markets Calm(er)

Overview: Oil prices have stabilized after yesterday's surge. Both Brent and WTI are holding on to around $7-$8 a barrel gain. Equity markets are mixed.  Some are attributing the losses in Asia Pacific outside of Japan (Nikkei rose its highest level since late April), Korea and Australia to the rise in oil prices.  European shares opened lower are straddling unchanged levels. US shares are also flat. Yields are mostly a little softer, though Italian bonds have come under some pressure. The dollar has edged higher against most of the major currencies, though the euro is resisting the pull. The Australian dollar and Swedish krona are the weakest currencies. The RBA minutes seem to suggest an October or November rate cut is likely. The unexpected rise in Swedish unemployment suggests the Riksbank's hawkishness from the meeting earlier this month will have to be reconsidered when it meets next month.  

Asia Pacific

The market seemed disappointed that the PBOC drained liquidity and failed to cut the one-year medium-term lending facility.  We suspect the disappointment may be misplaced. The PBOC is trying to draw attention to the recently reinvigorated prime lending rate. It will be set at the end of the week. A small rate cut is likely, but it is clear that Chinese officials are moving gradually and slower than the market expected. Another reduction in reserve requirements is thought likely now in Q4. Separately, while the market suspects it knows where the "officially" approved dollar top is (CNY7.18-CNY7.20), it has been fishing for the lower end of the range. It appears a little lower than we had anticipated. Rather than around CNY7.10, it now looks closer to CNY7.05-CNY7.06. For the first time in 18 sessions, the PBOC set the dollar's reference point above where bank models implied (CNY7.0730 vs. CNY7.0707). 

Moody's concluded that the ongoing demonstrations in Hong Kong put its institutions at risk. It cut the outlook on its Aa2 rating to negative from stable. The Aa2 rating is equivalent to Fitch's assessment of AA. It had cut Hong Kong's rating by a notch earlier this month and also has a negative outlook. The move also leaves the S&P as the outlier with its AA+ rating and a stable outlook.

Minutes from the Reserve Bank of Australia's meeting earlier this month emphasized the less favorable outlook for the domestic and global economies. Although the Australian dollar was sold in response to the apparent laying of the groundwork for a rate cut in Q4, the OIS market showed little change. Investors may be waiting for tomorrow's employment report before making a commitment to an October (about nine basis points is discounted) or November move (22 bp has been discounted). The median forecast in the Bloomberg survey calls for milder jobs report after 34.5k surge in full-time positions in July. Yesterday's weak Chinese data may also be seen as favoring an early cut.  

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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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