US Bonds Stabilize And The Dollar Finds Better Footing

Overview: The 13 bp jump in the US 10-year note and 30-year failed to derail the rebounding equities or lend the dollar support. The surge in US equity indices closed the gap created by the panic attack and Monday's sharply lower opening. However, the relation trade did not carry into today's activity. Most equity markets in the Asia Pacific region fell, with the notable exception of Japan, Taiwan, and India. India's main indices are at record highs. Recalling the sharp losses after last weekend, some participants moved to the sidelines. Europe's Dow Jones Stoxx 600 is giving back most of yesterday's gains and paring this week's gain, which would be its first in four weeks.US futures are giving back around half of yesterday's advance. The US 10-year yield is slightly lower today, and at 1.40%, it is up about four basis points on the week. Australia and New Zealand's 10-year benchmarks played catch-up and rose 14 bp and 11 bp, while European yields are 2-4 bp higher. The dollar is recouping some of yesterday's losses. Yesterday's leaders, the dollar bloc and sterling, are the weakest. The Swiss franc and euro are nursing small losses. Emerging market currencies are also finishing the week on a soft note. After a two-day advance, the South African rand's downtrend has resumed with around a 1.2% drop today. The large 100 bp rate cut by Turkey's central bank yesterday sent the currency to record lows, and the losses are being extended today. The JP Morgan Emerging Market Currency Index is off for the third consecutive week. Gold has snapped back after shedding nearly 1.8% over the past two sessions. At $1755, it is up less than a dollar on the week. Brent crude oil moved within cents of this year's high set in early July, near $77.85. November WTI has edged to a new high for the year today at roughly $73.65. While iron ore prices are firmer, copper is lower for the second consecutive session. Without a recovery today, copper will post its first back-to-back weekly loss since May. The CRB Index has a three-day advance in tow coming into today's session and is rising for its fifth consecutive week.  

Asia Pacific

Japan's headline CPI slipped deeper into deflation.  The -0.4% August reading is the 11th consecutive month of below zero year-over-year. The core rate, which excludes fresh food, and is the measure the BOJ targets, stands at zero, matching its highest level since March 2020. However, this is the result of higher energy prices. The measure of Japan's consumer prices that exclude fresh food and energy is 0.5% lower than a year ago. Separately, due to yesterday's holiday, Japan's preliminary September PMI was reported today. The manufacturing PMI eased to 51.2 from 52.7, while the services PMI rose to 47.4 from 42.9, showing the contraction is moderating. The composite is at 47.7, up from 45.5 in August. The year's high, set in April at 51.0, was the highest since September 2019. There are no policy implications. The BOJ met earlier this week, and the focus is the LDP leadership contest next week and a large fiscal package expected later this year.

It is still not clear under what terms Evergrande serviced its domestic debt or what it plans on doing about the $83.5 mln interest payment due yesterday or the $47.5 mln due next week.  Most such contracts include a grace period. Reports claimed Beijing told local governments to prepare for the collapse of Evergrande. At the same time, a former adviser to the PBOC contended that it will be broken into four parts (real estate development, finance, electric vehicles, and other commercial activity). Despite Thursday's equity rally in Hong Kong and the mainland, the NASDAQ Golden Dragon Index (tracks China-based companies that trade in the US) fell slightly. It is off 2.8% for the week coming into today. At the start of this week, the SEC formally reminded investors about the opaqueness of investing in Chinese companies that trade in the US. The news and fears surrounding Evergrande are a constructive development for the SEC's campaign.  

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Read more by Marc on his site Marc to Market.

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