Turn Around Tuesday Sees Firmer Dollar, Rates, And Equities

The modest gains in the S&P 500 yesterday, and the lack of new negative developments, has spurred better activity in Asia and Europe today. Japan’s Topix snapped a four-day drown draft, to post its second gain in the past ten sessions. The MSCI Asia Pacific Index eked out a small gain, its second in a row and the sixth advance in seven sessions. Most equities in the region rose, including Korea despite the beginning of the annual military exercises.  

European shares are advancing as well. The Dow Jones Stoxx 600 is moving higher for the first time in four sessions. The recovery is being led by materials, healthcare, and energy. We note that the France CAC gapped higher and has now filled the gain. Since peaking in May, the CAC has surrendered nearly the entire gain scored in the wake of Macron’s initial victory in the first round of the French election back in late April.  

Benchmark 10-year bond yields are mostly a little firmer (around a single basis point). Greek bonds are still basking in the recent upgrade by Fitch (B- from CCC, with a positive outlook) and the yield is off another six bp to 5.46%. The other exception is Italy. It is moving in the other direction. The 10-year yield is seven basis points higher at 2.09%. Some reports suggest that there is a focus on next week’s scheduled supply and unwinding of carry positions ahead of Draghi’s speech tomorrow (before going to Jackson Hole).  

There also may be interest stemming from a weekend interview with Berlusconi, who is enjoying a bit of a revival in the Italian political scene. He supports the idea of a parallel currency, which in itself may not be so surprising, but in the current context, it is troublesome for many investors who see next year’s Italian election as the next significant political risk in Europe.  

The Northern League (Lega Nord) has supported a parallel currency of sorts as well (mini-BoT). It seems similar to the scrip that California experimented with several years ago. In any event, this is important because it highlights the common ground of Berlusconi’s Forza Italia and the far-right parties (anti-immigration, flat tax on income, scrapping the already agreed upon pension reforms). In early September, a pact may be formalized. Such bloc would rival the center-left PD and the Five-Star Movement.