Markets Look For Direction

Most of the capital markets action here at the start of the week fall into one of two buckets.  The first bucket is consolidation.  Through the European morning, the most actively traded currency pair, the euro-dollar–is confined to less than 20-ticks. The dollar-yen has been confined to a quarter of a yen.   

The MSCI Asia-Pacific equity index rose less than a dime.  The Dow Jones Stoxx 600 in Europe is similarly little changed. 

The second bucket is evident in the bond market.  While most core bonds are little changed, Asian bonds and peripheral European bonds have advanced.  It is almost as if they are playing catch-up to the post-jobs rally.  Italian, Spanish and Portuguese 10-year benchmark yields are off 7 bp. 

In Portugal, there may be some relief that the Banco Espirito Santo 5 bln euro rescue was approved by the EU.   The complicated organizational structure may have concealed the solvency issue, but as of a couple weeks ago, officials were denying that a problem existed.  Many investors were already skeptical of the rigor of the Asset Quality Review and Stress Tests, and this experience does not auger well for confidence..  Yet, in fairness, there is some bureaucratic interest in a some rigor as the ECB will inherit oversight responsibility, and it is clearly in its interest to air any problems.

Greek bonds are also firmer, with the 10-year yield off a little more than 2 bp.  Before the weekend, citing fiscal improvement, Moody’s boosted the sovereign rating two notches to Caa1.  It adopted a stable outlook.   This is still lower than S&P (B-) and Fitch (B).  We suspect that that this helps explain the muted market response. 

Two piece of economic news stand out.  Australia retail sales rose 0.6% in June, twice what the consensus had expected, and the May series was revised to show a 0.3% decline rather than 0.5%, as initially reported.  This comes on the eve of the central bank meeting, and ahead of the July employment data later in the week  The central bank is likely to underscore the need for stable interest rates, but there is some risk that is weighs in against the strength of the Australian dollar.