The Storm Continues, Dollar Stabilizes

The global markets are struggling to regain some semblance of stability. The US dollar is consolidating yesterday’s losses and is modestly firmer. US 10-year Treasury yields have slipped back to near 2.0%, while the 10-year German bund yield has slipped to new record lows, below 75 bp. Peripheral bond yields are sharply higher 14-18 bp, though Greek bonds remain under sharp pressure, and the 10-year yield has jumped another 85 bp, which brings the five-session increase to almost 200 bp.  

Of note, French bonds are not being dragged higher by the rally in bunds, but instead yields are up six basis points. Given the logic of the German-French link, this divergence can be a more worrisome sign. On the other hand, the two-three basis point backing up in 10-year gilts seems to be more of consolidation after yesterday’s large move. The 10-year gilt yield is off 28 bp over the past five sessions, which is the same as the US.  

Equities in Asia continued to fall after sizable losses in the US yesterday. The MSCI Asia Pacific Index lost about 1.3%, and European bourses are mostly lower. The Dow Jones Stoxx 600 is off nearly 0.5%. There main exceptions are the German, UK, and Swedish equity markets, where small gains are being posted.  

Oil prices continue to slide. The market is focused on two main stories here. The first is the global slowdown, and the poor US data–retail sales and Empire survey–fed into such anxiety. The second is the reluctance of Saudi Arabia to assume its traditional role as the swing producer. Instead, it has cut prices and increased output.  By doing so, Saudi Arabia could be going to next month’s OPEC meeting with bargaining chits to re-establish discipline in the cartel.  Saudi Arabia is also delivering a powerful blow to its non-OPEC rivals, which are not just in Russia, and also includes US shale producers.  

The actual news stream is light.  There are two main stories. The first is the US Treasury report on the foreign exchange market and the international economy.  The big take away is the softening of the US language about the Chinese yuan. Since its last report back in the spring, the yuan has appreciated, and the US Treasury recognized this.  It still says that the yuan is significantly under-valued, but it acknowledged the new willingness to allow it to appreciate. Today’s the PBOC fixed the yuan at 6.1395, the lowest since March.