Fragile Stability: Little Change In U.S., Investors Return To Korea

2021
08 / 02
06 : 40
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Fragile Stability: Little Change In U.S., Investors Return To Korea Fragile Stability: Little Change In U.S., Investors Return To Korea

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The day began with equity losses in Asia before a sharp recovery, perhaps initiated in China. The was up a little more than 0.5%. The fell more than 1% before closing 0.25% better. Market talk suggests retail accounts followed the so-called national team of the large state-owned banks after comments by PBOC Governor Yi Gang that some took as a hint that another cut in reserves requirement could be forthcoming shortly.

Foreign investors returned to Korea for the first time in seven sessions. Foreign investors bought almost $241M of Korean shares today, after selling $1.43B since the start of last week. The was up 1% while the was up 3%. Foreign investors were not so keen about Taiwanese shares. They were net sellers for the sixth session. Over this period they sold $1.88B.

The Philippines central bank hiked the overnight deposit rate by 25 bp to 3.0%, the second hike in the cycle. The equity market fell 0.7%.

The positive tone carried into Europe, and the Dow Jones has recouped yesterdays loss, rising 0.7% in the morning, led by materials and consumer staples. All industry sectors were moving higher. The news stream is light. The market is digesting Merkel and Macrons proposals ahead of next weeks EU Summit. While details are of course light at this stage, the general sense is that it provides for an evolutionary step toward greater integration, but falls short of the bold initiatives that Macron has previously presented.

At the same time, it is clear that Merkel needs something from Europe to help defend her from a domestic challenge on asylum seekers. Merkel needs to take a tougher position on refugees and a more cooperative arrangement with Europe is essential. The challenge is that under EU rules, the first country that registers an asylum seeker is responsible for their welfare. Geography dictates it is southern Europe--like Greece, Italy, and Malta, among the least that can afford it.

The ECB confab in Portugal draws interest today as the headline speakers include , , , and . Some think Draghi broke new ground last year and are especially attentive for a fresh tell. We suspect Draghi was as surprised as any by last years market reaction. Draghi just laid out the ECB course and pre-committed to not raising interest rates for another year. His caution, tempered by optimism in May, gave way to an optimism tempered by caution over the extended soft path.

The chief drama of the day is in the UK. Around the time of the US equity open, the House of Commons is expected to begin voting on the Withdrawal Bill again. The key is the latest amendment by the House of Lords that gives parliament a "meaningful" vote on Brexit. This issue is partly over the terms of Brexit and partly a constitutional issue about the power of parliament. Even if May loses, it is not clear that the hardliners in the cabinet will challenge her. A palace coup would not resolve anything and could delay negotiations further.

After the summit, the next one is not until October, when ostensibly an agreement is necessary so it can go through the approval channels. Time is of the essence. The EC continues to complain that the UK is ill-prepared. Given the lack of substantial progress, the EC may urge members to step-up their contingency planning for a hard exit (no agreement).

The US economic calendar is light. It features Q1 and . Existing home sales are expected to have recovered after the 2.5% fall in April. The current account deficit is expected to be little changed from the $128B deficit recorded in Q418. We share two observations. First, the TIC data shows the portfolio investment inflows of almost $131B covered the current account deficit. Second, the US current account deficit, driven by the trade balance, is most likely going to deteriorate. The fiscal stimulus runs counter to the more aggressive trade position of the Trump Administration.

Turning to the US stock market. There has been an interesting pattern in the . For the past three sessions, the S&P 500 closed lower on the day but above the open. This leads to bullish candlestick formations. Yesterday, the benchmark slipped below 2747.7, the 38.2% retracement of this months rally, but closed above it and on its highs. A gap higher opening is possible today, setting the stage for another attempt on 2800.

The itself is little changed. The is the strongest of the majors, up a little less than 0.15% and the is the weakest, off 0.2%. The is consolidating in the lower half of yesterdays range. So far it is the first session that the euro has not traded above $1.16. There are very large options expiring tomorrow: $1.1500-$1.1525 houses 2.5B euro options. $1.1550-$1.1600 holds another 2.5B euro, and at $1.1625 there are an additional 2B euros. The dollar continues to straddle the 110 level. There is a $540M option struck there that expires today and $600M at JPY110.45.

is lower for the third session. Today it has not been able to poke back through $1.32. On the other hand, it has only marginally penetrated $1.3150. Lastly, we note that the is slipping to new lows for the year, with its fifth successive decline. The odds of a rate hike next month have eased, but remain the odds for the most likely scenario.

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