Mixed Markets Wait For Stimulus

What's New

. Equity markets in Asia were mixed today, conflicted between hopes for a new US stimulus plan and the global surge in coronavirus cases. At the same time, a mountain of short positions pushed the dollar higher.

. MSCI Asia-Pacific (ex. Japan) were down 0.2% from their six-month high, despite the Chinese CSI300 rising by 0.9%, helped by the Caixin/Markit PMI July reading rising to 52.8, the fastest pace in a nearly decade. The Nikkei rose by 2.1% as the Yen fell, and S&P500 E-Minis were largely unchanged.

. In general, investors appear to be nervous about the future of the new stimulus package in the United States, with White House pessimistic on reaching agreement soon on a deal.

. On Friday, Fitch Ratings cut the outlook on the US' AAA rating to negative from stable, citing eroding credit strength and a ballooning deficit. Fitch also said the future direction of US fiscal policy depends in part on the November election and the resulting makeup of Congress, cautioning there is a risk policy gridlock could continue.

. July was still very positive for stock markets, with the S&P 500 jumping 5.5%, with the NASDAQ gaining 6.8% due to its higher dependence on tech stocks. Other sectors, however, did not fair as well with many states pausing the reopening of their economies as infections jumped. On the other hand, the US dollar suffered its worst month in a decade, although it posed a mini rally today as the bears took their profits.

. Analysts in Barclays commented that the initial boost from pent-up demand is now fading and consumer confidence is lower, despite the improvement in business sentiment. This is also tied with concerns about the US labour market and the adverse virus developments, which could turn the US economic outlook sour if no fiscal support is presented.

. The uncertainty over the developments in the US economy pushed Treasury yields lower to 0.52%, their lowest since March. The 10-year real rate has just gone below -1% for the first time, with the yield curve flattening as investors expect more support from the Fed.

. In the currency market, the Dollar was around $1.1760, gaining from the single currency, after stretching as far as $1.1908. The dollar regained some ground against the Yen, reaching 106.01 after hitting a 4-1/2-month low last week at 104.17.

. The Yen's drop was not just the result of the Dollar rally, as it had bounced in part when the Japanese Finance Minister described the Yen's recent rise as "rapid", signaling concern that a strong currency could add pain to an export-led economy already in recession.

. The decline in the Dollar, along with the low real bond yields have boosted demand for gold, reaching a fresh peak early Monday at $1,984 per ounce, and seemed on track to take out $2,000 soon.

. Oil prices eased on concerns about oversupply as OPEC and its allies are due to pull back from production cuts in August. This, combined with fears over an increase in Covid-19 cases worldwide raised fears of slower pick-up in fuel demand. Brent crude stood at $43.45 per barrel, while US crude was $40.19 per barrel.

. Earlier today, the Australian Manufacturing Index came out at 53.5, higher than the 51.5 level in the previous month. At the same time, job ads rose by 16.7%, with the inflation gauge rising.

. In Japan, GDP performance was better than expected, standing at -2.2%, versus expectations of a 4.1% decline.

Up and Coming

. It's PMI day for Europe, with an overall improvement expected in most countries, all of which are expected to come out higher than 50. Still, the question on what the PMI really measures is there, as there does not appear to be capturing the correct sentiment across the markets.

. In the US, manufacturing PMI is also forecast to have risen to 53.6, with prices also rising.

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