The Chinese revaluation of yuan has unsettled Asian equity markets and the obvious spread across the globe. The Nikkei and Hang Seng were off 1.6 and 2.4% respectively, which rolled over into Europe. The recent performance in both the DAX and CAC finished today and became the worst performers — down around 3.6% each. The U.S. market was also feeling the pressure with the Dow is off 240pts mid-day.
We are seeing the bounce in gold and silver as forecast and oil is recovering with Brent back above the psychological $50 +2.25% (Oct. delivery) on currency inflation movement.
The bond market saw the “flight to quality” as dealers like to term it. This has been a thrust into U.S. Treasuries because of the bid for the dollar. The yield curve flattened 2/10 by around 4BP putting 10’s at 2.09% and 2/30’s by 7bp. Worth keeping an eye on the TY/RX spread last seen at +147BP.
Surprising many, today’s German auction was not well bid, given the flight to quality. It is clear that the trend is toward the dollar and the turmoil in Europe just will not go away.
Peripheral markets widened to core; if continued thin summer trading, things could start to prove difficult as this rally progresses.
DXY lost 1.2% in today’s trading, putting it around 96.15 last seen. The euro performed best in the currency space +1.25% against the US$, adding to the confusion.
We have not yet seen downgrade warnings for some of the EM land yet. With treasuries outperforming everything on the board, spreads will widen as equity markets decline further. This appears to be playing exactly into our forecasts for the flight to quality is helping to create the bubble in government.
