International Morning Comment
Markets have stabilized this morning, but jitters remain. Moves by the Fed last week to cut the discount rate, at which almost no one borrows, helped sentiment, as did the shift in the tone of the accompanying comment to a dovish stance, suggesting the Fed is concerned about damage to the real economy and could cut rates if this continues, which is not symbolic.
There are still signs that liquidity is tight. The RBA and BoJ again injected liquidity into the market. Still, the main story is a reversal of the trades which were a hit last week.
Equities are up this morning, notably so in Asia which lagged the rally in the US and Europe last week. The MSCI Asia Pacific index rose 3.9% overnight, after falling 8.0% last week. Many Asian markets were up 5% or so last night, including the Hang Seng, Kospi, and Taiwanese Taiex, along with major markets in China. European markets were more subdued this morning, with the CAC40 leading the gains with a rise of 1.28%; the DAX was up 0.41%.
Bond markets were just marginally weaker, with yields up about 1bp across the curve in Japan and 1-2bp in Europe.
The dollar is slightly weaker this morning against most currencies but the action was in the yen carry trade. The yen is down against the major currencies, notably so against the high yielders such as the AUD and Sterling. Euro yen was off ¥1.17 to 155.32 at around 7:00am.
Oil prices eased as it appears that Hurricane Dean would not head for the US gulf Coast, but it will threaten Mexico’s oil fields in the Bay of Campeche. There are wells in the threatened area but no refineries of note. The US light crude contract was trading down 61 cents, at $71.37/bbl with Brent off 27 cents, at $70.17/bbl.
There was little in the way of data overnight. UK BBA Mortgage lending was surprisingly strong, rising to £5.7 billion; expectations were for a gain of £5.2 billion. Credit card borrowing was soft. There are signs that past rate hikes are taking their toll, but so far they are rather sporadic. Public finances were as expected, with public sector net borrowing showing a July surplus of £6.5 billion and cumulative borrowing this year at £10 billion; the projection for the fiscal year is £16 billion. M4 money supply growth remained high, up 13% Y/Y in July.