There’s a bit of caution in the air to start the Asia session. Besides Covid-19 outbreak concerns, geopolitical tensions have dampened the multi-faceted boost in sentiment.
Overnight the dollar bounced broadly against Asian currencies amid heightened tensions between North and South Korea and, separately, India and China. This morning the press in Korea is dominated by the news of North Korea's demolition of the Inter-Korean Joint Liaison Office yesterday, which added another damp cloth to sentiment.
For me, the Korea squabble has fade written all over it as these regional flare-ups always get walked back a step or two. With China's activity picking up and such a large proportion of Korean hi-tech exports going to China, equity inflows rebounded and Kospi performed yesterday despite the geopolitical escalation – these are essential preconditions for KRW regional outperformance.
US equities closed stronger Tuesday with the S&P rising 1.9% following gains in Europe. US10Y yields are up 3bps to 0.75%, and oil is up 3.4%. Risk flourished as US retail sales rebounded, more than doubling May expectations.
And the robust report could get an honorable mention or two from Fed Chair Powell during his Senate testimony as there was evidence that stimulus codification was working, which could walk back some of his dour prompts from yesterday’s comments to Congress.
The great thing about positive US economic data in this recovery is that it only signals one thing: buy more stocks. Improving US data is nary a threat for the Fed to raise interest rates anytime soon.
Better-than-expected US retail sales data continues a run of positive data surprises relative to the consensus, but Fed Chair Powell was on hand to dish out another plate of caution, which capped the equity rally and USD's overnight gains.
Still, we’re a few months away from the data meaning anything, let alone hoisting the green flag. You don’t have to look too far for uncertainty, starting with the top tier economist forecast where the ranges of the estimates are so broad that you could drive your family fleet of Chevy Suburban through them.
Ultimately with concerns over the US labor market and Covid19 cases counts on the rise in the US, both could act as a drag on the US economy and I don’t expect the US dollar rally to stick. As such, it should favor currencies of economies that are emerging from the Covid-19 crisis sooner, such as AUD, NZD and KRW.
There was some news yesterday evening that China may cut the RRR at the end of June or early July and could cut the benchmark deposit rate in Q3. USDCNH back-end swaps have been selling off this morning.
Meanwhile, new daily Covid-19 cases are up 61.9% w/w in Florida (on a 7d moving average basis) and 48.5% in Arizona. In Beijing, while the latest outbreak is relatively small (106 cases since last Thursday), the decision to close schools in the city and have residents tested before leaving the city signals a slowing in economic reopening.
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US equities continue to welcome any high-risk event being put in the rear-view mirror – especially when rates markets look prime to consolidate lower