Kicking off the action in Asia, equity markets in Shenzhen and Shanghai came under pressure after MSCI declined to include mainland shares in its indices, this decision takes some of the wind out of the sails of Chinese equities because it forestalls an expected influx of foreign and institutional investment flow into Chinese equities that would result from bench markers including Chinese assets within their portfolios. Despite this, markets in Shanghai appear set to continue their ebullient outperformance largely on the back of the assumption that Beijing will continue to take steps to stimulate the economy as growth in the middle kingdom slips.
Outside of China, the yen is one of the key beneficiaries of a current bout of weakness in the greenback, surging 1.3 per cent. Much of this movement stems from earlier comments made by Bank of Japan governor Haruhiko Kuroda suggesting that the yen at current valuations is quite weak and that any further declines against the USD are unlikely. This comes on the back of economic data suggesting that the export sector of the Japanese economy continues to outperform with core machine orders beating expectations by a large margin, illustrating that investment in the Japanese economy remains strong.
Moving on to Europe, both equities and bonds are struggling as the skittishness in bond markets returns while both US Treasury and German Bunds yields hit multi-year highs. This return to volatility in European bonds has come as moods darken over the prospect of a negotiated settlement to the Greek financial crisis and as data points showing unexpected weakness in the French and Italian manufacturing sector have been released. The implications for the euro have not yet been fully borne out, with the common currency showing relative strength in the face of a broad fall in the buck but being slammed by the sterling as mixed data released in the UK has propelled the pound higher against all of its crosses.
North American equities are set to open on a weakened footing with equity futures suggesting that the S&P500 will open lower as investors contemplate what is next for a bull run in equities that is stretching into its seventh year. Outside of the equity markets the US dollar itself is struggling, with a half percent drop in the dollar index resulting in sharp losses versus yen, pound and loonie. It appears that this bout of weakness has largely been driven by the return of volatility in the bond market, as uncertainty begins to take hold across asset classes as the prospect of a rate rise in Autumn and the implications that come with it begin to materialize. In the last 24 hours, the dollar has lost over a cent against loonie and with federal budget numbers and the release of crude oil inventories set for later today price action in the pair can be expected to remain volatile as in the absence of more significant data points uncertainty has seeped into the market.
Further reading:
GBP/USD: Inverted H&S; EUR/USD: Double Bottom – RBS
A strong bounce on USDNOK would signal lower prices for crude oil
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