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The majority of North American equity indices finished higher  on Tuesday, able to snap their recent string of losses as the yield on the 10-year US treasury eased back to 2.82% and the DXY slumped through trend-line support to trade on the south side of 81.  The one notable exception for the rebound in equities was the Dow, as the DJIA faltered into the close, dropping into negative territory to mark its 5th  consecutive negative print.

A quick round-up of Asian trading saw a pretty quiet overnights session as traders turn into Fed watchers and are counting down the minutes to the release of the FOMC minutes.

The Nikkei managed to recover and finish higher on the day by 0.2%, after falling initially when Japan’s nuclear agency announced the latest Fukushima leak severity would be raised from Level 1 to Level 3.   The gains for the regional equity index were spurred by weakness in the yen, which pushed USDJPY back into the mid-97s where it has since been contained to a narrow range.

  • Greece needs 3rd  bailout; speculation any new package will be much smaller than previous programs
  • Markets jittery ahead of FOMC meeting minutes; S&P futures slightly lower before opening bell
  • Loonie selloff continues with broad USD strength overnight
  • Existing Home Sales (10:00am EST) on tap; median analysts’ estimates are for an annualized reading of 5.15M. Actual: 5.39 million.

The periphery of the Eurozone was back in the headlines overnight, although not much of a surprise considering the countries in question.   Yesterday, German Finance Minister Schauble stated that Greece would need a third bailout, and while not much of a shocker, subsequent reports from sources involved in the negotiations advised additional loans will not help the already debt-stricken country, and that any new programme would be significantly smaller than the previous two.   Elsewhere in the zone, after a brief pause, Spanish bad loans jumped to 11.6% of total lending, which amounts to the highest since records began in 1962.   While the most recent unemployment numbers gave hope the worst may be over in terms of economic stagnation, the resumption of the upward trajectory in non-performing loans suggest that things will remain on rocky ground for some time to come.   The EUR traded within a tight range during the Asian session, but has since lost ground against the USD, with the EURUSD pair sinking back below the 1.3400 handle.

Heading over to North America, the annualized reading of existing home sales for the month of July in the US is set to be released at  10:00am EST. Analysts are expecting to see a print of 5.15M in July, a 1.6% increase from the previous month.   As previously reported throughout this blog, the upward pressure on long-term rates since May is causing concern that the flow-through to mortgage rates could sap demand, stalling the recovery in the housing industry and the wealth effect that has been created from rising home prices.   Although the trajectory for existing and new homes sales is still of the upward variety, one has to wonder if the general public is feeling the squeeze and capitulating in order to rush through transactions before rates go higher.

Turning our attention to the Loonie, the Canadian currency has lagged the performance of the EUR and GBP so far this week, although it is safe to say the CAD has held its own when compared with the other commodity-linked currencies.   The fresh weakness in the DXY has come mainly in the form of EUR strength, as USDCAD posted a strong close  on Tuesday  above the 50-day moving average, signaling the momentum in turning against the Loonie.   Overnight price action saw the pair continue its trek higher, trumping the 1.0400 level and confirming the up-trend in USDCAD is still intact; if resistance in the mid-1.04s can be vaulted and held, there’s not much in the way for a re-test of the early July high at 1.0600.   A stark deviation from expectations on Existing Home Sales could cause a knee-jerk reaction for the USDCAD, but the Loonie will most likely be waiting for the FOMC minutes before making its next move.

North American equity futures are displaying a slight weight to the tape ahead of the opening bell, but relatively muted ahead of the big release.   Hydrocarbons are easing lower this morning as well, with WTI seeing offers in the mid $104/barrel range as news flow from Egypt quiets somewhat.   Precious metals are also feeling a little bit of a squeeze, with front-month Gold trading hands at 1,365/ounce, down 0.56% on the session thus far.   The DXY has managed to take back the 81 level as traders cautiously add USD exposure to their portfolio before the FOMC minutes, with the 10-year US yield hovering around 2.83%.

While the front half of the week has been largely skewed in favour of economic data points out of Asia, focus now shifts to the US and the juggernaut of controlling investor sentiment, the Federal Reserve.

As we get set for the North American open, as eyes are focused on the minutes from the July FOMC meeting, and how the discussions could set the stage for the next meeting in September.   The minutes are set to be released at  2:00pm EST, with the potential to see some choppy trading conditions after the statement as investors and traders reassess their expectations surrounding the size of the Fed’s balance sheet come September.   A rationale argument can be made that if the Fed was leaning towards scaling back their bond purchase program in September, they would most likely have preliminary discussions during the July meeting.   Those discussions could be focused around the logistics behind the size any potential taper, along with whether the cuts would be concentrated in either the treasury or mortgage-related sectors; any emphasis on these issues would most likely see traders flock to the DXY and continue to squeeze long-term yields higher.   On the other-hand, should there be emphasis placed upon a discussion surrounding the negative effects of stubbornly low interest rates and the backing-up of the 10-year yield throughout May and June, this could signal the Fed might be getting gun-shy surrounding a September taper, which would benefit high-beta currencies like the CAD, AUD, and EUR.   Make sure to speak to your risk-management teams ahead of the release, and discuss the different implications.