Dollar Sports Heavier Tone As Yesterday’s Bounce Runs Out Of Steam

Several developments have attracted our attention, but the key take away is that the global capital markets have stabilized after appearing downright frightful at the end of last week, as stocks, yields, and the dollar plummeted. Equities rallied om Monday and there was follow through buying in Asia on Tuesday. The US S&P 500 gapped higher yesterday, leaving a four-day island in its wake (after gapping lower on September 5) and posting a new record closing high. The dollar was two-three standard deviations below its 20-day moving average at the end of last week, and the recovery on Monday helped ease the over-extended condition of the market. The US 10-year yield is about 10 bp above the low hit last week, amid optimism that the Irma storm may not have been as devastating as initially feared before hitting Cuba sapped some of its energy.  

There are three macro developments to note. First, after tough rhetoric, the Trump Administration chose to dilute some of its demands for another round of sanctions on North Korea in order to ensure Chinese and Russian consent. It succeeded in winning a unanimous decision from UN Security Council. South Korea’s Kospi advanced for the second consecutive session. Its gains are modest (0.75% this week) in line with the MSCI Asia Pacific Index (except that the MSCI benchmark is at new 10-year highs). The Korean won itself remains a little lower on the week (~-0.2%). Of course, the underlying challenge has not been addressed, and many seem to be increasingly skeptical that the sanction regime results in a change in behavior of North Korea.   

Second, the Great Repeal Bill that is the legal basis for Brexit was approved by Parliament. The fight within the Tory Party seemed to have been deferred, as the fundamental issue of ministerial powers remains a divisive issue. In some ways, the UK government is fight a two-front battle. The first is with the EU, and it does not appear yet that sufficient progress has been made on the terms of the separation from the EU’s vantage point that would allow the next stage in the negotiations to start next month as some had hoped.