The Dollar

The stronger dollar is the story this morning, particularly against the yuan which continues to weaken. The onshore yuan is having its worst day vs the US dollar since August 12th 2015. Remember then? If you’re new to this and don’t, it was a day after the PBOC devalued the yuan which resulted in a temporary market earthquake. Both the A share Shanghai comp and the H share index in Hong Kong sold off about .50%. The H share index closed at a fresh one year low. Copper is sharply lower by almost 3% to a one year low. The dollar is also creeping higher again against most other currencies and according to Factset is the #1 factor companies are citing as having a negative impact on earnings. Of course other things are offsetting this and Q2 season, while early, has been great so far. I got this chart from Factset off Twitter. Tariffs yet are having little impact. I emphasize ‘yet.’

ONSHORE YUAN

In light of this weakness, especially today, a spokeswoman for China’s State Administration of FX is out saying that they would lift “macro prudential management…micro level market supervision…and use counter cyclical” measures to deal with the volatility coming its way with this yuan weakness. I don’t know what any of these measures mean though in terms of what they’ll do but them seem to be preparing.

In yesterday’s II market sentiment number, we saw another jump in Bulls and a 5 week high in its spread with Bears. Also, those expecting a Correction is at the least since late January. In today’s AAII survey of individual investors saw Bulls drop 8.4 pts after last weeks 15.2 spike but all of them and then some went Neutral, not Bearish. Bears fell 4.2 pts, down for a 3rd week to a 5 week low. Those that are Neutral, neither bullish nor bearish, rose to a two month high.

With worries over where global trade goes from here, Japan reported that its exports in June rose 6.7% y/o/y, about in line with the forecast of up 7%. The yen was a help. Exports to China jumped 11.1% while falling to the US by .9% (first drop to the US in 17 months). Imports grew just 2.5% y/o/y, half the forecast. The biggest story this week for Japanese trade was its trade agreement with the EU which will get rid of many tariffs. Bottom line, I take note the fall in exports to the US but it’s still early to fully gauge the impact of tariffs on the global flow of goods. The yen is at a 6 month low vs the US dollar today.

The Chinese proxy that is Australia reported a much better than expected jobs figure for June. Employment grew by 50.9k, well more than the estimate of up 16.5k. The unemployment rate though held at 5.4% as the participation rate rose. This strength does raise the possibility of an RBA rate hike and rates are rising across their curve. The 2 yr yield in particular is up 3.5 bps to a 3 month high at 2.10%. It is just 3 bps from a 3 year high. The Aussie$ though is down vs the dollar, along with many others today.

We saw a miss in UK retail sales for June relative to expectations. Retail sales ex auto fuel fell .5% m/o/m instead of rising by .2% as forecasted. The y/o/y gain of 2.9% is still good and the 2nd best since last Spring. I’m going to guess that many were watching the World Cup and not shopping at the same time. Thus, I’m not going to make much of this figure today. The pound though is breaking below $1.30, the weakest since last September.