The dollar is the king of castle, extending yesterday's post-Fed rally across the board. Emerging market currencies have been particularly hard hit and we note that the Turkish lira is at new record lows. Asset markets are also under strong downward pressure. The MSCI Asia-Pacific Index lost 4%. The MSCI Emerging Markets Index is off about 2.5%, while the Dow Jones Stoxx 600 is down almost 2% near midday in London.
Global fixed income markets are under strong downside pressure, with peripheral European bond yields up 20-25 bp and core bond yields rising 8-15 bp. The US 10-year yield is now above last year's highs and the 30-year yield is above 3.5%, for the first time since Q3 2011. Commodities are offering no refuge as gold is off more than 3% and oil off more than 2%.
Here are 10 things that you should know:
1. The Federal Reserve noted that the downside risks to the economy that prompted QE3+ last fall, have diminished and that if the economy continues to expand broadly in line with the Fed expectations it can begin tapering later this year and end QE sometime in the middle of next year. While many observers had previously thought this meant reduced asset purchases in the September/October period, there is some speculation that it could begin as early as next month. The "if" still seems significant to us. Although the Fed revised down its GDP forecast for this year, it is still above the market consensus. We also note that the 3-month average for private sector job growth is nearly 20% below the 6-month average. The easing of price pressures, which the FOMC statement recognized as partly transitory, looks set to continue in the coming months and this may be of growing concern, as reflected in Bullard's dovish dissent. Nevertheless, the markets are likely to become more sensitive (volatile) to US data in the coming period.
2. The liquidity squeeze in China continues. The PBOC drained CNY2 bln via 3-month bills today and the 7-day repo rate jumped to 25% at one point. At the same time, HSBC flash manufacturing PMI slumped to a 9-month low of 48.3 from 49.2. The forward looking new orders component hit a 10-month low, while new export orders fell to 44 (from 48.9) and is the lowest since March 2009. This news would have weighed on a emerging markets and commodities even without the impulses from the Federal Reserve.
3. The euro area reported better than expected flash PMIs. The manufacturing PMI rose to 48.7 from 47.8 in May. Although still below the boom/bust 50-level, it is still the highest since Feb 2012. The flash service PMI rose to 48.6 from 47.5 and is the highest since March 2012. Of note, the German manufacturing PMI slipped to 48.7 from 49.4, which was seen to be a weather induced fluke, while the service PMI rose to 51.3 from 49.7. This is the first time since March that the service component was above 50. France's readings showed more resilience, but both the manufacturing (48.3 from 45.5) and services (46.5 from 44.3) remain below 50 and may not show expansion until the middle to end of Q3.
4. There was some concern that if Berlusconi's conviction for tax evasion was upheld on his second and final appeal, he could topple Italy's fragile Letta government. Berlusconi's appeal was rejected yesterday, but the former prime minister indicated his allies would continue to support the government. He faces a four-year jail terms and a 5-year ban on holding public office.
5. The UK's May retail sales rose more than twice what the market expected. Headline retail sales rose 2.1%, more than offsetting the 1.1% decline in April and March's 0.5% fall. Even excluding fuel, retail sales rose 2.1%. The majority of the MPC rejected the Governor King-led faction that has persistently pressed to re-launch the gilt purchase operations. Carney replaces King next month and may find it just as difficult, especially with the uptick in inflation and economic activity, to be any more activist. This may be helping cable almost keep pace with the dollar today. It is the strongest of the major foreign currencies today.
6.The Norwegian krone is the weakest of the majors, falling about 2% against the dollar. It had been under some pressure yesterday following Sweden's decision to sell more of its Nordea stake. Today's impetus comes from the Norges Bank decision to push its rate hike further out into the end of next year.
7. The Swiss National Bank met and left policy and the cap on the franc unchanged. It did warn that growth in Q2 was not matching the Q1 expansion of 0.6%. It provided some forward guidance insofar is it suggested that the cap is likely to be in place for a few more quarters. Of note, the SNB also acknowledged that it held about CHF65 bln in equities on its balance sheet and that it represented holdings in all the advanced economies. Many observers had thought its equity holdings were in domestic companies primarily.
8. Japan's weekly MOF portfolio flows showed Japanese investors continued to sell foreign assets. In the week ending June 15, Japanese investors sold JPY402.5 bln worth of foreign bonds, which is a little above the recent average. They also sold JPY130 bln of foreign stocks, which is below the average pace. Foreign investors, for their part, sold a small amount of Japanese shares (JPY3.6 bln) and were better buyers of Japanese bonds (JPY313.3 bln).
9. New Zealand's Q1 GDP disappointed, expanding 0.3% compared with 1.5% in Q4 and expectations of 0.5%. The combination of the US and Chinese news, coupled with the pressure on the Australian dollar and the disappointing data, has pushed the Kiwi to new 2013 lows today. The Australian dollar is extending its losses as well today. The Aussie was above $0.96 at the start of the week and is now nearing $0.9160.
10. The US reports a slew of data, which as a whole, are unlikely to help steady the markets. Weekly initial jobless claims are expected to be largely flat, while continuing claims decline. The Markit preliminary PMI for June is expected to have ticked up to 52.7 from 52.3. Existing home sales are expected to have edged higher and at a 5 mln unit annual pace will be the highest since late 2009. The June Philly Fed survey is also expected to have improved to -2.0 from -5.2