Fragile Stabilization For Global Capital Markets

After dramatic moves yesterday, the global capital markets are stabilizing today. The S&P 500 recovered after gapping lowing at the open yesterday and although the close was not particularly constructive, it is called to open firmer.

Asian equities were heavy, though China, Hong Kong, Taiwan and the Philippine markets were closed for public holidays. The MSCI Asia-Pacific was off fractionally. After a lower opening, European bourses have turned higher, helped by a positive UK employment report and a unexpected 0.4% rise in the euro area April industrial output. Global bond markets have also stabilized. JGB prices are little changed and the peripheral European bond yields are mostly lower.

The yen recorded what looks to be its biggest advance in three years yesterday and those gains have been shaved today. The dollar was pushed to almost JPY95.50 yesterday and buying was seen in Asia and into the European morning before running out of steam near JPY97. News from Japan was mixed.

On one hand, domestic corporate prices rose, extended the country's economic advancing streak to a 6th consecutive monthly rise and lifting the year-over-year rate to 0.6%, the highest since December 11. On the other hand, machinery orders fell 8.8% in April. The more than expected decline follows the out sized 14.2% increase in March, but recall that the March gain was to offset the 13.1% decline in January (February was 4.2%). Although the Abe government continues to push for corporate tax cuts to boost investment, Japanese companies have the huge savings, but lack sufficient investment opportunities at home.

Th euro extended yesterday's move above $1.33 in early Europe, but ran out of steam abruptly. An important target for many chartists was $1.3340. A break now of yesterday's lows near $1.3330 would call into question the euro's recent uptrend. We share two observations about the euro area industrial production report. First, sentiment and surveys appear to have been weaker than the actual figures.

We find this distinction often helpful, but it is often obscured in data-surprise models. Second, at his press conference earlier this month, Draghi implied that it would take a worsening of the data for the ECB to deliver another rate cut. The recent data, including the rise in industrial output, suggest no rate cut in Q3.

UK employment data, showing a larger than expected decline in the claimant count and favorable revisions for the April series and improved earnings data (for April as it is reported with an extra month lag), is consistent with the recent data stream pointing to stronger economic activity here in Q2.

Sterling extended yesterday's gains, but stalled at last week's high just below $1.5685. A break of this area could see sterling run to ward $1.5790, which is the equivalent of the $1.3340 area in the euro--representing a retracement objective of the large Q1 decline. The euro has slipped to near one-month lows against sterling, but talk of M&A flows and the trend line support drawn off the early and mid-May lows near GBP0.8465.