Though merely a few angstroms wide
The pressure that Covid’s applied
To all politicians
Has led to conditions
That many find unjustified

For instance, New Zealand has closed
Its borders, and rights they’ve bulldozed
To help in prevention
Of viral retention
Unfortunately, they’re still exposed

While the major headlines around the world continue to focus on the ongoing events in Afghanistan, at this point, they have had limited, if any, impact on markets in general.  And let’s face it, if for some reason there was a negative market impact traced to the Afgahi government collapse, it is pretty clear that the global central bank response would simply be to print more money thus supporting markets more completely.  But so far, that has not been the case (I just hope you weren’t long Afghani, interestingly the name of their currency as well, as it has fallen about 4.5% in the past 72 hours.)

This means we must turn our attention elsewhere for market moving information.  Asia continues to be the region with the most interesting issues, although Oceania is making a run for the money there in the following way; PM Ardern of New Zealand has imposed a level 4 lockdown for the next three days because a single case of the delta variant of Covid-19 has been found in the entire country!  This has resulted in a significant reevaluation of the RBNZ’s next move.  Prior to this devastating outbreak, the punditry had largely concluded that the RBNZ would be the first developed country to raise rates at their meeting tonight.  But now, second thoughts have crept in and a number of economists have changed their view and are calling for no change.  You would have thought that Covid was the most powerful force in the universe based on the (over)reaction of policymakers.  A single case!  At any rate, this change in view has resulted in NZD (-1.4%) falling sharply along with the local equity market, while NZ government bonds rallied almost a full point with yields declining by 9.7bps to 1.70%.  A single case! 

Meanwhile, in Australia, the government is proposing rounding up 24,000 unvaccinated children in a stadium to insure they are vaccinated as half that nation remains under lockdown.  The economic data Down Under has clearly rolled over with Consumer confidence the latest number to fall, while the RBA minutes, released last night, indicated that they were “prepared to act” in the event a further outbreak had a significant impact on the economy.  Not surprisingly, the market understood that to be a more dovish stance than the comments immediately following their meeting two weeks ago when they promised to start taper asset purchases next month.  AUD (-0.7%) is correspondingly under pressure as well today.

As to Asia, the big news continues to come from China where the government continues its relentless attack on its tech behemoths as President Xi has become more focused on removing any sources of power that do not emanate from his office.  Chinese equity markets sold off once again (Shanghai -2.0%, Hang Seng -1.7%) as investors read about the newest competition rules that were to come into force there and would break down the walls between financial networks run by Alibaba and Tencent.  It appears that capitalism with Chinese characteristics actually means, government-controlled businesses…full stop.

And so, before Europe even walked in, risk was under severe pressure and continues that way as I type.  Markets remain amazingly resilient with respect to business failures, but when it comes to potential policy failures, investors have less confidence that everything will work out well.  Remember, too, that it has been many months since we have even seen a 5% drawdown in the S&P 500, so do not be surprised if this is the catalyst for some further risk mitigation.

Thus far, today is definitely in the risk-off column with not just the Chinese markets declining, but the Nikkei (-0.4%) also sliding, albeit not nearly as drastically.  European markets are generally weak (Dax -0.24%, CAC -0.55%, FTSE MIB -1.0%, IBEX -0.95%) although the UK (FTSE 100 +0.1%) is holding its own after much better than expected employment data was released earlier.  It seems the combination of a highly vaccinated population and massive fiscal and monetary stimulus is helping the UK economy recover quite nicely.

It can be no surprise that bond markets are rallying sharply on this risk-off day, with Treasuries seeing yields fall by 3.7 basis points while all of Europe (Bunds -2.1bps, OATs -2.1bps, Gilts -3.8bps) are also seeing demand for haven assets.  This is even true for the PIGS where yields have fallen between 1 and 2 basis points.

On the commodity front, oil (-0.8%) continues to respond to concerns over slowing economic growth worldwide amid the spread of the delta variant, as does copper (-0.9%).  Both of these commodities are seen as the most sensitive to economic expectations.  Gold (+0.4% today, +6.2% from last week’s low) is performing the way many believe it should in times of stress.  As to the rest of the bloc, there are gainers and losers amid both base metals and agricultural products.

Finally, the dollar is on top of the world this morning, rallying against 9 of its G10 counterparts with only CHF (+0.1%) maintaining its status as a world haven.  Granted, the commodity currencies are the worst off, with CAD (-0.35%) also under pressure.  Interestingly, despite the positive UK data, the pound (-0.45%) is feeling the weight of the dollar today.

Emerging market currencies continue to struggle in general, although there are a couple of positive stories.  First up is PHP (+0.45%) which saw equity inflows as bargain hunters were seen following several days of equity market declines, and the central bank indicated no policy change was upcoming, an upgrade from concerns over further easing.  THB (+0.45%) was also stronger on the back of comments from the central bank governor as well as the fact that it had fallen so far lately, more than 6% in the past two months and back to 3-year lows, that there was a bout of profit taking.  On the downside, KRW (-0.65%) continues to be the region’s laggard as ongoing concern over chip stocks has encouraged more equity market selling (KOSPI -0.9%) and seen funds flow out of the country.  Adding to this pressure is the continued increase in Covid infections and that has been enough for the won to fall 3.4% in the past two weeks.

On the data front, this morning brings Retail Sales (exp -0.3%, +0.2% ex autos) as well as IP (0.5%) and Capacity Utilization (75.7%).  The Retail Sales data has been quite volatile lately, as each wave of Federal stimulus money has quickly found uses, but when that money has not been forthcoming, sales decline sharply.  I have seen estimates that we could see a MUCH worse than expected outcome here, something on the order of -2.5%, which would be of a piece with the weaker Michigan and Philly Fed data that we have seen lately.

This afternoon, Chairman Powell hosts a town hall meeting with educators, which does not seem like a venue for new information.  We also hear from the uber dove, Neel Kashkari.

While I understand tapering talk remains all the rage, I cannot help but look at what clearly appears to be a weakening economic impulse and wonder if by the time the Fed says they want to start tapering, the data are pointing in the wrong direction and it never comes to pass.  In that event, I feel the dollar, which has greatly benefitted from tapering talk, is likely to fall back, maybe quite a bit.  But that is still a few months away.  For now, it feels like the dollar remains numero uno.

Good luck and stay safe
Adf