Intraday Market Thoughts Archives

REVALUATION REVERBERATIONS die down as China ends up doing nothing after last weekend's announcement to render its currency regime more flexible. In fact, Beijing never actually said it would revalue its currency, but instead, will add flexibility to its basket system, which is allowed to move +(-) 0.5% daily. We noted in Sunday's IMT that Asian currencies and global equities would rally on hopes of higher purchasing power in the yuan, but also warned the importance of seeing through the rally into week's end. As stocks lost all of those gains, emphasis shifts back to Spanish banks, Greek debt, US housing (post-home buyer credits) and growth impact of austere UK budget. Yuan revaluation remains in the cards, but don't bet on anything more than 7-8% from here onto year-end. USA WORLD CUP SQUAD seeks to avenge the 2006 defeat against Ghana as it faces the sole African team in the WCup in Rustenburg tonight. We expect Ghana to beat Bradley's boys and advance to 1/8th finals. Santiago had riots last night following Chile's defeat to Spain, despite the fact that both nations advance to 1/8 finals. Perhaps the Chileans were angry by the fact that their inability to head the Group sends them to face Brazil, rather than Portugal, which will face Spain in the IberoClash.

RIDDLE (Soccer + Markets) What does the Dutch football (soccer) squad + LehmanBros collapse have in common? By the way, Ashraf had tipped holland to win the Wcup back in May.

WHEN IN DOUBT REMAIN DOVISH. Yesterday's FOMC decision may have been uneventful but the statement did sound more dovish on two fronts: 1) downgrading "financial conditions" and 2)highlighting "depressed" housing starts. The record tumble in US April new home sales to 47 year lows was nearly double the 19 pct forecasted decline posted in our last IMT. The fact that US CEO confidence hit 4-yr highs and US home sales at 47 year lows will resurrect the debate of lagging vs. leading economic dynamics. We still see EUR retesting 1.1650, while the new Australian PM is not expected to impact the Aussie's trajectory in the same way as toppish copper prices and the upcoming election later this year. US indices remains below their 200-day MAs w/ SP500 well below 1111. WORLDCUP: US led Group C by scoring in injury time against a hesitant Algeria, followed by an improved England. ITALY IS ELIMINATED out of the tournament after a humiliating 3-2 defeat to minnows Slovakia. The Last time Italy failed to qualify for the 2nd round of the Wcup was in 1974....I'm tipping England to beat Germany but still favouring Holland to take it all.

PBOC OVERSHADOWS FOMC as hardly a word is said about this week's FOMC announcement. Although China's central bank used the rationale of improved domestic and global economy for its decision to allow more flexible currency regime ie further strengthening, the US central bank is widely expected to reiterate its cautious mantra of federal funds rate remaining 'exceptionally low ... for an extended period". If no hint is made about selling the Fed's assets, then markets have a good reason to regain last week's highs. Note the SP500 has fallen back below its CURRENT and PREVIOUS 200-day moving averages of 1111 and 1107 respectively after last week's decisive break above the average of 1107. Jitters with European banks rather then the Fed were cited as a reason to the retreat in stocks (as well as latest US housing data). UK BUDGET had enough cuts and tax hikes to appease the budget hawks, which was positive for GBP (see retreat in EURGBP eyeing 0.8150). Algeria and Ghana are the only remaining 2 African nations to have hope for qualifying to the 1/16 round of the World Cup as Algeria faces USA at 1400 GMT and Ghana faces Germany at 1830 GMT.

CHINESE BABY STEPS wikk likely be the way of any yuan strengthening against USD after Beijing announced more flexibility in their FX peg regime. China allowed the yuan to rise 0.43% on Monday, which is close to the maximum daily permissible fluctuation of 0.5%. China could allow more of such increases ahead of this week's G20 meeting (such as three daily gains of 0.3%-0.5%) to achieve 2.30-2.50% increase. But the more relevant matter is that currency tightening is unlikely to prove as effective as monetary policy tightening (interest rate hikes and higher reserve requirements) to stem the +3% annual CPI. We noted in prev IMT that world stocks and Asian FX will be boosted on hopes of higher Chinese demand but will these gains hold into the rest of week. As markets await to see whether Chinals FX announcement was mereley political posturing ahead of the G20, they will want to recall that US stocks have mostly declined during the week after June expiration ie next week. EURUSD to test $1.2270 as tensions remain with French banks. In the WorldCup, LatAm nations remain the biggest winners following Chile's 1-0 victory vs. Switzerland. Spain's modest 1-0 win over Honduras may not prevent the group from turning into the battle over goal difference, while Portugal's 7-0 win over KoreaDPR could mean that Brazil will play Spain in the 1/16 round.

CHINA's ANNOUNCEMENT TO INCREASE YUAN FLEXIBILITY would have a negligible market impact (no major change by end of week) if any currency revaluation is no more than 2%. If the revaluation is more than 2% then we could see some upside in commodities, Asian currencies as well as global equities on the rationale that a stronger purchasing power would increase Chinese imports for global trade. Only to the extent that markets worry about the negative impact to Chinese exports would equities sell-off. Some Chinese textile makers are already on the edge of bankruptcy. The other issue is that of the FX band, which if widened from 2.1%, then it could raise the risk of a potential DEPRECIATION of the yuan in the event of falling stocks. One last thing; the MORE important factor is the SUBSEQUENT revaluation of the yuan over the rest of the year and NOT just the initial annnouncement of today or this week. Ashraf is still in South Africa for the World Cup (on holiday).