Sigh Of Relief Weighs On Yen And Gold, While Lifting Equities And The Dollar

London (Aug 14)  The lack of new antagonisms over the weekend between the US and North Korea has prompted the markets to react accordingly. Already before the weekend, we detected some signs that at least some market participants had begun looking past the dramatic rhetoric.

The relief rally spread today.  The MSCI Asia Pacific Index, excluding Japan, rallied 0.8% to snap a three-day fall. Korea's Kospi rose 0.6%, ending its three-day nearly 3.3% slide. Backing the regional recovery, Japanese markets, returning from a long holiday weekend, fell. The 1.1% drop in the Topix was the largest decline since May and extends the losing streak to the fourth consecutive sessions and six of the past seven - no safe haven here.

At the same time, the gap lower opening in Tokyo was still a bit surprising given the strength of Q2 GDP.  The 4.0% annualized expansion easily beat estimates for a 2.5% gain and 1.5% in Q1. Private consumption rose 0.9%, nearly twice what was expected. Business spending was also twice as strong as expected, rising 2.4%. Net exports shaved 0.3%. Public investment gained 5.1% in Q2. The one troublesome element was the minus 0.4% GDP deflator.

The 1% quarterly expansion for Japan puts it atop the G7.  Senior BOJ officials had intimated if the global economy recovery spilled over and lifted the Japanese economy then officials might consider increasing the 10-year yield target, which is now +/- 10 bp around zero. We suspect that it will take a further rise in other benchmark yields, including US Treasuries to prompt such a discussion.

After dipping below JPY109 before the weekend, the greenback rallied to JPY109.80 steadily through the European morning. There is a large (~$1.2 bln) option struck at JPY110. The euro has approached the JPY129.70 area, which is a retracement objective of the decline since JPY131.40 was seen on August 2.

Source: SeekingAlpha