Overview: The small gains in China’s Shanghai Composite and the yuan is helping sentiment today. News that Italy’s budget watchdog may reject the government’s fiscal plans has helped stabilize Italian assets initially, but renewed pressure quickly materialized. Most Asian equities retreated while Europe’s Dow Jones Stoxx 600 is struggling to snap a three-day slide. US shares are trading heavily in Europe. US 10-year yields are a little higher today after yesterday’s holiday. European bond yields are mostly one-to-three basis points higher, with the 10-year Italian bond jumping more than 10 bp near midday in Rome. The 10-year JGB is at 15 bp, creeping closer to the upper end of the +/- 20 bp. The 30-year JGB yield is approaching 1%, and this level had been identified earlier this year by domestic asset managers as a possible inducement to keep more funds at home. Japanese banks bought a record amount of foreign bonds last month, and insurance companies bought the most in two years.  

The greenback is firm but mostly consolidating within yesterday’s ranges. The Dollar Index has been knocking on 96.00 for the past few sessions, and while intraday penetration has occurred, it has failed to close above that threshold. If satisfaction is not seen shortly, it may need to set back to get a running start, as it were. The euro is pinned near yesterday’s lows, near $1.1460 in the European morning. The bears want to push it through $1.1450, were stops and optionality may force additional sales. On the upside, there is a 1.6 bln euro option at $1.15 that expires today. The upper end of the consolidative range is seen around $1.1550. The dollar held above yesterday’s low just ahead of JPY112.80. Resistance is seen by yesterday’s North American high close to JPY113.40. There is a $415 mln option at JPY113 and $1.1 bln at JPY113.25 that are expiring today. Sterling is also having an inside day and appears comfortable in a $1.30-$1.31 range.  Options with a $1.30 strike for GBP325 mln will be cut today. The Australian dollar, which we thought was the most likely to lead a recovery, extended yesterday’s gains but faltered in front of $0.7100. Provided support holds near $0.7060, our favorable near-term outlook remains intact. The US dollar is firm against its northern neighbor, after CAD1.2950 support, where an $815 mln expiring option is struck. Yesterday’s greenback high of CAD1.3010 looks likely to hold today.