Key Highlights

• U.S. Secretary of State Marco Rubio is leading the overall security guarantees coordination effort ahead of a potential trilateral meeting between Presidents Zelenskyy, Putin and Trump.

• S&P Global Ratings affirms its AA+ long-term rating and A-1+ short-term rating for the U.S., with a stable outlook for the long-term rating.

• Hong Kong dollar strengthens past the 7.80 midpoint of its trading band against the dollar for the first time in three months.

Chart of the Day

FOREIGN PARTICIPATION TAKING THE LEAD IN U.S. EQUITIES

^{Source: BNY}

International diversification away from U.S. assets has been a defining allocation theme this year. The narrative peaked in April following the “Liberation Day” tariffs, when signs emerged of markets shifting away from the dollar and Treasurys; in fairness, there was clear de-rating at the time, but this only opened up value prospects for cross-border investors who went back into U.S. Treasurys in earnest. By contrast, diversification away from U.S. equities has been less evident thematically, as original investment intent was seen as relatively insulated from trade or fiscal narratives. Despite some large corporates being exposed to exports, secular themes in technology have continued to attract capital, with the current capex cycle expected to outlast monetary, fiscal and political dynamics. While the dollar and Treasury diversification story has often seemed more rhetorical than realized, the case appears even stronger for equities. In terms of participation, cross-border flows into U.S. equities were above their historical trend for much of the first half of the year. It was only in July that international investors stepped back, albeit from a relatively high level, leaving domestic investors to offset weaker foreign participation. As summer draws to a close, however, cross-border investors are once again taking the lead in U.S. equity transaction volumes. Within technology in particular, international investors appear to see limited alternatives.

What's Changed?

The unprecedented gathering of European leaders in the White House yesterday has not produced any clear results, but the visitors were likely encouraged by President Trump’s greater openness to the U.S. providing security guarantees for Ukraine. Nonetheless, markets have acknowledged that the process will be slow and is unlikely to be a major sentiment driver in the near term. The day ahead is extremely light on data and events, providing space for pre-positioning ahead of the Jackson Hole Economic Symposium, which opens on Thursday. Given the current run of price and labor market data, conviction in yield curve steepening appears stronger than in equity gains, which speaks volumes about the state of the cycle. While inflation premiums pose the biggest short-term concern for bond markets, fiscal issues are never far from the surface. S&P’s affirmation of the U.S.’s credit ratings, citing a larger revenue cushion from higher tariff rates, may be seen as an initial relief; however, there is also a risk that any gains in term premiums will simply be redistributed through to the inflation side. The most optimal path would certainly involve “paying down debt,” as mentioned by Treasury Secretary Scott Bessent when asked last week about the best use of tariffs. However, recent history indicates that fiscal consolidation through expenditure adjustments would have the strongest disinflationary impact. Meanwhile, activity levels remain robust in APAC markets, with the Hong Kong dollar finally reversing its recent weakness as retail investors continue to push flows into regional equities. Nonetheless, participation by cross-border investors, especially from beyond the region, is relatively limited amid concerns that data and earnings validation is lacking.

What You Need to Know

S&P Global Ratings affirmed the US’s AA+ long-term rating with stable outlook, noting tariff revenues will help offset fiscal pressures from recent tax and spending legislation. The agency said higher effective tariff rates are expected to generate meaningful revenue, cushioning weaker fiscal outcomes from fiscal policy changes. S&P projects that the general government deficit will average 6% of GDP between 2025 and 2028, compared with 7.5% last year, though net general government debt is forecast to surpass 100% of GDP within three years. The stable outlook reflects expectations that the fiscal deficit will neither materially improve nor persistently deteriorate in the medium term. S&P Mini -0.162% to 6458.75, DXY -0.154% to 98.016, 10y UST +1bp to 4.343%.

President Trump said he has called Vladimir Putin to begin arrangements for a summit with Volodymyr Zelenskyy. He has proposed a bilateral meeting between the Russian and Ukrainian leaders followed by a trilateral session including himself. Trump confirmed that no time or location had been set and tasked Vice President JD Vance, Secretary of State Marco Rubio and envoy Steve Witkoff with coordinating logistics. Zelenskyy welcomed Trump’s support for security guarantees and for leaving territorial issues to direct talks with Putin, while European leaders including Germany’s Friedrich Merz and France’s Emmanuel Macron suggested a summit could be finalized within weeks. NATO’s Mark Rutte said discussions focused on security guarantees, with further coordination expected in coming days. The U.S. and allies have stated that they will immediately start on a Ukraine security plan. Euro Stoxx 50 +0.123% to 5441.33, EURUSD +0.146% to 1.1678, BBG AGG Euro Government High Grade EUR unchanged at 2.863%.

Hong Kong’s dollar strengthened to 7.7991 against the U.S. dollar, its firmest level since May. This was supported by inflows through the Stock Connect and a sharp rise in local borrowing costs. One-month Hibor surged for a third consecutive session and has nearly tripled over the past week, helping narrow the city’s interest rate gap with the U.S. to its smallest since May. HKD 1-month Hibor rose 56bp to 2.57%, the largest daily spike since October 2008. The tighter spread has reduced the appeal of carry trades against the currency, while sustained mainland investor purchases of Hong Kong equities have further bolstered demand. The combined effect lifted the Hong Kong dollar back to the midpoint of its trading band for the first time in three months. Hang Seng -0.188% to 25129.54, USDHKD -0.264% to 7.7994, 10y HKGB -1.2bp to 1.417%.

India and China have pledged to continue to mend ties in the face of U.S. challenges, as Chinese Foreign Minister Wang Yi meets with Indian Prime Minister Narendra Modi and National Security Adviser Ajit Doval, who noted ties have seen an “upward trend.” Indian Foreign Minister Subrahmanyam Jaishankar said that, after a difficult period, the two countries are now aiming for a “stable, cooperative and forward-looking relationship,” stressing that differences must not become disputes. Wang called on both nations to act as partners, oppose unilateral bullying and promote multipolarity. Talks also highlighted resuming exchanges, maintaining border peace and enabling Indian pilgrimages to China. Modi is expected to meet Xi Jinping later this month, while Wang Yi is heading to Islamabad later this week, with assessing burgeoning ties between the U.S. and Pakistan high on Beijing’s agenda. SENSEX +0.499% to 81679.06, USDINR -0.267% to 87.12, 10y INGB +3.4bp to 6.531%.

What We're Watching

U.S. July housing starts are seen slowing to 1,300k vs. 1,321k.

U.S. July preliminary building permits are expected at -0.4% m/m, 1,388k vs. -0.1% m/m, 1,393k in June.

U.S. Treasury sells $85bn in 6-week bills.

The Reserve Bank of New Zealand is expected to cut its overnight cash rate by 25bp to 3.00%.

What iFlow is Showing Us

Mood: iFlow Mood remains in risk-off zone (-0.24). Equities continued to be sold, against steady demand for core sovereign bonds.

FX: The overall bias for FX flows is on the sell side, led by HKD and THB. JPY, EUR, ZAR, TWD, ZAR, PLN and COP posted light outflows, against light selling for the rest, including USD and GBP. Notable shift on CLP scored holdings, which turned negative or underheld for the first time this year.

FI: Mixed and light flows. U.S. Treasurys, U.K. gilts, and Eurozone, Indonesian and Philippine government bonds posted the most inflows, against light selling in Chinese, Mexican and Canadian government bonds.

Equities: Israeli and Mexican equities posted the most relative selling, while Turkish, South Korean and Brazilian equities saw the best demand. In the G10, the U.S. and Japan were lightly bought, against selling in U.K. and European equities. Within EM APAC, the real estate and consumer discretionary sectors were most sold, against good buying interest in the materials and industrials sectors.

Quotes of the Day

“Peace is not absence of conflict, it is the ability to handle conflict by peaceful means.” – Ronald Reagan

“If you want peace, you don’t talk to your friends. You talk to your enemies.” – Desmond Tutu

Economic Details

The euro area’s June current account surplus rose to €36bn from €32bn in May, with surpluses in goods (€23bn), services (€16bn) and primary income (€14bn) partly offset by a €17bn deficit in secondary income. For the 12 months to June, the surplus stood at €318bn, equal to 2.0% of GDP, down from €386bn (2.6%) a year earlier. This was mainly attributable to a swing in primary income from a €43bn surplus to a €7bn deficit, alongside a wider secondary income deficit and lower services surplus. On the financial account, euro area residents’ net purchases of non-euro area portfolio securities reached €814bn, while non-residents bought €749bn of euro area securities over the same period. Euro Stoxx 50 +0.123% to 5441.33, EURUSD +0.146% to 1.1678, BBG AGG Euro Government High Grade EUR unchanged at 2.863%.

The U.K.’s Blue Book 2025 raised the level of nominal GDP, now estimated to have been 1.5% higher in 2023, on improved R&D data and updated measurement of multinational pharmaceutical activity. Average annual volume growth over 1998-2023 remains at 1.8%, with cumulative growth for 1997-2023 revised up to 57.6% from 57.0%. Annual real GDP growth for 2023 was revised down 0.1 percentage points to 0.3%, following a 0.3 percentage point upward revision for 2022. At end-2023, GDP was 2.2% above its pre-pandemic Q4 2019 peak, up from the previous 1.9% estimate, while real GDP per head was 1.0% below Q4 2019, revised from 1.4% lower. FTSE 100 -0.008% to 9156.99, GBPUSD +0.097% to 1.3517, 10y gilt +1.7bp to 4.755%.

Australia August Westpac consumer confidence rose to 98.5 vs 93.1, the highest since March 2022. The Consumer Sentiment Index is a composite measure based on five sub-indexes: two tracking assessments of family finances, two tracking expectations for the economy and one on whether consumers see now as a good time to buy a major household item. All components posted gains in August. Consumers appear much less anxious about their finances. The “family finances vs. a year ago” sub-index surged 6.2% in August to 84.2, still a pessimistic read but only marginally below the long-run average of 88. Meanwhile, expectations are becoming outright positive, with the “family finances, next 12 months” sub-index rising a further 5.4% to 106.8, slightly above the long-term average of 106.6. Interestingly, the gains are not confined to or even being led by the “mortgage belt,” the section of consumers that stand to benefit most directly from lower interest rates. Some of the strongest improvements in the August month were among renters, suggesting that easing cost-of-living pressures, including slower growth in rents, have also been a positive. That said, the mortgage belt has seen a bigger improvement in sentiment around finances since the middle of last year. ASX +0.011% to 4963.74, AUDUSD -0.108% to 0.6484, 10y ACGB +5.8bp to 4.327%.

New Zealand Q2 June PPI (outputs) rose 0.6% q/q vs 2.1% in Q1 2025. Prices paid by producers of goods and services (inputs) rose 0.6% q/q vs 2.9% q/q in Q1 2025. Looking into the breakdown, the largest output industry contributions were from electricity, gas, water and waste services, up 6.2% q/q; manufacturing, up 0.3%; and agriculture, forestry and fishing, up 0.9%. The largest input industry contributions were from electricity, gas, water and waste services, up 3.5%; agriculture, forestry and fishing, up 1.2%; and retail trade and accommodation, up 1.2% q/q. NZX 50 -0.323% to 12928.68, NZDUSD -0.034% to 0.592, 10y NZGB +4.4bp to 4.491%.

South Korea Q2 household credit rose sharply to ₩1,9528tn from ₩1,928.3tn in Q1 2025. The quarterly increment of ₩24.6tn is the biggest since Q3 2021. Total household loans came in at ₩1,8326tn, +₩23tn vs. ₩1,809tn in Q1 2025. On the year, household credit grew at 3.0% y/y from 2.4% in Q1 2025, the fastest pace since Q1 2020. The aggressive accumulation of debt is a structural issue and one of the top concerns for the BoK. KOSPI -0.809% to 3151.56, USDKRW +0.163% to 1390.2, 10y KTB +5.3bp to 2.835%.

Fitch Ratings believes India-based corporates generally have low direct exposure to U.S. tariffs, but sectors that are currently unaffected, including pharmaceuticals, could be hit by further U.S. tariff announcements. The risk of second-order effects from existing tariffs is also rising. A U.S.-India trade deal, if secured, would reduce these risks. The U.S. is a key export destination for Indian pharmaceutical companies. Significant U.S. tariffs on pharmaceutical products are not yet factored into Fitch’s rating base case and could pose downside risks to its operating performance. The competitive industry landscape could limit some key pharmaceutical companies’ ability to pass on higher costs, despite the non-discretionary demand for their products. SENSEX +0.499% to 81679.06, USDINR -0.267% to 87.12, 10y INGB +3.4bp to 6.531%.

Malaysia’s July trade rose 3.8% y/y to MYR 265.9bn, with exports up 6.8% to MYR 140.4bn, imports up 0.6% to MYR 125.5bn, and the trade surplus jumping 120.7%. The export gain was driven by a 42.0% surge in re-exports to MYR 37.0bn, while domestic exports, making up 73.6% of the total, fell 1.9% to MYR 103.4bn. On a m/m basis, exports rose by 15.5%, imports by 10.9%, total trade by 13.3% and the trade surplus by 78.2%. For January-July, exports grew by 4.3%, imports by 5.1% and total trade by 4.7%, while the surplus shrank by 4.7%. Imports of capital goods increased by 20.6% y/y, while intermediate and consumption goods imports fell by 17.8% and 5.0%, respectively. KLCI +0.334% to 1590.25, USDMYR +0.043% to 4.2245, 10y MGB +1bp to 3.368%.