Fed and trade threats to drive markets

Monday September 24: Five things the markets are talking about

Global equities are under pressure as China called off planned trade talks with U.S, potentially triggering an escalation in the tariff war between the world’s largest economies.

Note: U.S’ tariffs on +$200B in China goods took effect at midnight, while China’s counter tariffs on +$60B of U.S goods also came into effect this morning.

Presidents Trumps’ veiled threat to OPEC to increase global crude supply was met with a tepid response over the weekend. The Saudi oil minister said that the market was adequately supplied.

The ‘big’ dollar continues to find support on pullbacks, while Treasuries trade under pressure along with Euro sovereign bonds.

Topping investors’ agenda this week is the FOMC meeting along with the Fed’s updated forecasts and the chair’s quarterly press conference (Sep 25-26). The market is looking for a third +25 bps rate hike and is pricing in another one for December. Investors await Fed chair Powell’s views on trade and tariffs.

Elsewhere, the Reserve Bank of New Zealand (RBNZ) will also meet Wednesday (Sept 26) and no rate hike is expected. The U.K posts its final estimate of Q2 GDP, while the Eurozone releases the September flash harmonized index of consumer prices (Sept 28). Also on Friday, Canada will release its monthly GDP data for July.

1. Stocks see red

Asian volumes were light and liquidity a concern as markets in China, Japan, South Korea and Taiwan were closed for holidays. Both Hong Kong and South Korea will be closed on Tuesday.

Note: Despite Japanese markets closed, Japans Economy Minister Motegi and USTR Lighthizer are expected to hold trade talks today in New York. Japan is said to considering a bilateral trade agreement with the U.S.

Down-under, Aussie stocks edged lower overnight, as lower commodities prices hit materials stocks while financials slipped on new revelations of wrongdoing in the sector revealed in a quasi-judicial inquiry. The S&P/ASX 200 index fell -0.1% at the close of trade. The benchmark rose +0.4% on Friday.

In Hong Kong, stocks plummeted after the U.S imposed fresh tariffs on an additional +$200B of Chinese imports and as Beijing cancelled planned talks between the two sides. The Hang Seng Index fell -1.62%.

In Europe, regional bourses opened in the ‘red’ and continue to trade lower. Market risk sentiment continues to be impacted over trade concerns as U.S tariffs came into effect at midnight and China cancels trade talks – consumer discretionary sector among worst performers.

U.S stocks are set to open in the ‘red’ (-0.2%).

Indices: Stoxx50 -0.3% at 3,419, FTSE -0.1% at 7,480, DAX -0.3% at 12,389, CAC-40 -0.2% at 5,481, IBEX-35 -0.5% at 9,543, FTSE MIB -0.5% at 21,427, SMI % at , S&P 500 Futures -0.2%

2. OPEC, Russia reject Trump’s call for immediate boost to oil output

Yesterday in Algiers, both OPEC and Russia ruled out any immediate, additional increase in crude output, effectively rejecting Trump’s calls for action to “cool” the market.

The recent price rally has mainly stemmed from a decline in oil exports from OPEC member Iran due to fresh U.S sanctions.

Also, according to OPEC’s projections, a strong rise in non-OPEC production could exceed global demand growth, which could eventually put pressure on prices.

Oil prices remain better bid this Monday morning as U.S. markets tighten ahead of Washington’s plan to impose new sanctions against Iran.

Brent crude futures are at +$79.74 per barrel, up by +94c, or +1.2%. U.S West Texas Intermediate (WTI) crude futures have rallied +74c, or +1.1%, to +$71.52 a barrel.

The market remains concerned about U.S inventory levels. U.S commercial crude oil inventories (EIA) are at their lowest level in three-years, and while output remains around the record of +11M bpd, recent subdued U.S drilling activity points towards a slowdown.

Gold prices have edged a tad lower this morning as the U.S dollar holds firm on news that China has cancelled trade talks with the U.S, while the market waits for this week’s FOMC meeting for guidance on future rate hikes. Spot gold is down -0.1% at +$1,198.36, after declining as much as -1.3% on Friday. U.S gold futures are little changed at +$1,201.60 an ounce.

3. HK interbank rates jump to 10-year highs after HKD surge

Some of the short-term rates banks in Hong Kong charge each other leapt to their highest levels in roughly a decade, in the first trading session after a sudden surge in the tightly controlled HKD.

Note: Speculators have been covering some significant ‘short’ HKD positions and the lack of liquidity has not helped the move.

The overnight HK interbank offered rate jumped +2% to +3.85%, it’s highest since 2007. One-month Hibor rose less sharply, but still reached nearly +2.17%. On Friday, HKD unexpectedly surged +0.42%, its biggest gain since 2003.

Note: The currency, which is pegged in a range of $7.75 to $7.85 to the U.S. dollar, was little changed at $7.8113.

Elsewhere, Italian government bond yields are backing up again this morning, again reflecting some unease among investors given this week’s deadline for the government to present its budget targets.

Note: ECB’s Mario Draghi speaks at the European Parliament later today, while on Wednesday; the Fed is expected to raise interest rates again.

Two-year Italian bond yields are up +4.5 bps on the day at +0.81%, while the ten-year yields are +3.5 bps higher at +2.87%. The gap over benchmark German Bunds yields have widened from Friday’s close at around +241 bps.

The yield on U.S 10-year Treasuries has increased +1 bps to +3.07%. In Germany, the 10-year Bund yield has rallied less than +1 bps to +0.47%, while in the U.K, the 10-year Gilt yield has climbed +1 bps to +1.563%.

4. Dollar hold firms, but G7 does find some support

GBP/USD (£1.3123) remains handcuffed to Brexit rhetoric and PM May woes. Sterling has begun Monday’s session on the front foot, reclaiming the psychological £1.31 handle after comments from U.K Brexit Minister Raab indicated that he is confident he will make progress on Brexit. There are also whispers that PM May has started contingency planning for possible snap election in November – however, Raab reiterated that “no election is planned.”

The EUR (€1.1770) is again wading towards the key €1.18 handle. Consensus does not expect this week’s data or monetary policy decisions to mount a serious challenge to the ‘single unit’s recent rally. The FOMC meeting is due on Wednesday, but a +25 bps increase to +2.25% is already priced into EUR/USD. The government in Italy is expected to roll out new fiscal projections, but the 2019 budget deficit will probably be set at close to +2% of GDP, which is similar to where the deficit stands now. While eurozone inflation data later this week should provide the euro with “minor support.”

The INR continues to weaken; with the USD/INR rallying to an intraday high of $72.73. There have been rumours that Reserve Bank of India (RBI) has intervened to cap dollar gains. Trade concerns continue to weigh as China cancels trade talks with the U.S.

5. German business sentiment slipped in September

Ifo data this morning showed that German business sentiment slipped this month following a sharp rise in August, as companies slightly lowered their business outlooks.

The Ifo business climate index decreased to 103.7 from an upwardly revised 103.9 in August, but still beat forecasts. The street had been looking for a decline to 103.2.

“Despite growing uncertainty, the German economy remains robust,” said Ifo president Clemens Fuest.

In manufacturing, managers were less content with the current situation in September compared with the month before. Business expectations, however, hit their highest level since February.

“Manufacturers plan to ramp up production in the months ahead,” according to the Ifo Institute.

Forex heatmap

OANDA Trading Asia markets update

Asia markets update

The weekend headlines have not been a blessing for ‘risk sentiment” and while the optimist in me is siding on this too shall pass. But with markets closed in Japan, China and South Korea as a large part of Asia celebrates the Mid-Autumn festival, it impossible to gauge sentiment in these drastically diminished liquidity conditions.

While Hong Kong markets are trading poorly but it difficult to separate the wheat from the chaff after last Friday the Pboc announced they would issue T-bills via the HKMA in Hong Kong money markets, which implies driving local interest rates higher. But of course, shelving the US-China trade talks is not rated highly for local risk sentiment either, a bit of a double whammy of sorts today for Hong Kong.

However, it was unlikely that either the US or China was going to pull a rabbit out of the hat before the US midterm election anyway. However, traders remain in wait and see mode while treading rather gingerly in today Asia session. But indeed, this discussion will likely continue throughout the 24-hour trading cycle.

But overall, no one is taking anything for granted and certainly won’t underestimate the possibility of the US announcing reviews of further China tariffs at some point in time given the Trump administration ‘modus operandi’ of applying non-stop pressure.

Currencies

More risk-sensitive currencies, especially EM are feeling the pinch from weekend headlines bluster, but liquidity is extremely thin and likely contributing to some outsized moves. For reference, G-10 volumes are around 50 % lower as per EBS data. But what action we are seeing is small AUD selling.

Indian Rupee

Not too surprising the INR back under pressure from rising crude prices and domestic credit wobbles after one of the large Non-Banking Financial Companies missed an interest payment last Friday

Oil Markets

Oil investors are trading the weekend news very favourably, Saudi Arabia and Russia ruled out any expeditious supply increases at the Algeria meeting while decidedly ignoring U.S. President Trump’s call to increase supplies and ease price pressures.
Not a great deal of oil market noise today, but traders are quickly pivoting to US inventories data with some small discussion around reports that Cushing Oklahoma delivery point may have declined further in the week ended September 21. But ultimately all these noises pale in the lead up to November 4 Iran sanctions, which continue to underpin sentiment

OANDA Trading Podcast: BFM 89.9 Kuala Lumpur

A Cautious FOMC?? : dovish tail risks abound

US Federal Reserve chairman Jerome Powell is expected to reaffirm his cautious approach to monetary policy this week, potentially paving the way for an extended rally in the Australian dollar.

The Aussie has battled back from below US71¢ less than two weeks ago and is now within reach of US73¢, helped by a muted market response to the latest trade tariff moves by the US and China and the return of a semblance of calm to emerging markets.

With the economic party raging, the Federal Reserve is widely expected to drain some more punch from the bowl,” TD economist Leslie Preston said, adding the central bank appears far from done: “We expect the Fed to hike four more times over the next year, placing the fed funds target at a peak level of 3.25 per cent in 2019.”

The challenge for investors, as it is for Fed policymakers, is more nuanced.

“We suspect the FOMC will signal in its statement the need for policy, moving forward, to potentially become more nimble when it comes to rate hikes compared to the current workmanlike (quarterly) pace,” Bank of Montreal deputy chief economist Michael Gregory. “This could mean longer-than-one-meeting pauses or none at all (the latter becomes easier with the advent of pressers after each meeting next year).

“In any event, we suspect the phrase: ‘The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labour market conditions, and inflation near the Committee’s symmetric 2 per cent objective over the medium term’, might be modified.

The dot plot – or the specific rate forecasts by individual policymakers – is expected to be little changed for both 2019 and 2020.

“With two US rates hikes priced into [the balance of] 2018 and in the absence of inflation, it’s almost impossible for the Fed to bump up the 2019 curve,” OANDA’s Stephen Innes said in a weekend note.

“So, the markets will end up focusing on shifts in the long ball forecast into 2020 which is not the best or brightest of signals for currency traders who tend to view markets in much nearer time horizons,” Mr Innes said.

Australian Financial Review

By Stephen Innes Head of Trading Asia @steveinnes123

Bring on the FOMC!

EM Asia: Next weeks discussions

Please join me on Live on Monday, Sept 24  discussing cross-asset markets 

BFM Radio Kuala Lumpur  7:35 AM SGT  on the Market Watch

938Now 9:00 AM SGT for an extended view  on global markets

France 24 TV at 12:15 SGT for the European Open coverage

Jazz FM London 1:00 PM SGT discussing the Asia markets today

EM Asia: Next weeks discussions

By Stephen Innes Head of Trading Asia @steveinnes123

EM Asia sentiment continues to improve; regional equities were trading very well on a  weaker dollar. ASEAN markets do enjoy a capital inflows bump when the US dollar is broadly weaker.

Bloomberg China Calls Off Trade Talks, Won’t Go to Washington Until After Mid-Terms

China

In addition to the significant headlines risk around the FOMC and trade war, the local discussion will continue centring around Premier Li Keqiang ’s comments on import tax cuts, and that policymakers have no intention to weaponise the Yuan in a trade war.

By cause in effect, his comments appear to have improved investor sentiment, as the Shanghai Composite ended up having its best week since 2016, although market chatter is suggesting Friday afternoon extension was nudged on by intervention to reach that high-water mark and boost investor conviction ahead of the long weekend. Nonetheless, we will leave that discussion for another day on how China market intervention, if right in this instance, does tend to hurt the credibility of their intentions.

But let’s not lose sight of the fact that in the absence of a trade deal or a clear signal that one is about to happen post-November G-20, the policy hawks in the Trump administration will be hell-bent on imposing 25 % tariff on 200 billion if not doubling down to 400 billion.

End of November remains the key, and if no resolution by then, the market will yet again price in a meltdown in Chinese equities and a  strong probability the PBOC would allow the renminbi to weaken substantially. Knowing this, investors may tap the brakes after last weeks astonishing equity market recovery, and FX traders will continue to position long USDCNY, knowing full well where the significant tail risk lies.

INR and IDR 

As for the regional whipping boys IDR and INR, this a very complicated landscape and surging oil prices will continue to be an outsized problem for both currencies, And despite pledges to fix deficits, there has been no proof in that pudding. Instead, BI and RBI are coming up with creative yet very patchy methods of unorthodox interventions like the mandatory conversion for export proceeds in Indonesia, for example, or taking oil demand off the market in India.

Which brings us full circle, to this weeks FOMC where it’s widely expected both BI and RBI will raise interest rates to match next week Fed hike. So, their ongoing currency struggles will continue to make headlines. However, without addressing the real underlying problems around deficits, hiking interest rates to prop up currency is like putting a band-aid on a broken leg as speculators will continue to target deficit currencies at every opportunity.

Friday Rupee sell-off was directly related to the impact of the RBI raising interest rates which have reportedly caused a massive corporate default for a shadow lender in the housing sector and triggered a significant sell-off in local equity markets.

Ultimately the consumer pays the piper in any rate hike scenario.

Please join me on Live on Monday discussing cross-asset markets 

BFM Radio Kuala Lumpur  7:35 AM SGT  on the Market Watch

938Now 9:00 AM SGT for an extended view  on global markets

France 24 TV at 12:15 SGT for the European Open coverage

Jazz FM London 1:00 PM SGT discussing the Asia markets today

Bring on the FOMC !

FOMC 

The FOMC meeting next week has a hike fully priced in so the focus will be on the dot plots and the follow-up presser which has dollar bulls questioning their near-term positions.

The meeting will be overly scrutinised to see if there are any changes in the projections, with new Vice-chair Clarida voting for the first time. Also, Chair Powell will likely be quizzed on Fed Governor Lael Brainard view that US interest will probably need to be made more restrictive in the sense that at some point in the future if the unemployment rate remains low, policy rates should move above neutral and into the restrictive territory.

Dovish tail risk

And herein lies the dovish tail risk which has  USD Bulls erring on the side of caution. With 2 US rates hikes priced into  the rest of 2018 and in the absence of inflation, it’s almost impossible for the  Feds to bump up the 2019 curve. So, the markets will end up focusing on shifts in the longball forecast into 2020 which is not the best or brightest of signals for currency traders who tend to view markets in much nearer time horizons. Even if the Feds prod 2020 curve higher, its unclear how much of a USD fillip that shift could deliver given that Chair Jay Powell has contiued to de-emphasise 2020 dots. Unless we get an unexpected shift in the Feds terminal policy range of 2.75-3.00%, not sure the dollar ( X -JPY) goes anywhere but trades within well-worn ranges.

What else in G-10?

AS for the rest of G10, there will be no shift from RBNZ, but in the wake of the surprisingly strong data of late especially the monster GDP beat, we could see a subtle less dovish change in guidance.

It’s not a busy calendar next week per say but dotted by US PCE and EUR sentiment surveys. Canada delivers a GDP report, but NAFTA talks will continue to overshadow data as yet another NAFTA month-end deadline looms.

Brexit Blues 

It’s back to the Brexit drawing board after EU leaders “Chequers mated “and utterly humiliated May at the Salzburg meeting which sent the Pound tumbling below the 1.3100 before finding some composure. Of course, most believe a deal in some form or another will eventually happen. But in the nub of all this Brexit bluster, UK data has been surging with both CPI and Retail Sales beating expectations, but indeed  Brexit uncertainty has overshadowed.  Next week’s UK GDP data could be another strong point, however, with little to no breakthrough on Brexit likely to happen any time soon, The Bank of England will remain unwavering until clarity on Brexit it offered up so the market will likely look past next weeks UK data.

Great insights from our Senior Markets Analyst in London, Craig Erlam  

Sterling Down on May Brexit Warnings

OANDA Market Insights podcast (episode 32)

Craig reviews the week’s business and market news with Jazz FM Business Breakfast presenter Jonny Hart.

This week’s big stories: Sterling wobbles on Brexit fears, US/China tariffs tit for tat, Inflation hike against expectations.

China 

China PMI which will be closely monitored. Also, we should expect more trade headlines to come into play as both US and China tease with the idea of resurrecting trade talks.

USD Price Action 

Gauging this weeks price action in the wake of Trump tariff announcement, the markets overwhelming viewed the 10 % on 200 billion tariff levy and the measured responses from China as a smoke signal for further negotiation shortly. So the unwind of global USD hedges ensued as the market just found themselves far too long USD at not such grand levels. But the robust fundamental storyline in the US economy coupled with weak PMI data in Eurozone this week, I don’t think we’ve heard the last from the dollar bulls just yet.

Currencies in focus next week

EUR: a huge disappointment to the bulls with a close below 1.1750. While Fed forward guidance will drive the bus next week, the negative  EU PMI lean could hang like an anvil around the EURO neck.

CNH: It has to be on everyone’s radar especially after this weeks exodus of long USD hedge position on a combination of Trade war de-escalation, comments that mainland will not weaponise the Yuan as a tool in the trade war and offshore funding squeeze on the back Pboc to sell bills in Hong Kong. Despite the correction lower in USDCNH, given that China’s current account surplus is expected to shrink as a result of US tariffs and if the Feds signal clear dot plot sailing or even shift slight higher, CNH could sell off again.

Oil markets

Traders will pay close attention to Sunday headlines from Algiers as OPEC, and cooperating non-OPEC producers will meet on Sunday in Algeria

Likely seeking to appease President Trump, unnamed members of OPEC suggested they would discuss adding 500 K barrels per day, and while it gave cause to book some profit and reduce risk, its highly unlikely anything dealing with supplies will happen before the December 3 OPEC summit.

Despite wire reports suggestions otherwise, most of the oil traders in my circle, and despite the usual OPEC headline noise, think the meeting will be little more than the steering committee review of production and market data.

Please join me on Live on Monday discussing cross-asset markets 

BFM Radio Kuala Lumpur  7:35 AM SGT  on the Market Watch

938Now 9:00 AM SGT for an extended view  on global markets

France 24 TV at 12:15 SGT for the European Open coverage

Jazz FM London 1:00 PM SGT discussing the Asia markets today

 

 

 

 

US Dollar Recovers Ground Ahead of Fed Meeting

The US dollar bounced back on Friday, but could not offset the losses suffered during the week. The greenback was lower against most major pairs at the end of five days. Traders adjusted their positions before the weekend giving some breathing room to the USD.

The U.S. Federal Reserve will host its two-day meeting on Tuesday and Wednesday. The Federal Open Market Committee (FOMC) statement will be published at 2:00 pm EDT followed by a press conference by Fed Chair Jerome Powell at 2:30 pm EDT.

A rate lift by the US central bank is highly anticipated and has been priced in to the dollar putting more focus on the words of the Fed chief.

Euro Appreciates as US Trade War Fears Soften

The EUR/USD surged 1.05 percent this week. The single currency is trading at 1.1743 after a late recovery attempt by the USD on Friday.



The Trump administration unveiled the second round of tariffs against Chinese goods on Monday but as more details came out an all out trade war can still be averted.

Despite the rhetoric market participants are optimistic about a resolution that will not have a negative impact on global growth.

German data and EU inflation will be released this week. German confidence has improved of late and forecasts show that trend will continue but European inflation early results are not expected to have gained traction. The EUR has recovered from political uncertainty earlier in the year, but investors will look at fundamentals for guidance.

Canadian Inflation Lifts Probabilities of an October Rate Hike

The USD/CAD fell 0.92 percent in the last five days. The currency pair is trading at 1.2921 after various phases of NAFTA jitters have helped and pressured the loonie. The Canadian currency gained on a weekly basis against a softening greenback.

US-China trade rhetoric hast lost some traction, and as JP Morgan CEO Jamie Dimon put it, it’s more like a skirmish than a war.


Canadian dollar weekly graph September 17, 2018

NAFTA optimism remains high, but officials from both sides have begun to trade sound bites as frustrations mount.

US White House Chief Economic Advisor Kevin Hasset said in a TV interview that the US could forge ahead with the Mexico only trade deal. The US has been trying to get Canada to join the quick agreement made with Mexico, but so far the negotiations have not been as smooth.

Canadian Foreign Minister wrapped up her Washington visit on Thursday with the Quebec elections on October 1 an important day if dairy concessions are given as part of the NAFTA renegotiation.

Canadian monthly GDP data will be released on Friday September 28, with a forecast of 0.1 percent. The stronger pace earlier in the year and with inflation above target will pressure the Bank of Canada (BoC) to lift rates in October. Probabilities of a 25 basis points hike are at 88.74 percent.

Oil Ends Week Higher with OPEC Meeting to Provide Guidance

Oil prices rose ahead of the Organization of the Petroleum Exporting Countries (OPEC) meeting in Algiers in a week that included supply concerns and pressure from US President Trump to keep prices low.


West Texas Intermediate graph

The production cut agreement by the OPEC and other major producers has been the most important factor in the stabilization of crude prices since the 2014 drop.

Supply disruptions have kept prices in current ranges even as the OPEC and partners such as Russia will be discussing ramping up production.

The biggest disruption to supply this year has come from the reapplication of US sanctions against Iranian exports. Global producers that are part of the supply curb have telegraphed their intentions but weather and geopolitical factors have been offset with global growth and energy demand forecast downgrades.

Weekly US inventories threw another drawdown data point on Wednesday and have kept the black stuff bid. President Trump has used twitter as a macro policy tool and this time his aim fell on the OPEC.

The organization has limited options and will look to Saudi Arabia for leadership as some members have pressured internally to increase production for their own national interests.

This time the US is mixing political and economic factors to force an increase in supply, even though the White House is the one who triggered the latest disruption.

Yellow Metal Loses Shine on Friday Looks Ahead to Fed Rate Hike

Gold was lower on Friday by 0.65 percent, but gains earlier in the week still managed to put it in the black with a 0.19 percent gain.

The safe haven appeal of the yellow metal was lower as US stock markets continued their rally stoked by improving economic data in America.



The Fed’s imminent rate hike is keeping gold close to the $1,200 price level and the Swiss franc is now the de facto refuge for investors.

With a 25 basis points fully priced in from the Fed metal investors will be focusing on the economic projections and any changes in the wording of the statement looking for clues on the rate hike path of the central bank.

Market events to watch this week:

Monday, September 24
4:00am EUR German Ifo Business Climate
Tuesday, September 25
10:00am USD CB Consumer Confidence
9:00pm NZD ANZ Business Confidence
Wednesday, September 26
10:30am USD Crude Oil Inventories
2:00pm USD FOMC Economic Projections
2:00pm USD FOMC Statement
2:00pmUSD Federal Funds Rate
2:30pm USD FOMC Press Conference
5:00pm NZD Official Cash Rate
6:00pm NZD RBNZ Press Conference
Thursday, September 27
8:30am USD Core Durable Goods Orders m/m
8:30amUSD Final GDP q/q
Friday, September 28
4:30am GBP Current Account
8:30am CAD GDP m/m

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

Central Banks up the ante to normalize interest rates

Friday September 21: Five things the markets are talking about

Aside from trade, tariff and retaliation, central banks are upping the ante to “normalize” interest rates.

This week, Norway’s Norges Bank has joined the BoE, and the central banks of the Czech Republic and Romania in withdrawing some of its stimulus, while Sweden’s Riksbank has indicated that it may raise its key rate before the end of the year. The ECB plans to end QE this December, while next week the Fed is expected to hike +25 bps (Sep 26) – the market will be looking for any comments on the impact of escalating trade tensions.

Earlier this week the BoJ kept its stimulus policy unchanged, however, the move overnight to cut the purchases of super long-bonds would suggest that the period of easy-money era is ending. In Hong Kong, the HKD has surged the most in 15-years in part due to the prospect for higher interest rates there.

There are a number of EM hotspots that the market is also focusing on, in particular – Turkey & South Africa. The lack of details on how Turkey can achieve a soft landing for an economy that topped the G20 growth charts in 2017/18 continues to contribute to a volatile TRY, but a plan is forthcoming.

While in South Africa this morning, President Ramaphosa announced details of a stimulus package to take immediate effect to battle the country’s technical recession.

With trade war concerns receding in the background, the U.S dollar is on track to close out the week trading atop of its seven-month lows against G10 currency pairs as stronger equity markets and rising bond yields encourage investors to purchase riskier assets.

Note: Expect today’s session to be volatile as its quadruple witching – futures and options on indexes and individual stocks expire.

On tap: Canadian CPI and retail sales at 08:30 am EDT

1. Stocks rally to records

With Wall Street indexes hitting a record high again yesterday has encouraged Asian and Euro bourses to take flight.

In Japan, equities rallied to an eight-month high, with noted gains in insurance, energy, and shipping stocks. The Nikkei did fade late, but still gained +0.8%. Financials were helped by the BoJ’s offer to buy less super-long bonds. The broader Topix gained +0.9% to hit a four-month high.

Down-under, the Aussie stock market again underperformed in the region overnight. The S&P/ASX 200 finished up +0.4%. The index ticked up +0.5% for the week, a second consecutive modest gain. Providing intraday pressure were utilities, which lost -0.5% last night, but consumer staples rallied that much while materials jumped a further +1.5% and IT climbed +2.2%. In S. Korea, the Kospi closed +0.68% higher on Friday as investors risk appetite recovered. For the week, the benchmark index climbed +0.9%.

In China, stocks surged overnight before a long holiday weekend, with investor sentiment boosted by hopes that a government effort to boost domestic demand could help offset effects of an escalating trade war. At the close, the blue-chip CSI300 index rallied +3.0%, its biggest one-day gain in four-months. The Shanghai Composite Index gained +2.5%, closing out its best week in six months.

In Hong Kong, stocks ended higher for a fourth consecutive session overnight, helped by consumer and technology shares, as sentiment improved after the Sino-U.S trade war unfolded in ways less damaging than feared. The Hang Seng index ended +1.73% higher, while the China Enterprises Index closed +2.17% firmer.

In Europe, regional bourses continue to rise despite sluggish PMI results. In the U.K, the FTSE is supported by positive Brexit comments, while in Italy; bourses are supported by budget talks.

Note: Expect stock markets to be influenced by today’s quadruple witching hour.

U.S stocks are set to open in the ‘black’ (+0.1%).

Indices: Stoxx50 +0.7% at 3,428, FTSE +0.8% at 7,429, DAX +0.7% at 12,418, CAC-40 +0.8% at 5,494, IBEX-35 +0.6% at 9,639, FTSE MIB +0.9% at 21,588, SMI

2. Oil higher on supply worries, but Trump’s call for lower prices drags

Oil prices are a tad higher this morning after falling in yesterday’s session as U.S President Donald Trump urged OPEC to lower crude prices at its meeting in Algeria this weekend (Sep 23).

Note: OPEC and its allies are scheduled to meet on Sunday to discuss how to allocate supply increases to offset a shortage of Iran supplies due to U.S sanctions.

Brent crude for November delivery is up +26c, or +0.33%, at +$78.96 a barrel, while
U.S West Texas Intermediate crude for October delivery is up +7c, or +0.10% at +$70.39 a barrel.

Trump took to twitter and called on OPEC to lower prices, saying, “they would not be safe for very long without us, and yet they continue to push for higher and higher oil prices”.

Trump’s veiled threats are unlikely to force OPEC and its allies to agree to an official increase in crude output on Sunday.

The fact that Sino-U.S trade tensions have somewhat dissipated is helping precious metal prices. Ahead of the U.S open, gold prices remain better bid on the back of a weaker U.S dollar and are heading for its first weekly gain in a month. Spot gold is up +0.3% at +$1,210.68, after touching its highest since Sept. 13 at +$1,211.02. It has rallied +1.3% so far this week. U.S gold futures are up +0.3% at +$1,215 per ounce.

3. Italian bond yields fall as investors await budget clarity

Italian bond yields are under some pressure this morning as the market awaits clarity on the 2019 budget and after the 5-Star Movement denied a report that Deputy PM Di Maio had threatened to pull his party out of the government.

An ISTAT report shows that the budget deficit as a proportion of national output was slightly higher last year than previously estimated, but that debt was lower also helped to push down yields.

Italian BTP yields are down -5 bps along the curve, having jumped by up to +12 bps yesterday. Elsewhere, Germany’s 10-year Bund yield has eased to +0.47% as some Euro investors returned to safe-haven assets.

Note: Bunds backed up to a four-month high of +0.506% Wednesday, but have struggled to maintain this level, rallying back down after renewed Brexit concerns and the infighting in the Italian government.

In Japan, the Bank of Japan (BoJ) has cut its purchase of super long JGB’s. This has send Japanese yields to 2018 highs. The 40-year yield has jumped +5 bps to +1.04% while 10’s gained +1.5 bp to +0.13%.

Stateside, the yield on 10-year Treasuries has jumped + 2 bps to +3.08%, the highest in more than four-months.

4. Hong Kong dollar spikes

Expectations of a rise in bank lending rates and tightness in cash supplies caused a sharp spike in HKD overnight, pulling it off the weak end of its narrow trading band it had been stuck in for the six-months.

The HKD rallied to $7.8244, hitting its highest levels since late February. Since March, it had stayed near $7.85, the lower end of the Hong Kong Monetary Authority’s (HKMA) managed trading band.

USD/INR rose to an intraday high of $72.47 before fading after a sharp spike lower in Indian Indices on liquidity concerns of Indian Housing name Dewan Housing.

ZAR (+0.46% to $14.2629) found support after S. African President Ramaphosa announced a number of policy reform plans this morning, including re-prioritising +$3.5B of public spending to boost economic growth and create jobs.

GBP/USD (£1.3185) falls from yesterday’s highs as the E.U warns the U.K of a possible “no-deal” Brexit. Initial support is around £1.3171.

5. Euro zone business growth eased

Data this morning showed that Euro zone business growth eased this month although optimism picked up a tad from last month’s two-year low.

Nevertheless, growth remained robust and firms were able to increase prices, which should keep the ECB happy.

Digging deeper, there remains a divergence between services and manufacturing – the dominant service industry beat forecasts for no change in the pace of growth from last month. IHS Markit’s Euro Zone Services Flash Purchasing Managers’ Index (PMI) rose to 54.7 from 54.4.

Manufacturers however failed to live up to expectations. The factory PMI slumped to a two-year low of 53.3 from 54.6 – the market was looking for 54.4.

Divergence raises the question, how long can you maintain a strong service sector growth without an upbeat manufacturing sector?

Forex heatmap

ASEAN currencies edge higher

Sept 21 (Reuters) – Asian currencies strengthened for the
third consecutive day on Friday, supported by a weaker dollar
and shifting views over how much damage the Sino-U.S. trade war
will inflict on global demand and export-reliant regional
economies.

The dollar index has fallen more than 1 per cent this
week. Analysts said investment flows are being diverted away
from the greenback to its peers such as emerging market
currencies as trade tensions have ebbed.
“A significant factor in adding to the current run of dollar
weakness is the drop on safe-haven appeal after China suggested
they won’t weaponise yuan in a trade war,” said Stephen Innes,
head of trading for Asia-Pacific at OANDA in Singapore.
“Regional risk is very steady supported by thriving global
equity markets, a slightly weaker dollar and a positive glean
that North Korea’s leader Kim Jung-un has asked for a second
summit with President Trump.”

 

Reuters

U.S weekly jobless claims fall

The number of Americans filing for unemployment benefits unexpectedly fell last week, hitting near a 49-year low in a sign the job market remains strong.

Initial claims for state unemployment benefits fell by 3,000 to a seasonally adjusted level of 201,000 for the week ended Sept. 15, the Labor Department said on Thursday. That is the lowest level since November 1969. Data for the prior week’s claims was unrevised.

Economists polled by Reuters had forecast claims rising to 210,000 in the latest week.

The Labor Department said only claims for Hawaii were estimated last week. The four-week moving average of initial claims, considered a better measure of labor market trends as it irons out week-to-week volatility, declined by 2,250 to 205,750 last week, the lowest level since December 1969.

The labor market is viewed as being near or at full employment. It continues to strengthen, with nonfarm payrolls increasing by 201,000 jobs in August and annual wage growth notching its biggest gain in more than nine years. Job openings hit an all-time high of 6.9 million in July.

Though there have been reports of some companies either planning job cuts or laying off workers because of trade tensions between the United States and its major trade partners, they have been partially offset by increased hiring in the steel industry.

Economists, however, have warned of job losses if the trade tensions escalate.

Thursday’s claims report also showed the number of people receiving benefits after an initial week of aid fell 55,000 to 1.645 million for the week ended Sept. 8, the lowest level since August 1973. The four-week moving average of the so-called continuing claims fell 20,750 to 1.691 million, the lowest level since November 1973.

CNBC

U.S safe-haven appeal diminishes

Thursday September 20: Five things the markets are talking about

It’s not been easy, two and two do not add up when trading these Twitter directional asset classes. Fundamentals have been temporary ignored as the ‘lemming’ trades takes a grip.

Fading market fears over a Sino-U.S trade row has the U.S dollar trading within striking distance of its two-month lows. Even emerging-market currency pairs have found some traction after China said it would not retaliate with competitive currency devaluations.

Global equities are beginning to struggle as U.S yields approach their highest level this year.

In Europe, U.K Consumer spending remains buoyant despite Brexit uncertainties. Norway raises interest rates for the first time in seven-years and the Swiss kept rates on hold.

1. Stocks mixed results

In Japan, the Nikkei ended little changed overnight as an extended rally in financial sector was largely offset by profit taking after this weeks rally. The Nikkei inched up +0.01%, just about staying in positive territory for the fifth consecutive session. The broader Topix added +0.11%.

Down-under, Aussie shares slipped overnight, led lower by banks and consumer staples as investors shifted funds to emerging markets as they became less worried about a U.S-China trade war. The S&P/ASX 200 index fell -0.3% at the close of trade. The benchmark gained +0.5% yesterday. In S. Korea, the Kospi index rallied +0.65%, supported again mostly by Samsung.

Stocks in China fell overnight, as investor sentiment remained fragile following the latest hit of tariffs in the Sino-U.S. trade war. At the close, the Shanghai Composite index and the blue-chip CSI300 index were both down -0.1%.

In Hong Kong, there were mixed results as some investors held on to hopes that China and the U.S would eventually reach an agreement to avert an all-out trade war. The Hang Seng Index rose +0.26%, while the Shanghai Composite Index slipped -0.06%.

In Europe, regional bourses have opened broadly higher. Market will focus on the ‘informal’ E.U leaders summit comments.

U.S stocks are set to open little changed (+0.0%).

Indices: Stoxx50 +0.3% at 3,379, FTSE +0.1% at 7,334, DAX +0.2% at 12,248, CAC-40 +0.4% at 5,415, IBEX-35 +0.4% at 9,526, FTSE MIB +0.5% at 21,396, SMI +0.4% at 8,974, S&P 500 Futures flat

2. Oil steady, supported by U.S. stocks and supply concerns

Oil prices trade steady, nevertheless, the market remains a tad better ‘bullish’ after this week’s U.S crude inventory reports and on signs that OPEC may not raise production enough to compensate for the loss of Iranian exports hit by U.S. sanctions.

Brent crude oil is unchanged at +$79.40 a barrel, while U.S light crude oil is +40c higher at +$71.52 after rising nearly +2% in yesterday’s session.

Note: Brent has been trading below $80 for the past week after conflicting reports of the market views of Saudi Arabia, the biggest producer in OPEC. They wanted oil to stay between +$70 and +$80 a barrel for now, seeking a balance between maximizing revenue and keeping a lid on prices until U.S midterms. However, giving the market a bid undertone are reports yesterday indicating that the Saudi’s were happy with prices above +$80 a barrel.

EIA data Wednesday showed that U.S crude oil stockpiles fell for a fifth consecutive week to a three-year low in the week to Sept. 14, while gas stocks also showed a larger than expected draw on unseasonably strong demand. Crude inventories fell by -2.1m barrels, compared with expectations for a decrease of -2.7m.

Note: OPEC and other producers, including Russia, meet on Sunday in Algeria to discuss how to allocate supply increases to offset the loss of Iranian barrels.

Ahead of the U.S open, gold prices have inched higher as the ‘big’ dollar softened amid easing Sino-U.S trade tensions. Nevertheless, expect investors to remain cautious ahead of next week’s Fed meeting. Spot gold is up +0.1% at +$1,204.69, after rising +0.5%yesterday.

3. Norway hikes rates for the first time in seven years, SNB on hold

Earlier this morning, Norway’s central bank hiked its key interest rate for the first time in more than seven-years. Norges Bank increased the rate to +0.75% from +0.5%.

The central bank said another rate increase is likely in the first three months of next year, with a gradual series of moves taking it to +2% by the end of 2021.

“If the key policy rate is kept at the current level for too long, price and wage inflation may accelerate and financial imbalances build up further,” said Governor Olsen. “That would increase the risk of a sharp economic downturn further out.”

Note: Sweden has also indicated that it may raise its key rate before the end of the year, while the ECB plans to end QE in December.

Elsewhere, the Swiss National Bank (SNB) kept its deposit rate at -0.75%, as expected. The accompanying statement painted two different pictures – the negative rate and willingness to intervene in FX markets “remain essential in order to keep the attractiveness of CHF low and thus ease pressure on the currency.” That said, policy makers also painted a brighter economic future and raised its 2018 GDP forecast to between +2.5% and +3%.

4. Dollar downfall

The CHF ($0.9659) is a tad weaker after the Swiss National Bank (SNB) left rates on hold. The fact that the franc remains “highly valued and has appreciated noticeably” has investors wary of the bank’s next moves.

EUR/NOK (€9.6068) initially fell following the Norges rate hike, but has since reversed and is trading down -1% outright after the bank cut its policy rate forecasts.

GBP/USD (£1.3226) has rallied sharply, again testing yesterday’s intraday highs, on Brexit talk and on stronger than expected U.K retail sales (see below).

USD/ZAR is down by -1.5% at $14.4793 – some investors are anticipating a surprised rate hike this morning. Nevertheless, the consensus expects rates to remain unchanged, given that prices remain within the bank’s inflation target range and that the economy has slid into a recession.

5. U.K retail sales slowed in August

Data this morning showed that U.K. retail sales slowed in August but continued to point to buoyant consumer spending in Q3, which suggests that the economy has kept expanding despite uncertainty over Brexit.

According to the ONS, U.K retail sales rose +0.3% on month in August, after a revised +0.9% rise in July.

Digging deeper, consumer spending continues to power the U.K economy as sales increased across most store categories with the exception of food and clothing outlets.

But is it sustainable, given high inflation, low wage growth and rising interest rates? Uncertainty over the U.K’s future continues to deter investment.

Forex heatmap