Look to Fed’s Powell for help

Wednesday September 26: Five things the markets are talking about

Global stocks are trading mixed ahead of today’s FOMC rate decision, with Asian shares closing out higher, while Euro bourses are a tad down as Italy’s budget talks continue to be a source of concern.

The Italian government has until tomorrow to outline its fiscal and economic projections ahead of a budget law discussion due to take place in October. Currently, the markets remains concerned that the government will try to pass a budget that is out of step with E.U rules.

This afternoon, the Fed is expected to raise interest rates by +25 bps to a corridor of +2% to +2.25% as it continues to roll back easy-money policies.

Market attention will focus on the forward guidance, including the new ‘dot plot’ diagram, to gain insight into the plans for 2019 and beyond.

Currently, the U.S dollar trades steady while U.S Treasury yields trade atop of their the seven-year highs reached in May.

Note: Today’s Fed decision (02:00 pm EDT) will be followed by a press conference with Chair Jerome Powell (02:30 pm EDT).

1. Stocks trade mixed ahead of Fed

In Japan, gains overnight lifted the Nikkei to an 8-months high as the index was able to overcome the impact from a number of companies’ stock prices being adjusted lower amid looming dividend payments. The index rallied +0.4%. Again helping was the U.S dollar briefly hitting a two-month high and breaching ¥113.

Down-under, the S&P/ASX 200 was able to squeeze out a slight gain and ended up +0.1% at the close. Energy stocks rose a further +0.9% as oil prices rallied, while materials gained +0.8%. But financials fell -0.6% as the initial report on an alleged industry misconduct looms and health care dropped a fresh -0.7%.

Note: South Korea’s markets were closed for a holiday.

In China, stocks rallied overnight on hopes that global index provider MSCI would consider quadrupling the weighting of Chinese big-caps in its global benchmarks. At the close, the Shanghai Composite index was up +1%, while the blue-chip CSI300 index was up +1.1%.

In Hong Kong, shares followed the region higher on receding trade war fears and high oil prices. The Hang Seng index rose +1.2%, while the China Enterprises Index gained +1.5%.

In Europe, regional bourses remain somewhat muted ahead of the Fed’s rate announcement.

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

Indices: Stoxx50 +0.1% at 3,423, FTSE flat at 7,506, DAX -0.1% at 12,362, CAC-40 +0.2% at 5,489, IBEX-35 flat at 9,492, FTSE MIB -0.1% at 21,644, SMI flat at 9,020, S&P 500 Futures +0.2%

2. Brent trades near four-year high, but U.S crude retreats

While global trade tensions remain a source of investor concern, rising oil prices are taking on a greater importance.

Despite President Trump calling for increased crude output from OPEC, crude prices have been lifted by the pending U.S sanctions on Iran in November.

Producers fear pumping more oil to compensate for lower output from Iran and Venezuela could mark a return of oversupply.

Brent crude is up +10c, or +0.1%, at +$81.87 a barrel, after gaining nearly +1% yesterday. Brent rose on Tuesday to its highest since November 2014 at +$82.55 per barrel.

U.S crude futures (WTI) are down -4c at +$72.24 a barrel. They climbed +0.3% yesterday to close at their highest level since July 11.

U.S data yesterday showed that domestic crude stockpiles unexpectedly climbed last week. API data showed that inventories rose by +2.9M barrels in the week to Sept. 21 to +400M, compared with market expectations for a decrease of -1.3M barrels.

Expect dealers to take their cue from today’s official figures on stockpiles and refinery runs from the U.S Department of Energy’s Information Administration (EIA 10:30 am EDT).

Ahead of the U.S open, gold prices are steady ahead of the Fed’s rate decision. Spot gold is little changed at +$1,200.43 per ounce. It’s been a narrow +$4 range overnight, and even tested key resistance at +$1,200. U.S. gold futures are flat at $1,204.70 an ounce.

3. Italian yields fall on budget talks

Italian bond yields continue to trade under pressure in the run-up to the presentation of Italy’s budget draft, scheduled for tomorrow. A budget deficit below +2% gap (to GDP) is expected to give further support to Italian BTP’s.

This morning, Italian government bond yields have dropped across the curve. Short-dated Italian yields have fallen -10 bps to +0.77%, while Italy’s five- and 10-year BTP yields have dropped -5-7 bps.

Elsewhere, German Bund yields remain just below highs reached yesterday. Germany’s 10-year Bund has opened at around +0.54%, down around -1 bps.

Stateside, the yield on 10-year Treasuries has fallen -1 bps to +3.09%, the largest drop in two-weeks, while in the U.K, the 10-year Gilt yield has also fallen -1 bps to +1.62%.

4. Dollar needs guidance

The ‘big’ dollar is little changed ahead of today’s Fed’s rate decision and has meant little doing for currencies in general (€1.1765, £1.3160 and ¥112.90).

While the Fed’s monetary policy tightening is likely to end next year, investors are trying to figure out if most of the dollar’s strength is behind us.

Later today, the Fed could remove the word “accommodative” from its statement, but consensus thinks this is most unlikely. Even if it does, the U.S dollar may still find it difficult to find support due to its trade and protectionist policies.

Down-under, the Kiwi (NZ$0.6655) bounced higher on an uptick in business confidence.

5. New Zealand business sentiment rallies

Data overnight showed that New Zealand business sentiment lifted this month from a decade low even as firms remained pessimistic overall.

An ANZ Bank survey showed a net +38.3% of respondents expected the Kiwi economy to deteriorate over the year ahead – a previous poll showed +50.3%, which was its lowest reading since 2008.

Last month, the Reserve Bank of New Zealand (RBNZ) said gloomy business confidence was a major risk that could result in firms holding off on investment, dragging on growth and increasing the chances of another cut in official interest rates.

Later today (05:00 pm EDT), the RBNZ is widely expected to hold rates at a record low of +1.75% and signal that it plans to hold them there for an extended period of time.

Fed Economic Projections and Powell Speech to Guide Markets

The US dollar is mixed on Tuesday ahead of the highly anticipated Federal Open Market Committee (FOMC) rate statement to be published on Wednesday. The market has already priced in a 25 basis points lift to the Fed funds rate. The economic projections and the speech by Chair Fed Powell will be dissected for insights into what the central bank sees in 2019.

The Fed has already hiked two times in 2018 and is on track for two more starting this week. Updates to the famed dot-plot will help investors understand how many more rate hikes do Fed members forecast for next year.

  • Fed likely to lift rates on Wednesday
  • API crude oil inventories rose by 2.9 million barrels
  • Reserve Bank of New Zealand (RBNZ) expected to leave rates untouched

Euro Rises on Political Stability and Inflation Green-shoots

The EUR/USD gained 0.17 percent on Tuesday. The single currency is trading at 1.1768 ahead of the September Federal Open Market Committee (FOMC) on Wednesday, September 26.



On Monday, European Central Bank (ECB) President Mario Draghi was optimistic about rising European inflation as a tight labor market is making way for higher wages.

The monetary policy divergence will continue as the Fed keeps rising rates while the ECB still has to wrap up its QE program and will star looking at hiking interests rates in summer of 2019 at the earliest.

Trade concerns have taken a backseat as the United Nations General Assembly has given more attention to different view points.

Brexit Optimism Boosts Pound

The GBP/USD rose 0.48 percent in the last 24 hours. Sterling is trading at 1.3180 versus the US dollar after positive reports surfaced from the EU and UK on their imminent divorce.

A EU internal document shows that there is still possibility of a free trade area between the two, but the area could not include all of Britain.



Although the news is far from positive, the fact that both sides are getting closer to a real alternative has boosted the pound.

Investors are still no clear on what the final deal or even if there will be one, but leaders are starting to put forward more realistic alternatives.

Loonie Sensitive to NAFTA Headlines

The Canadian dollar ended flat after US Trade Representative Lightizer said that time is running out with Canada on NAFTA talks. The US has pressured Canada to join the US-Mexico trade agreement but various deadlines have come and gone with no results.

The US wants to get this negotiation wrapped up as soon s possible to be able to present a trilateral deal to congress ahead of the mid-term elections.


usdcad Canadian dollar graph, September 25, 2018

Gaps remains between the two sides, with the most visible ones are access to the Canadian dairy market and the dispute resolution mechanism.

Elections in the province of Quebec, where a large number of dairy farmers are located, complicates matter as Canada realistically could not make big concessions until after the election.

The Canadian dollar is stuck in a tight range on Tuesday. Earlier in the session it was gaining on the US dollar, but the words from Lightizer put the loonie in a back foot, despite the rise in oil prices supporting the currency.

Gold Shines Ahead of FOMC

Gold is trading above the $1,200 price level at the start of the FOMC meeting in Washington.

The U.S. Federal Reserve is highly anticipated to announce a 25 basis points rate lift on Wednesday.



The move has already been priced in, but gold traders will be on the look out for insights on the economic projections and Chair Jerome Powell’s speech.

Gold has struggled as a safe haven under trade war concerns as investors have flocked to the safety of the US dollar, putting downward pressure on the yellow metal.

A neutral to dovish speech from Chair Powell could boost gold prices, specially if it comes from more mentions of trade turmoil risks.

Crude Falls as Trump Focuses on OPEC at UN

Oil prices are mixed on Tuesday. In the aftermath of the Organization of the Petroleum Exporting Countries (OPEC) and Russia meeting in Algiers the supply picture has not changed.

The sanctions against Iran have already had a negative effect and if major producers did not announce a ramp up there will be a short fall.


West Texas Intermediate graph

Prices continue near 4 year highs as geopolitical and weather factors have supported current price levels.

OPEC members appear to have learnt the lesson of four years ago. The oversupply battle waged against shale producers in the US caused energy prices to drop.


West Texas Intermediate graph

A coordinated approach to limit production has produced stability and at this point Saudi Arabia and Russia are leading a gradual path despite external pressure.

US President Trump made sure to mention how the OPEC is not doing enough to bring prices down, despite the efforts of the US to protect the region. The American president also hinted at the possibility of ramping up US crude production, a point that he has made before.

On August 20, the US sold 11 million barrels of oil from its emergency oil reserves, a minor data point in terms of volume but an important one that shows the willingness of the Trump administration to keep oil prices low.

During his address to the UN Trump mentioned:

In America, we believe strongly in energy security for ourselves and for our allies. We have become the largest energy producer anywhere on the face of the Earth.
The United States stands ready to export our abundant, affordable supply of oil, clean coal, and natural gas.

Market events to watch this week:

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

Dollar Recovers Ahead of September FOMC – OANDA Market Beat

OANDA Senior Market Analyst Alfonso Esparza reviews the major upcoming market news, macro analysis and economic indicator releases that will impact currencies, stocks other asset classes.

Subscription available on iTunes https://goo.gl/TZEWRW and GooglePlay https://goo.gl/cRBk39. Tune in every Tuesday and don’t miss a beat as we cover the hottest trends impacting the markets in the week ahead. Trading is high risk. Losses can exceed investment.

The greenback recharged and on Monday it is now higher against most major pairs.

Positive Brexit and ECB comments gave an edge to the Euro and Sterling.

The U.S. Federal Reserve will host its two-day meeting on Tuesday and Wednesday this week.

Live FX Analysis – 25 September 2018 (Video)

In this week’s FX webinar, Senior Market Analyst Craig Erlam discusses the upcoming Federal Reserve meeting and provides and update on Brexit and trade wars.

Craig also gives his live analysis on EURUSD (12:04), GBPUSD (17:23), EURGBP (22:05), AUDUSD (24:38), USDCAD (27:24), GBPCAD (28:30), NZDUSD (29:54), USDJPY (30:47), GBPJPY (32:31) and EURJPY (34:25).

If in doubt, look to the Fed for direction

Tuesday September 25: Five things the markets are talking about

It’s a return to the drawing board for many investors who are now back online beginning their holiday shortened Asian trading week.

Euro equities are trading mixed following a “get back to basics” Asian session as investors ponder the outlook for global trade and U.S politics.

The U.S dollar continues to hang tough, while stateside, Treasury yields consolidate atop of +3.1% while crude oil trades at a four-year high.

In Europe, Italian bonds rally as the country edges closer to delivering a budget.

Topping investors’ agenda this week is today’s two-day FOMC meeting, along with the Fed’s updated forecasts and the chair’s quarterly press conference (Sep 25-26).

Note: 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 tomorrow.

1. Stocks mixed results

In Japan, the Nikkei rallied for a seventh consecutive session overnight, helped by gains in chip-related stocks that offset weakness in construction equipment manufacturers. The ‘big’ dollar trading through ¥112 also helped to support overall sentiment. The index gained +0.3% to hit its highest print in more than eight-months.

Note: Both Hong Kong and South Korea indexes were closed for holidays on Tuesday.

Down-under, Aussie stocks traded flat overnight as an escalation in Sino-U.S trade tensions hit risk sentiment, while energy stocks rallied on a firmer oil prices. The benchmark dipped -0.1% on Monday.

In China, stock fell on Tuesday in their first trading session after fresh U.S tariffs on +$200B worth of Chinese imports began yesterday. At the close, the Shanghai Composite index was down -0.58%, while the blue-chip CSI300 index was down -1%.

In Europe, in early trade, regional bourses are being supported by stronger commodity prices and optimism over the Italian budget.

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

Indices: Stoxx50 +0.3% at 3,419, FTSE +0.3% at 7,482, DAX +0.2% at 12,373, CAC-40 +0.2% at 5,486, IBEX-35 +0.4% at 9,550, FTSE MIB +0.5% at 21,450, SMI +0.3% at 8,972, S&P 500 Futures +0.1%

2. Oil hits new four-year highs as OPEC resists output rise, gold steady

Crude oil prices remain better bid after Brent hit a fresh four-year high amid looming U.S sanctions against Iran and an apparent reluctance by OPEC and Russia to raise output to offset the expected hit to supply.

With OPEC and Russia having ignored Trump’s twitter pleas to increase production, coupled with U.S sanctions to hit Iran exports in November, should again provide support for oil ‘bulls’ to seek higher price prints.

Brent crude futures are up +30c, or +0.4% from Monday’s close at +$81.69 a barrel, a level not seen since November 2014. U.S West Texas Intermediate (WTI) crude futures are at +$72.28 a barrel, up +20c or +0.3% from yesterday’s close.

The U.S from Nov. 4 will target Iran’s oil exports with sanctions, and Trump continues to put pressure on governments and companies around the world to fall in line and cut purchases from Tehran.

Ahead of the U.S open, gold prices trade steady as the market remains somewhat cautious ahead of today’s two-day U.S Fed meeting, which could offer direction on future interest rate hikes. Spot gold is little changed at +$1,199.06 an ounce. U.S gold futures are also steady at +$1,203.70 an ounce.

Note: Gold has fallen -12% since hitting a peak in April against a backdrop of trade disputes and rising U.S interest rates.

3. Italian yields’ fall on budget hopes, Bund yields rally

Italian borrowing costs rally, narrowing the gap with its German counterparts, on signs that Italy’s coalition is likely to reach a compromise over next years budget. The ruling coalition is willing to keep the budget deficit below +2% of GDP.

In contrast, Germany’s Bund yields continue to back-up, trading atop of their four-month highs, a day after ECB chief Mario Draghi pointed to a “vigorous” pick-up in underlying inflation.

In early trade, Italy’s 10-year BTP yield has fallen -9 bps to +2.86%, narrowing the spread over the benchmark German Bund yield to around +232 bps, from around +245 bps late yesterday.

In Germany, the 10-year bund yields has rallied to a four-month high at +0.54%, a day after posting their biggest one-day jump since June.

Elsewhere, the yield on 10-year Treasuries has advanced +1 bps to +3.09%, its highest yield in almost 19-weeks. In the U.K, the 10-year Gilt yield has climbed +1 bps to +1.624%, , the highest in more than seven months.

4. Bitcoin’s pullback quickens

In early trade, BTC has slid to new intraday lows, falling nearly -4% to +$6,400 in the overnight session, moving the cryptocurrency back toward this month’s lows. The BTC ‘bears’ continue to eye the +$6,000 region.

TRY has rallied +6% in the past 24-hrs to $6.1374 on reports that Turkish authorities are sending signals that an American pastor facing terrorism charges could be released next month.

EUR/USD (€1.1762) softened slightly after comments from ECB’s Praet noting that comments from Draghi yesterday were nothing new. The pair fell -30 pips to a low of €1.7133 following the comments.

Note: The ‘single unit’ found support yesterday after ECB President Draghi said there has been a relatively vigorous pick-up in inflation.

5. Swedish PM Lofven ousted in no-confidence vote

Earlier this morning, Swedish PM Stefan Lofven lost a no-confidence vote in parliament and will step down after four-years in power, but with neither major political bloc holding a majority it remained unclear who will form the next government.

Note: Voters delivered a hung parliament in the Sept. 9 election with Lofven’s center-left bloc garnering 144 seats, one more than the center-right opposition Alliance.

SEK is down -0.18% at €10.3374.

Headline overload

US Markets

Another case of headline overload overnight.

US markets closed lower overnight due to some factors including, trade war phase 2, more political turmoil ahead of US midterm after reports surface ahead Attorney General Rod Rosenstein was resigning from his post and of course equity investors taking bets off the table ahead of any potential FOMC bullish tail risk. But given the short half-life that political turmoil has on the overall market sentiment, profit taking is more to do with trade war escalation fears and a possible hawkish Fed.

FOMC bullish tail risk

Yesterday we looked at the dovish tail risks but now a look at the opposite side of the coin.

With a rate hike baked into this FOMC meeting will be all about the future path of interest rates.

Don’t toss your dollar out the window just yet, by any standard all the US economic surprise index still favour the USD by a long shot. Of course, all data should be gleaned but its the surprises are what move asset currency markets and since most if not all Macroeconomics data are generally priced in over the long term, therefore adding up the sum of the data surprises can shed significant into monetary policy vies , and a  very basic  understanding of anticipated moves in currency markets. And by all current standards, the US surprise index is leading the charge and Fed will be looking at this metric.

Surprise = Realized Change – Expected Change in Economic

To that end, the markets still have a relatively pessimistic view on the US rates curve into 2019 and beyond as there has been too much focus and external issues and if trade wars etc. were really a concern for the Feds, they wouldn’t be raising interest rates this week nor guiding the market to another rate hike in December.

But a hawkish case can be made after several Fed members have been turning the dial up but none more so significant that Lael Brainard.

It’s challenging not to be dollar bullish from a pragmatic US interest rate storyline. But of course, price action needs to be respected especially with the EUR veering towards 1.1800 again. The strong US economy suggests USD yields have further room to run. And when former doves like Fed Governor Lael Brainard, who I dare say, is starting to roost with the Hawks and provides the clearest of signals hat this sitting Fed is more hawkish than the markets 2019 overly pessimistic lean.

Oil Markets

Oil continues to hold on to astonishing gains as the latest move was helped along by headlines from OPEC’s weekend meeting as the organisation agreed to no immediate supply boosts here and last weeks reports that Saudi Arabia was now comfortable with Brent at $80.

But with the 72nd session of the United Nations General Assembly kicking off, and President Trump set to hold court. Indeed, Iran is sure to be a fashionable topic so prepare for some headline risk, and I would expect some of Trumps OPEC barbs to surface. So it will be interesting to see how Oil markets absorb headlines with Brent trading near four years highs.

Headline risk notwithstanding, price action suggests that oil investors hopes are skyrocketing that US sanctions on Iranian crude oil exports will cause a significant shortfall in global supply. With that in mind, it’s possible we could see further advances in the weeks ahead. With OPEC showing little inclination to add amounts anytime before the December 3 summit, it’s very likely, in the absence of any about-face from OPEC, that Brent could trade to $85 + and WTI $75 + ahead of Nov 4 Iran sanction date as bullish expectations should continue to boil. But when taken in combination with the fact US commercial crude oil inventories are at their lowest since early 2015, it makes for a convincing bullish argument.

Gold Markets

It’s interesting to see Gold glued to the $1200 see-saw level this morning as frankly, I was expecting the yellow metal to be trading a tad weaker ahead of the FOMC. But with the markets in the very much oversold territory, some short bets are ceding just in case the Feds do unexpected give some notion of a pause for cause in the current 2019 Fed rate hike cycle. As a dovish inference for the Feds could send Gold prices above the critical $1210 level. There’s a lot of cross action inference on this week’s Fed forward guidance.

Currency Markets 

No idea why dollar bulls are so scared of their shadow these days, but It does tell me a significant number are long at not so comfortable levels.

Euro
Hawkish comments from Draghi has a significant impact on EUR volumes overnight as I continue to view the EURUSD the primary battlefield for USD positioning. Anytime the Uber dove Draghi underline the pick up on inflation, the market listens. Which triggered a rally in Bund yields, with a close above 0.50% but the EUR was rebuffed above 1.1800.
EU zone data remains uneven and at least currently in the USD cycle dollar bulls feel comfortable to sell EURO at 1.1800.

1.1720 remains the key for downside after it was such an obstacle to push through last week

JPY
Starting to see a nascent recovery in USD strength the back of this week’s Fed meeting, my views for a stronger JPY are a way to far in the horizon as the market is testing some significant near-term levels with a break into 113’s will open test of 114.25 on follow through. Interesting from my seta was yesterday absolute zero reaction in JPY to the glint of risk off, suggesting the dollar bulls are targeting USDJPY higher.

EM Asia

The Malaysian Ringgit

Brent above 80 has improved, but one look at global yields ratcheting higher in the wake of Draghi’s hawkish inflation comments and the true inflationary impact of surging oil prices are having on the US yields, will make local EM traders think twice about diving in headfirst.

Support comes in at 4.12 resistance 4.15

Brexit sterling shorts back to July 2016 levels

“Bear” pound speculators hold nearly the same amount of net short positions in sterling as they did in July 2016.

This would suggest that the markets worries about how the Brexit divorce on March 29, 2019 will look, and the uncertainty surrounding it, has got back to levels it was at just after the referendum vote.

According to CFTC latest data, sterling shorts have increased by +18K to +79K in the week to Sept. 18 – this is the highest level of “short” positions in four-months.

Pound bid

The pound trades higher this morning, both against the dollar and the euro, reversing some of the losses it made on Friday after E.U leaders rejected U.K PM Theresa May’s Brexit deal proposal and May reiterating in a speech that a no-deal scenario was better than a bad deal.

GBP/USD (£1.3152) remains handcuffed to Brexit rhetoric and PM May woes and has reclaimed the psychological £1.31 handle after comments this morning 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.”

Canada: Wholesale trade, July 2018

Wholesale sales rose for the third time in five months, up 1.5% to $63.9 billion in July, more than offsetting the 0.9% decline in June. Sales were up in four of seven subsectors, representing approximately 66% of total wholesale sales.

The personal and household goods; food, beverage and tobacco; and motor vehicle and parts subsectors led the gains in July, while the miscellaneous subsector posted the largest decline.

In volume terms, wholesale sales increased 1.2%.

Increase in July attributable to higher sales in four of seven subsectors

The personal and household goods subsector rose for the second consecutive month, up 4.2% to $9.2 billion in July. Sales were up in five of six industries, led by the textile, clothing and footwear, and personal goods industries. In volume terms, sales in the subsector increased 4.6%.

Following two consecutive months of declines, sales in the food, beverage and tobacco subsector were up 2.6% to $12.0 billion, mainly on the strength of higher sales in the food industry (+2.4%). The gain in July was partly attributable to an increase in prices as sales in the industry were up 1.6% in volume terms.

Sales in the motor vehicle and parts subsector increased 2.4% to $11.1 billion, the first gain in four months. While increases were reported in all three industries, the motor vehicle industry (+2.0%) contributed the most to the overall gain in July.

Of the three subsectors posting declines in July, the miscellaneous subsector was the largest contributor, edging down 0.2% to $8.2 billion. Two of the subsector’s five industries declined in July, accounting for approximately 41% of the subsector’s sales.

Sales up in six provinces

Sales increased in six provinces in July, which together represented 97% of total wholesale sales in Canada. Quebec and Ontario accounted for most of the gain.

Sales in Quebec increased for the third time in four months, up 3.2% to $11.9 billion in July. Six of seven subsectors increased, led by the personal and household goods (+5.8%) and the food, beverage and tobacco (+5.0%) subsectors. Sales in the personal and household goods subsector increased after two consecutive declines, reaching their highest level on record, while sales in the food, beverage and tobacco subsector increased for the second consecutive month.

Wholesale sales in Ontario rose for the second month in a row, up 1.1% to $32.6 billion in July, on the strength of higher sales in four of seven subsectors. The motor vehicle and parts subsector (+3.1%), which rose after three consecutive monthly declines, and the personal and household goods subsector (+4.0%), which increased for the second consecutive month, contributed the most to higher sales in Ontario.

In Alberta, sales increased for the third time in five months, up 2.5% in July to $7.0 billion. The machinery, equipment and supplies subsector (+4.9%) contributed the most to the gain. The gain in this subsector was attributable to higher sales reported in the construction, forestry, mining and industrial machinery, equipment and supplies industry.

Sales in British Columbia rose 0.7% to $6.7 billion in July, on the strength of higher sales in the food, beverage and tobacco and the building material and supplies subsectors. Both subsectors increased following two consecutive monthly declines.

In dollar terms, the Atlantic provinces reported the largest decline in July. Sales in Newfoundland and Labrador decreased 4.6% to $354 million, on the strength of lower sales in the miscellaneous subsector.

The food, beverage and tobacco subsector contributed the most to the decline in Nova Scotia (-1.0%), New Brunswick (-0.8%) and Prince Edward Island (-0.8%).

Inventories rise in July

Wholesale inventories increased for the fifth time in seven months, up 1.4% to $87.1 billion in July. Gains were recorded in six of seven subsectors, representing 86% of total wholesale inventories.

In dollar terms, the personal and household goods subsector (+4.3%) recorded the largest gain, on the strength of higher inventories in five of six industries. This was the third consecutive monthly increase for the subsector.

Inventories in the building material and supplies subsector (+2.2%) grew for the fifth consecutive month in July. The increase was mostly attributable to gains in the electrical, plumbing, heating and air-conditioning equipment and supplies industry (+4.1%).

The food, beverage and tobacco subsector (+1.8%) posted a second consecutive monthly increase, mainly due to higher inventories in the food industry (+2.0%).

The machinery, equipment and supplies subsector (+0.6%) rose for the fifth time in seven months, on the strength of the farm, lawn and garden machinery and equipment industry (+1.5%).

The lone subsector to decline in July was motor vehicle and parts, down 0.8% following three consecutive monthly gains.

The inventory-to-sales ratio was unchanged at 1.36 in July. The ratio is a measure of the time in months required to exhaust inventories if sales were to remain at their current levels.

StatsCanada

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

Numerous crosscurrents in play

Numerous crosscurrents in play

US equities 

On Friday the Dow and S&P opened and closed again at fresh highs on massive volumes due to options expirations, and while headlines over the weekend suggested that trade talks between both US and China will be shelved until after the US midterm elections, markets will not view this in too much of a negative light. It’s not so unexpected, and frankly, the US administration would be just as happy to keep trade wars out of the headlines ahead of the politically charge midterms where the Whitehouse will need to expend much political energy righting their political ship. But more importantly, the markets were viewing the November G-20 summit as a critical focal point where it’s expected both Ji and Trump will take to the sidelines with the intentions agreeing on a roadmap to settle this trade dispute. Not to mention, backchannels will most likely be open. But make no mistake, this will be a bumpy ride and don’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.

Regardless, the astounding closing price action in equities last week, particularly the Shanghai composite and the US Indices suggest the markets are incredibly confident on a US-China trade deal by year-end, more Chinese stimulus to come, and hopefully a stable Yuan.

NAFTA 
On the no less political contentious NAFTA 2 trade talks. Canada is expected to join a NAFTA 2.0 agreement. But the Quebec election falls on Oct 1, and with the Provincial Liberals pulling ahead in the polls every so slightly, it’s debatable how much of a rush the Federal Liberals will be to ink a deal before month end. Especially given the political fallout from any concessions around the dairy industry, as the bulk of Canada’s Milk industry is based in Quebec.

Focus 

Traders will continue to monitor Chinese equities, DXY and copper.

Copper is fantastic leading indicators of risk and the economic cycle. Shanghai copper rose smartly on Friday bolstered by China’s fiscal efforts to bump up demand.

US Yields 

The US 10 yields finished the week above 3.05 % and could be setting the stage for a push higher. Rate differentials are still very much in favour of the USD story. But unlike when US yields rocketed higher in May, the UK and Canadian yields are breaking higher, while Japan is staying the top end of YCCC But more significantly Bunds are trading in the 50 bp region so there’s a bit more yield competition for the dollar to contend.

The US dollar 

Speaking of which, the USD could trade defensively ahead of this weeks FOMC as USD Bulls erring on the side of caution. With 2 US rates hikes priced into the balance 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.

Oil Markets 

Last week oil prices were trading buoyantly on reports Saudis are more than happy with a Brent price above $80 or that OPEC, more generally, is not considering raising output. That was until President Trump castigated OPEC ahead of this weekends Algiers meeting.

However, 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 easing price pressures. Not wholly unexpected mind you as the markets have been leaning toward December 3 OPEC summit for more formal decisions

WTI is trading the weekend news very favourably, up over 1 % at the NYMEX open and additionally spirited on by reports  of inventories at the Cushing Oklahoma delivery point may have declined further in the week ended September 21.

But bullish sentiment could be tempered somewhat by several reports suggest ing OPEC producers generally agree that oil prices above Brent $80 a barrel would be too high. Which plays into the long-held market axiom that OPEC is looking to stabilise prices within the $70-80 $ sweet spot

Gold Markets 

With risk sentiment soaring there has been very little demand for Gold and when you factor in the fact that Gold traditionally trades poorly ahead of anticipated Fed hike, the USD will have up ground to entice buyer back to the market.

G-10

Japanese Yen

The Yen continues to consolidate but with the BoJ continuing to float the idea of shiting policy for no other reason than to support the beleaguered banking sector after years of 0 % interest rates. These trial balloons could contiued to weight on the top side despite USDJPY getting massive support from the favourable interest rate differentials.

The Euro 

I still think Italy risk is way underpriced and the Eurozone economic recovery is so uneven that the EURUSD could move lower given the US robust US economic story.

EM Asia

Hard to envision anything other the current account ( ca)deficit currencies remain vulnerable while ca surplus countries will contiued fare well.

The Chinese Yuan

China will move towards current account deficit and with interest rates likely to move lower to stimulate the economy the RMB will either trade weaker or remain stable at the at the CNY weakest levels of the current range.

The Malaysian Ringgit

The song remains the same. Positive updraft from global risk sentiment coupled with rising oil prices. But offset by increasing global yields, especially those in the US which lessens the appeal for local bonds.

The Rupee and Rupiah 

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 different 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 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.