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.”

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

Canada retail sales climb, inflation falls, CAD rallies

Canadian retail sales climbed in July following a decline in June, led by demand for food and higher gas prices.

Stats Canada said retail sales rose +0.3% in July to a seasonally adjusted C$50.9B.

Note: In June, retail sales fell by a revised -0.1%.

Ex-autos, July sales rose by a robust +0.9%, despite a decline of -2.2% at new car dealerships weighing on the overall results. However, on a price-adjusted basis, sales fell -0.1%. On a year-over-year basis, retail sales in July rose +3.7%.

Canada inflation slows in August

On the inflation front, it decelerated in Canada last month, but remained close to its seven-year high print from July. This headline print very much keeps the Bank of Canada (BoC) in play for another +25 bps hike in October.

Stats Canada said that CPI rose +2.8% y/y in August, following a +3.0% increase in July.

Digging deeper, core-inflation prices rose in a range from +2.0% to +2.2%, based on the three preferred gauges used by the BoC.

CAD initial reaction saw the loonie catch a bid, to deal at C$1.28864 a new weekly high.

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

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

Hungary central bank leaves rates unchanged

As expected, the Hungarian Central Bank (MNB) left their base rate unchanged at +0.9% this morning.

It’s the 28th consecutive pause for the base rate in the current easing cycle.

Also, policy makers left the overnight deposit rate at -0.15%, as expected.

Yesterday, Hungary’s 10-year government bond yields rallied to its highest level since early July amid expectations that the central bank could tweak a swap tool that encourages banks to buy long-term bonds. 10’s backed up to +3.64%.

Inflation ran at +3.4% in August, above the mid-point of the bank’s +2-4% target range. Don’t expect the MNB to get worried unless the forint weakens significantly, lifting import prices.

The forint is trading up +0.28% at €324.00.

Governor Matolcsy is to hold his post-rate decision statement at 09:00 EDT

Where to hide? That’s the next million-dollar question

Tuesday September 18: Five things the markets are talking about

It was coming, the market new it was coming, just when, and how much, were the unknown variables.

President Trump has imposed an additional +10% tariffs on about +$200B worth of imports from China, rising to +25% by the turn of the New Year. Trump has threatened additional duties on about +$267B more if China contemplates hitting back on the latest U.S action, beginning next Monday.

Of course China is going to retaliate, but how, is part of the guessing game – “to protect its legitimate rights and interests and order in international free trade, China is left with no choice but to retaliate simultaneously.”

There are a few tech exceptions – which benefit Apple/Fitbit for now – and the tiered deployment is to help U.S companies find alternative supply chains. However, if the U.S needs to go to phase three, it would consume all remaining U.S imports from China and Apple products and its competitors would not be spared.

The problem for China is that they do not import enough U.S goods to go head-to-head with the U.S leverage strategy. They will want to cause U.S pain and will probably focus even more on the tech sector. Nevertheless, watch the Yuan’s value, it may be one of China’s strongest weapons. It has weakened by about -6.0% in the past three-months, offsetting any -10% tariff rate by a substantial margin.

From an asset price viewpoint, it’s been a rather ‘subdued’ reaction to Trump’s announcement. Buying U.S dollars in response to trade conflicts does not seem to be as appealing anymore. The delay in imposing +25% tariffs may explain the lack of movement, in addition to the fact that the tariffs have been widely anticipated.

1. Stocks mixed results

In Japan, the Nikkei rallied overnight to its highest close in seven-months, led by insurers thanks to rising U.S Treasury yields. However, no surprises, capping gains were electronic suppliers, which underperformed as the market weighs the new U.S China, tariff impact. The index closed out +1.4% higher, while the broader Topix rallied +1.8%.

Down-under, materials and energy stocks pushed Aussie equities lower as the escalating Sino-U.S trade war pressured commodity and oil prices. The S&P/ASX 200 index fell -0.4% at the close. The index rallied +0.3% yesterday. In S. Korea, the Kospi stock index closed +0.26% higher along with some of its regional bourses as Chinese markets largely shrugged off trade tariff threats.

In China, stocks staged a late rebound as the blue-chip index CSI300 rallied +1.9% as some investors bet that authorities will increase their investment in infrastructure to offset the impact of the latest tariff penalties from Trump. In Hong Kong, the Hang Seng index closed out +0.6% higher.

In Europe, regional bourses have shrugged off early weakness following the ‘telegraphed’ U.S tariff announcement after the yesterday’s U.S close. Autos lead the gains, while the materials sector and consumer discretionary are under early pressure.

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

Indices: Stoxx50 +0.5% at 3,363, FTSE +0.1% at 7,318, DAX +0.6% at 12,164, CAC-40 +0.6% at 5,383; IBEX-35 +0.4% at 9,446, FTSE MIB +0.2% at 21,148, SMI -0.3% at 8,908, S&P 500 Futures +0.2%

2. Oil prices fall as U.S-China trade war questions demand, gold lower

Oil markets have eased a tad as the Sino-U.S trade war questions the outlook for crude demand from the world’s two largest economies.

Brent crude futures have dropped -29c, or -0.37% to +$77.76 per barrel, while U.S West Texas Intermediate (WTI) crude is down -15c, or -0.22%, at +$68.76 per barrel.

U.S crude ‘bears’ believe that these tariffs are likely to limit economic activity in both China and the U.S – a hit to growth is a hit to consumption.

Note: Refineries stateside consumed about +17.7m bpd of crude oil last week, while China’s refiners used about +11.8m last month.

Crude ‘bulls’ are currently clinging to the potential supply cuts caused by U.S sanctions on Iran (third-largest producer in OPEC) as reason enough to support short-term oil prices.

Ahead of the U.S open, gold prices are under pressure as the ‘big’ dollar steadies amid concerns of an escalation in Sino-U.S trade tensions. Spot gold is -0.3% lower at +$1,197.51 an ounce, after rising +0.6% in Monday’s session. U.S gold futures are down -0.3% at +$1,202.20 an ounce.

However, if the ‘big’ dollar loses its ‘tariff haven’ appeal, expect the ‘yellow’ metal to find support on pullbacks.

3. Sovereign yields rally

U.S Treasury yields have backed up along the curve on growing expectations that the Fed could raise interest rates a few more times this year after recent data showed wages spiking last month, elevating concerns about inflation.

Note: U.S data last week showed that wages in August posted their largest annual increase in more than nine-years, rising +0.4% m/m and +2.9% y/y.

Yesterday, U.S 10’s touched +3.022%, the highest level in four-months, along with U.S 30-year yields at +3.159%. As to be expected, the short end rallied to a 10-year high, backing up to +2.799%.

Elsewhere, German Bund yields continue drifting upward to the +0.50% level amid better sentiment around Italy. The 10-year Bund yield is trading at +0.46%, up +0.05%. In the U.K, the 10-year Gilt yield has rallied +1 bps to +1.536%.

4. Dollar muted reaction

EUR/USD (€1.1680) shows a muted reaction to the U.S announcement that it will charge +10% on another +$200B of Chinese imports starting from next Monday. Typically trade tensions have been positive for the ‘big’ dollar; maybe attitudes will change once China shows its hand.

GBP/USD (£1.3126) pulls back from recent six-week highs as the market awaits Thursday’s E.U summit.

TRY ($6.3670) continues to weaken, down another -0.7% as investors remain confident in fading last weeks bigger than expected Central Bank of the Republic of Turkey (CBRT) rate hike.

An interest rate increase by the Norges Bank on Thursday is widely expected and already broadly priced into EUR/NOK (€9.5406). However, NOK bulls believe the central bank will likely signal more rate increases, which should provide further support for this commodity currency.

5. Reserve Bank of Australia (RBA) stays true to its ‘hawkish’ stance

In its minutes released overnight there were no surprises. The RBA maintained its interest-rate guidance in the minutes from its meeting a fortnight ago, reiterating that increases will eventually come amid anticipated economic strength.

RBA also noted that a number of G10 central banks, including the Fed, were expected to continuing rate hikes. This had been reflected in the markets, “most notably a broad-based appreciation of the US dollar” that “raised risks” for some, especially for “fragile emerging” markets. However, “the modest depreciation of the AUD was helpful for domestic economic growth.”

The copy and recent rhetoric suggests that Aussie policy makers remains highly confident its current stance – interest rates at record lows will ultimately bring lower unemployment, higher wage growth and an uptick in inflation over time.

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No tariffs, now tariffs, what gives?

Monday September 17: Five things the markets are talking about

The possibility of a new round on tariffs on Chinese goods is not helping equity markets this Monday morning. The ‘big’ dollar is holding onto Friday’s gains as investors try and acclimatize themselves to the ever-fluid trade situation that President Trump seems to be creating himself.

Deflection or negotiation, whatever the reason, markets continue to wait for the counter punch before throwing all in. China is not expected to be a willing dance partner in proposed trade talks later this month if the Trump administration goes ahead with the additional tariffs expected later today.

Note: Tariff level likely to be around +10%, and below the +25% previously announced.

Last week, the outlook for global trade looked improved, however, true to form, inconsistency seems consistent with this Trump administration.

This week, on the central bank front, the Bank of Japan (BoJ) dominates proceedings (Sept 18). However, recent domestic data remains mixed – Q2 GDP was revised upward while monthly core-machine orders rebounded from June’s decline and PPI edged downward – and certainlgly disappointing news to Governor Kuroda’s inflation fight.

On tap: AUD monetary policy minutes (Sept 17), BoJ rate announcement (Sept 18), U.K CPI and NZD GDP (Sept 19), SNB monetary policy decision & U.K retail sales, CAD retail sales (Sept 21)

1. Stocks see mostly red

The Nikkei 225 was closed for a bank holiday.

Down-under, Aussie stocks were the best performer in the region, as other Asia-Pacific indexes struggled with Sino-U.S trade worries. The ASX 200 rose +0.3% as energy and financial stocks logged solid gains and telecom rallied +1.5%. The negatives were elder care providers due to a planned government probe into the sector. In S. Korea, the Kospi closed down -0.66% on global trade worries.

Stocks in Hong Kong finished lower while China’s main Shanghai Composite index fell to its lowest close in four-years overnight on fears that Washington is expected to unveil new tariffs on imported Chinese goods this week.

In Hong Kong, the Hang Seng index ended -1.3% lower, while the China Enterprises index closed down -1.1%. In China, the Shanghai Composite index dropped -1.1%, while the blue-chip CSI300 index also declined -1.1%.

In Europe, regional bourses reverse earlier losses to trade mostly unchanged after weakness in Asia.

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

Indices: Stoxx50 +0.1% at 3,348, FTSE -0.2% at 7,291, DAX -0.2% at 12,100, CAC-40 flat at 5,351; IBEX-35 +0.6% at 9,417, FTSE MIB +0.7% at 21,019, SMI -0.3% at 8,936, S&P 500 Futures -0.1%

2. Oil higher as U.S Iran sanctions raise supply concerns, gold higher

Oil prices remain better bid as the market focuses on the potential impact of U.S sanctions on Iran despite promises by Washington that the Saudis, Russia and the U.S could together raise output fast enough to offset falling supplies.

Brent crude oil is up +45c a barrel at +$78.54, while U.S light crude (WTI) is up +43c at +$69.44.

Note: Washington aims to cut Iran oil exports to force Tehran to re-negotiate a nuclear deal. Iran exports have declined by -580k bpd in the past 90-days.

On Friday, U.S Energy Secretary Rick Perry said that he did not expect any price spikes and that the world’s top three oil producers could raise global output in the next 18-months.

Also capping oil prices, U.S drillers added two oilrigs in the week to Sep. 1, bringing the total count up to 749 according to Baker Hughes energy services.

Note: A Joint Technical Committee of OPEC and non-OPEC producers are due to meet today to coordinate production.

Ahead of the U.S open, gold prices have inched a tad higher as speculators look for short-term gains, amid increasing Sino-U.S trade tensions and prospects of further Fed interest rate hikes. Spot gold is up +0.2% at +$1,195.83 an ounce, after falling -0.6% on Friday when it marked its third straight weekly decline. U.S gold futures are down -0.1% at +$1,199.80.

3. Sweden’s Riksbank ready to hike despite low inflation

This morning minutes from Sweden’s Riksbank suggests that the board has become more tolerant of downside surprises to inflation and that it is now ready to hike rates before core-inflation has returned all the way to target.

Board members indicated that inflation expectations are “firmly anchored at the target, indicating that this is sufficient to start a very gradual tightening of the currently very expansionary monetary policy.” The bond market is pricing in a +25 bps hike in early Q1, 2019. The SEK is rallying, with EUR/SEK down -0.4% at €10.4774.

Elsewhere, the yield on U.S 10’s has fallen -1 bps to +2.99%. In Germany, the 10-year Bund yield is unchanged at +0.45%, while in the U.K, the 10-year Gilt yield has rallied less than -1 bps to +1.53%. The spread of Italy’s 10-year BTP’s over Bunds has narrowed -8 bps.

4. Sterling rallies on Irish border hopes

GBP (£1.3095) trades atop of the psychological £1.31 handle on optimism of progress on the Irish border question ahead of this week’s E.U summit.

E.U chief negotiator Michel Barnier is supposedly working on a plan to minimise physical checks at the Irish border by tracking goods using barcodes on shipping containers.

Note: The first of three Brexit summits will be held on Thursday, and E.U leaders hope a deal can be struck within the next two months.

EUR/USD (€1.1636) little changed. The ‘big’ dollar is expected to remain contained this week due to the absence of Tier 1 U.S data releases, while EUR gains may be capped on ongoing Italian concerns.

Emerging market currency’s trade under pressure once again on tariffs threats, with the USD/TRY over +1.6% ($6.2554) higher, while the USD/INR is +0.8% higher as the Reserve Bank of India (RBI) plans over the weekend to curb INR’s fall fail to lift the rupee.

5. Annual inflation down to +2.0% in the euro area

Data this morning from Eurostat showed that the euro area (19 members) annual inflation rate was +2.0% in August, down from +2.1% in July. A year earlier, the rate was +1.5%.

For the European Union (28 members) annual inflation was +2.1% in August, down from +2.2% in July. A year earlier, the rate was +1.7%.

Digging deeper, the lowest annual rates were registered in Denmark (+0.8%), Ireland and Greece (both +0.9%). The highest annual rates were recorded in Romania (+4.7%), Bulgaria (+3.7%), Estonia (+3.5%) and Hungary (+3.4%).

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Erdogan hurts TRY ahead of CBRT decision

Thursday September 13: Five things the markets are talking about

U.S. equity futures and euro regional bourses trade steady after the overnight Asian session put an end to its longest losing streak since 2002 on fresh hopes that the worlds’ two largest economies will again sit down and talk trade.

The EUR (€1.1617) and the pound (£1.3040) are little changed ahead of their respective central banks key policy decisions in a few hours.

In anticipation of the European Central Bank’s (ECB) rate announcement (07:45 am EDT) – no rate change is expected – however, investors will be searching for clues about the ECB’s ‘reinvestment policy.’ The bank is expected to downgrade its 2018 eurozone GDP. The reason is likely to be a slowdown in global trade amid trade war uncertainty, rather than a eurozone-specific factor. Eurozone inflation projections are expected to remain unchanged.

Sterling bulls are looking for the pound and short-term interest rates to gain from this morning’s Bank of England (BoE) rate call (07:00 am EDT). Touted support will come from the recent flurry of stronger U.K GDP growth and wage data.

Brexit comments are not expected to have an effect on the pound , as Governor Carney is likely to reiterate that he “assumes a smooth and orderly exit from the E.U.” Also, Carney will want to avoid becoming politicized at such a vital occasion in U.K politics.

For volatility, the market will be looking closely at this morning’s Central Bank of the Republic of Turkey (CBRT) rate announcement. The CBRT needs to raise rates to slow inflation and reverse some of the recent sharp falls in TRY ($6.5345), but faces political pressure from President Erdogan not to. He would cut high interest rates, as he believes high inflation is a result of CBRT’s wrong steps. TRY is expected to weaken further without a sufficient rate increase. The market is pricing anything from zero to +725 bps hike.

Elsewhere, crude oil prices have retreated a tad, mostly on the outlook for tighter supply. Also, the potential impact on commodities from Hurricane Florence has eased along with lower wind speeds.

On tap: Both China and the U.S will release its I.P numbers and retail sales data Friday.

1. Stocks see the light

Global stocks have pared some of this month’s loss overnight; climbing on the news that the U.S had invited China to a new round of trade talks.

In Japan, the Nikkei rallied to two-week highs overnight as news of a proposed fresh round of trade talks between China and the U.S lifted risk appetite. The Nikkei share average soared +1.0%, while the broader Topix surged +1.1%.

Down-under, Aussie stocks were the outlier, falling Thursday as banks and insurers were sold on the back of damaging testimony at a public inquiry, though gains in miners on a recovery in commodity prices capped the losses. The S&P/ASX 200 index fell -0.8%. In S. Korea, the Kospi stock index rallied +0.18% following Sino-U.S trade talk news.

In Hong Kong, Chinese banks helped push the Hang Seng index +2.5% higher, while in China, the Shanghai Composite Index was up +1.2%, although that index still remained down almost -19% on the year after the release of subdued credit growth and new loans figures out of China.

In Europe, regional bourses trade mixed as investors focus on upcoming macro events with rate decisions by ECB and BoE on tap.

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

Indices: Stoxx50 +0.4% at 3,341, FTSE -0.2% at 7,299, DAX +0.5% at 12,090, CAC-40 +0.4% at 5,351; IBEX-35 +0.3% at 9,322, FTSE MIB -0.2% at 20,930, SMI +0.2% at 8,974, S&P 500 Futures +0.1%

2. Oil slips as economic concerns counter tighter supply, gold steady

Oil prices are under pressure, falling from their four-month highs as investors focused on the risk that EM crises and trade disputes could dent demand.

Benchmark Brent crude oil is down -70c a barrel at +$79.04, while U.S light crude (WTI) fell -$1.15 to a low of +$69.22 a barrel.

The IEA indicated this morning that although the oil market was tightening at the moment and world oil demand would soon reach +100M bpd, global economic risks were mounting.

Note: Brent rallied above +$80 per barrel yesterday for the first time since May, supported by expectations that U.S sanctions against Iran’s oil exports, which will start in November, will tighten global markets. U.S light crude pushed over +$70 on Wednesday due to falling U.S crude inventories and production levels.

Ahead of the U.S open, gold prices trade steady, atop of their one-week high, amid hopes for a new round of Sino-U.S trade talks. However, a firmer U.S dollar is expected to keep gains in check. Spot gold is at +$1,205.78 an ounce, after hitting its highest since Aug. 31 at +$1,208.48.

Note: The ‘yellow’ metal gained +0.7% in yesterday’s session, its biggest single-day rise since Aug. 24.

3. Yields steady ahead of ECB and BoE

Both the ECB and BoE are not expected to make any major policy changes this morning.

The demand for safe-haven government debt has also been weak this month by declining fears about the political situation in Italy, where a new populist government is working on its first budget proposal. They expect to adhere to the E.U rules and regulations.

This week’s selling of high-grade sovereign bonds has been led by Europe, with the 10-year German Bund yield backing up to +0.431% from Wednesday’s +0.404%. In the U.K, the 10-year Gilt yield increased to +1.498% from +1.470%.

Stateside, U.S government bond prices are also lower as the market braces for the possibility of tighter monetary policy – a further two rate hikes are been priced in by Fed by the end of 2018. U.S 10’s are trading just shy of the psychological +3% level at +2.97%.

4. A sufficient CBRT hike could weaken the dollar vs. EM FX

If the CBRT were to aggressively hike interest rates this morning, this would likely dampen investors’ appetite for the U.S dollar against EM currency pairs. It may also help the EUR (€1.1616), given that European banks are lenders to Turkish businesses.

However, most EUR moves will be driven by the CB rhetoric. The ECB’s Draghi will likely sound “dovish” by lowering growth forecasts for 2018, which should prevent the ‘single’ currency from gaining on any other factors.

It too would not be a surprise if the CBRT were to disappoint, especially after President Erdogan reiterated this morning his view that interest rates should be cut. USD/TRY is last up +3% at $6.5433. EUR/USD is down -0.1% at €1.1619.

Note: If the Fed continues to raise interest rates, the currencies of Turkey, South Africa, Malaysia, India and Indonesia would be hardest hit. The less vulnerable currencies would be those of South Korea, China, Thailand and Russia.

5. Aussie employment

Overnight, Australia added a stellar +44K jobs in August, the second-highest monthly add in the last nine-months. Even more impressive was the fact that nearly all of the jobs, +33.7K, were in the full-time category and despite a higher participation rate, 65.7% from 65.5%; the unemployment rate remained steady at 5.3%.

This strong report will be much welcomed by the Reserve Bank of Australia (RBA) – more workers mean more tax revenue, and possibly a long-awaited uptick in wage growth as household budgets are strained.

It does not signal an imminent interest-rate increases, but ‘hawkish’ rhetoric could enter the fray.

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CAD rallies on Nafta optimism

Wednesday September 12: Five things the markets are talking about

It’s ‘hump’ day and despite the contained trading ranges across the various asset classes, investors have a lot to contend with, and strategize for, as we head towards the Autumn months which are expected to bring heightened volatility and risk aversion to financial markets.

China and EM crisis risk – can they both be pushed deeper at the same time?

U.K and E.U are preparing for a “special” summit in November – will the Irish be blamed for a “hard” Brexit and can PM Theresa May survive a leadership challenge?

Telegraphed Fed rate hikes – is the market willing to accept two more Fed hikes by year-end?

Trump, tariffs and trade – will the President go too far and hurt the U.S economy?

U.S Midterms – pro-Democratic November election results?

This morning across the asset classes, global equities mostly see red as investors’ assesse the outlook for global growth amidst heightened trade tensions. Oil prices are well supported as dealers try to get a handle on Hurricane Florence potential impact.

U.S two-year yields trade atop a decade high as dealers nail down two more Fed rate hikes to close out this year. U.S 10’s have stalled their advance towards +3%, which is providing for a steady U.S dollar against G-10 currency pairs.

On tap: The next three-days are busy on the data front. Today, it’s the release of U.S PPI (08:30 am EDT) and Aussie employment numbers (09:30 pm). Tomorrow, both the ECB and BoE deliver their monetary policy rate announcement and on Friday, both China and the U.S release their industrial production (IP) and retail sales prints.

1. Stocks see mostly red

Market worries about escalation in the Sino-U.S trade war and the outcome of U.S-Japan trade talks negatively impacted Asian regional bourses in the overnight session.

In Japan, the Nikkei fell -0.3% as chip-stocks followed the weakness of their U.S counterparts’ performance yesterday. Not helping was agriculture equipment maker Kubota plummeting after admitting falsifying data. The index closed out the previous session +1.3% higher. The broader Topix lost –0.7%.

Down-under, Aussie shares ended lower on financials and miners. The S&P/ASX 200 index fell -0.1% at the close of trade, having risen +0.6% Tuesday. The index has now fallen for nine of the last 10 sessions. In S. Korea, the KOSPI stock index closed steady (-0.02%) overnight amid investor concerns about EM and the latest round of verbal threats in the Sino-U.S trade conflict.

In China, stocks fell Wednesday morning, dragging the Shanghai Composite and the blue-chip CSI300 indexes down to new multi-year lows, on Sino-U.S trade worries, with China seeking WTO sanctions. The Shanghai Composite index was down -0.33%, while China’s blue-chip CSI300 index was down -0.61%.

The declines continued for Hong Kong equities. The Hang Seng Index was off a further -0.5% as it officially entered bear-market territory.

In Europe, regional bourses opened higher, in contrast to Asia, mostly supported by some positive Brexit comments from E.U’s Juncker, who welcomes PM Theresa May’s Brexit proposal and on robust oil and mining stocks

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

Indices: Stoxx600 +0.5% at 373.6, FTSE +0.12% 7282, DAX +0.% at 12030, CAC-40 -0.8% at 5326, IBEX-35 +0.2% at 9285, FTSE MIB +0.27% at 20909, SMI +0.6% at 8970, S&P 500 Futures +0.2%

2. Oil prices rally on falling stockpiles, looming sanctions and Florence

Oil prices have rallied overnight after a report of a decline in U.S crude inventories and pending sanctions against Iran raised expectations of tightening supply, while top Russia warned of a fragile global market. U.S oil prices also found support from hurricane Florence that is threatening U.S East Coast fuel markets.

U.S West Texas Intermediate (WTI) crude futures are at +$69.93 per barrel, up +68c, or +1% from Tuesday’s close – WTI futures gained +2.5% yesterday. Brent crude futures have climbed +30c, or +0.4%, to +$79.36 a barrel – Brent gained +2.2% yesterday.

Also providing support is U.S inventories. API data Tuesday showed a large drawdown in inventories. Stocks fell by -8.6m barrels in the week to Sept. 7 to +395.9M.

Expect dealers to take their cue from today’s EIA inventory report.

Ahead of the U.S open, gold prices have edged a tad lower as the key technical resistance level (+$1,200) continues to act as a deterrent for the ‘yellow’ metal and as the Yuan weakened outright on fears the U.S-China trade war could escalate. Spot gold is down -0.3% at +$1,194.08 an ounce, after hitting its lowest since Aug. 24 at +$1,187.21 yesterday. U.S gold futures are down -0.3% at +$1,198.90 an ounce.

3. German Bund yield steadies above +0.40%

Both the ECB and BoE will hold their respective policy meetings tomorrow. Neither CB is expected to make any major policy changes.

The demand for safe-haven government debt has also been weak this month by declining fears about the political situation in Italy, where a new populist government is working on its first budget proposal. They expect to adhere to the E.U rules and regulations.

Overnight, the selling of high-grade sovereign bonds was led by Europe, with the 10-year German Bund yield backing up to +0.431% from Tuesday’s +0.404%. In the U.K, the 10-year Gilt yield increased to +1.498% from +1.470%.

Stateside, U.S government bond prices are also lower as the market braces for the possibility of tighter monetary policy – a further two rate hikes are been priced in by Fed by the end of 2018. U.S 10’s are trading just shy of the psychological +3% level at +2.97%.

4. CAD rallies on Nafta optimism

Late yesterday afternoon, USD/CAD (C$1.3048) encountered a heavy sell-off on Nafta optimism comments by President Trump. Currently, the pair remains under pressure with the 20-period moving average standing below the 50-period one. According to the techies, the RSI has broken below the ‘over-sold’ area of 30, showing a strong downside momentum.

Investors should expect key resistance to be located just north of C$1.3100 and as long as this key resistance is not penetrated, intraday “bearishness” should remain in vogue.

Sterling (£1.2998) briefly penetrated the £1.3000 support level after the BBC reported a group of about 50 lawmakers in PM Theresa May’s government had met to discuss “how and when” they could force her out of her job. The pound (£1.3040) was able to rebound and recoup all of its Euro-session losses on favourable Brexit comments E.U’s Juncker.

Finally, SEK (€10.4848) remains in ‘no man’s land’ after last Sunday’s inconclusive general election, which witnessed the rise of ‘right.’ As Sweden requires political clarity and if the parliamentary deadlock cannot be broken and new elections are announced, some of the political risk premium in the run-up to the vote could easily return.

5. Aussie consumer confidence weakest in 10-months

Data down-under overnight showed that Australian consumer confidence plummeted -3% in September in the wake of the political row among the ruling conservatives.

Digging deeper and politics aside, rising Aussie mortgage rates and household-budget pressures are also weighing on consumer optimism. All index components fell versus last months prints, while the reading for the next five-years’ economic outlook slid the most at -5.8%.

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