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.

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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?

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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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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%.

Forex heatmap

Focus on the three T’s – trade, tariffs and Trump

Tuesday September 11: Five things the markets are talking about

The three T’s – trade, tariffs and Trump are driving capital market asset prices in September.

Today, thus far, is a good feel-day as market sentiment seems to be improving, supported by renewed optimism that the U.K can cut a Brexit deal in a timely fashion. This has pushed sterling (£1.3067) to a five-week high overnight.

However, be forewarned, emerging markets and recent commodity price weakness provides enough reasons for caution. This market is still waiting for the “other shoe to drop” in the Sino-U.S trade dispute after President Trump signalled late last week that he is ready to impose tariffs on even more goods.

This Thursday, the European Central Bank (ECB) is expected to deliver caution regarding concerns about protectionism and turmoil in EM at its monetary policy meeting. Draghi is likely to continue stressing that the eurozone’s economic recovery remains “robust” and that policy makers are confident of a recovery in inflation, which will keep its monetary ‘normalization’ intact.

Dollar ‘bulls’ will be looking to strong data due later in the week for support – U.S core-CPI release on Thursday and retail sales on Friday are likely to come in strong and boost the buck.

In commodities, WTI crude speculators are looking to Hurricane Florence approaching the U.S east cost – will there be much disruption in supplies? Crude ‘bulls’ are pushing WTI prices towards $68 bp.

1. Global equities mixed results

European stocks and U.S equity futures are a tad lower after a mixed session in Asia.

In Japan, equities had their best session in a month overnight, with exporters lifted by the yen weaker outright (¥111.48) and tech stocks boosted by gains stateside yesterday. The Nikkei ended the day +1.3% higher, while the broader Topix closed +0.67% stronger.

Down-under, Aussie shares rallied overnight, ending its eight consecutive days of losses, supported by financials and energy stocks. The S&P/ASX 200 index rose +0.6% at the close. In S. Korea, the Kospi weakened, tracking losses from China as Sino-U.S tariff worries continue to linger. At the close, the index lost -0.24%.

In Hong Kong, shares fell into bear market territory on Tuesday as the Hang Seng index ended atop of its 14-month low, on fears of further escalation in the U.S-China trade war. The Hang Seng index ended down -0.72%, while the China Enterprises Index lost -0.96%.

In China, shares hit a 31-month closing low on trade worries. At the close, the Shanghai Composite index was down -0.2%, while he blue-chip CSI300 index was down -0.18%.

In Europe, regional bourses trade lower across the board as the downtrend continues tracking U.S futures lower.

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

Indices: Stoxx600 -0.5% at 373.6, FTSE -0.6% 7233, DAX -0.9% at 11879, CAC-40 -0.2% at 5257, IBEX-35 -0.3% at 9240, FTSE MIB -0.7% at 20775, SMI -0.1% at 8919, S&P 500 Futures -0.2%

2. Oil prices climb ahead of U.S. sanctions on Iran, gold lower

Oil prices have rallied overnight as U.S sanctions begin to squeeze Iranian crude exports. This is tightening global supply despite U.S encouraging other producers to increase output.

Note: It’s not in the U.S’s best interest to push up oil prices – it could depress economic activity or even triggers a slowdown in global growth.

Brent crude oil is up +50c at +$77.87 a barrel, while U.S light crude is +15c higher at +$67.69.

Note: Russia, the U.S and Saudi Arabia are the world’s three biggest oil producers, delivering around a third of the world’s almost +100M bpd of daily crude consumption.

U.S Energy Secretary Rick Perry met the Saudi’s yesterday, and will meet the Russians on Thursday to encourages big oil-producing countries to keep output high.

Note: Before the year-end, OPEC and allies are to discuss cooperation post-2018 in Algeria. OPEC has the tools to use “quotas” if the market requires it. However, OPEC believes cooperation can continue without output quotas in 2019.

Ahead of the U.S open, gold prices are little changed, mostly capped by U.S rate hike concerns, while trade tensions weigh on the ‘yellow’ metal. Spot gold is unchanged at +$1,195.79 an ounce, while U.S gold futures have rallied +0.1% to +$1,201.60.

Note: After last week’s strong U.S payrolls, fixed income dealers are pricing in another Fed rate hike for September – it would be the third hike in 2018, with expectations of one rise more in December.

3. German Bund yields at five-week highs, Italian yields plummet

German 10-year Bund yields have backed up to their highest level in five-weeks overnight, as growing hopes of fiscal restraint in Italy and a Brexit deal being completed in the coming weeks.

Italy’s BTP yields fell for a seventh consecutive session, with long-dated yields hitting their lowest level since late July. Comments from Italian politicians this month that E.U fiscal rules would be respected in next year’s budget have supported the markets demand for Italian debt.

Note: Italy’s 10-year BTP yield fell to its lowest in more than six weeks at +2.7%, while Germany’s Bund yield rose more than +2 bps to a five-week high at +0.423% – the spread is +225 bps, its tightest since the start of August.

Elsewhere, the yield on U.S 10-year notes has backed up +1 bps to +2.95%, the highest in almost five-weeks. In the U.K, the 10-year Gilt yield increased +2 bps to +1.493%, the highest in 16-weeks.

4. Dollar falls, but is looking to regain momentum

The dollar trades lower ahead of the open, with EUR/USD up +0.3% at €1.1626, GBP at £1.3040 and JPY at ¥111.35, but strong U.S data, due later in the week, could give the ‘buck’ some needed TLC – U.S core-CPI figures on Thursday and U.S retail sales on Friday are likely to come in strong.

The EUR has found support as easing concerns about Italian debt boosted the single currency for a second day, while broader moves in forex markets remain contained until there is further clarity in the Sino-U.S. trade dispute.

GBP (£1.3040) gets another Brexit boost. Market headlines appear more positive as the E.U seems more willing to compromise to achieve an agreement with the U.K. Also, domestic wage data beat expectations (see below) and justified the recent BoE rate hike.

The TRY ($6.4783) is little changed as investors wait for the Central Bank of the Republic of Turkey (CBRT) rate decision on Thursday. Current consensus is looking for the CB to hike 1-week repo auction rate by +325 bps to +21.00%.

5. U.K jobs and wage data

U.K data this morning provided the pound with some support. Stronger-than-expected U.K jobs data, pushed EUR/GBP briefly to a five-week low of €0.8887.

U.K. earnings for the three-months to July rose by +2.9%, up from a +2.7% increase in the previous period and above the market consensus of a +2.8%.

Other data showed that the U.K unemployment rate stayed flat at +4% in July vs. expectations of a +4.1% rise.

The Bank of England (BoE) meets Thursday and further proof of rising U.K wage growth may concern Governor Carney and company, however, ongoing Brexit uncertainty is expected to weaken any chances of another rate rise any time soon.

Forex heatmap

Phew! Turkey bashing takes a break for now

Tuesday August 14: Five things the markets are talking about

Tuesday sees a tentative reprieve for global equities in the wake of Turkey’s induced turmoil and the forex market has managed to stabilize a tad, aided by reports this morning that the Turkish Finance Ministry has scheduled an investor call for Thursday, Aug 16.

The ‘big’ dollar has managed to slip from its 15-month highs against G10 currency pairs as U.S Treasury prices ease as a degree of calm returns to Turkish markets – USD/TRY is down -4.75% at $6.5622.

Nevertheless, a sizable rate increase by the Central Bank of the Republic of Turkey (CBRT) followed by drastic measures to reduce the fiscal deficit still appears to be the most viable option to re-anchor the lira and pull the country’s economy from the brink. Currently, fixed income dealers are pricing in a +10% rate hike by the CBRT to stem the lira’s depreciation.

Is it economic suicide or attack? President Erdogan knows what needs to be done, but will he allow it? The U.S. has nothing further to negotiate until the detained American pastor is freed.

Elsewhere, crude oil has pared some of its recent losses, while gold finds a bid on a weaker dollar and BTC is again under pressure dropping below $6,000.

On tap: U.S retail sales data appears stateside tomorrow, followed by housing data on Thursday. In Brussels Thursday, Brexit talks between the E.U and the U.K resume.

1. Stocks mixed results on bargain hunting

In Japan, the Nikkei posted its biggest gain in five month after the Turkish lira pared some of yesterday’s losses. Export-driven firms benefited from a pause in the safe-haven yen’s (¥111.01) strengthening. The Nikkei share average surged +2.3%, while the broader Topix rallied +1.6%.

Note: Japanese trading volumes remain thin as many domestic investors are on holiday.

Down-under, Aussie shares closed firmer, supported by the financial and material sectors. The S&P/ASX 200 index rose +0.8% at the close of trade. The benchmark slipped -0.4% on Monday. In S. Korea, both the Kospi stock index and the won gained overnight, supported by recovering confidence after the Turkish turmoil. The Kospi closed up +0.47%.

In Hong Kong and China, stocks fell for a third consecutive session overnight, after data showed further signs of cooling in China’s economy and as trade war worries lingered. In Hong Kong, the Hang Seng index fell -0.7%, while the China Enterprises Index lost -0.2%. In China, the blue-chip CSI300 index fell -0.5%, while the Shanghai Composite Index closed down -0.2%.

Note: Overnight, China July data missed market expectations amid trade frictions – industrial production y/y, +6.0% vs. +6.3%e and retail sales y/y, +8.8% vs. +9.1%e.

In Europe, regional bourses have opened higher across the board as concerns over geopolitical issues, as well as improved outlook over Turkey is helping to support risk sentiment.

U.S stocks are set to open in the ‘black’ (+0.3%).

Indices: Stoxx50 +0.4% at 3,246, FTSE +0.1% at 7,655, DAX +0.5% at 12,415, CAC-40 +0.4% at 5,432; IBEX-35 +0.2% at 9,550, FTSE MIB +0.4% at 21,047, SMI +0.4% at 9,0.42, S&P 500 Futures +0.3%

2. Oil edges up on Saudi output cut and Iran sanctions, gold higher

Crude oil prices are better bid this morning after Saudi Arabia said it had cut production in July. However, market concerns over a slowdown in global economic growth is capping prices for now.

Brent crude oil is up +50c at +$73.11 a barrel, while U.S light crude has gained +55c to +$67.75.

Saudi Arabia has told OPEC that it had reduced crude output by -200Kbpd to +10.29M bpd in July.

Note: Saudi Arabia is OPEC’s biggest producer and the only major exporter that can easily adjust output to balance global supply. A self-imposed cut in product would suggest that Saudi’s are keen to avoid a repeat of a global glut that has depressed prices over the past few years.

Ahead of the U.S open, gold prices are better bid, edging away from yesterday’s 18-month low print (+$1,191.25). Support is coming from a weaker U.S dollar and a break below some key psychological levels has triggered some technical buying interest. Spot gold is up +0.2% at +$1,195.51 an ounce. U.S gold futures are up +0.3% at +$1,202.50 per ounce.

3. Italian bond yields fall from two-month highs

Italian bond yields have pared some of yesterday’s sharp rise on reassuring comments from the government and as fears about contagion from Turkey has eased for now.

PM Conte and his top ministers discussed the 2019 budget yesterday – investors have been concerned that the government’s high-spending plans would lead to a further deterioration in Italy’s finances. However, the Italian government have agreed to preserve the “stability of state finances and lower public debt.”

Italy’s 10-year BTP yield has fallen – 7 bps to +3.03%, off two-month highs of +3.109% set yesterday, with its 5-year note yield down -6 bps at +2.32%.

Elsewhere, the yield on U.S 10-year Treasuries have backed up +2 bps to +2.89%, the largest gain in a week. In Germany, the 10-year Bund yield has gained +2 bps to +0.33%, the first advance in a week, while in the U.K, 10-year Gilt yield has also climbed +2 bps to +1.277%, the largest surge in almost a fortnight.

4. Indian rupee hits new all time low

Emerging-market currencies remain under pressure despite today’s TRY reprieve that Turkey’s Finance Ministry has scheduled an investor call for Thursday, Aug 16. Overnight, INR fell to new record low of $70.08 outright, retaining its position as one of Asia’s worst performing currencies this year. It’s believed that the Reserve Bank of India (RBI) has been trying to defend the $70 level by selling USD.

Note: The rupee has fallen -9.5% in 2018. Among other major emerging markets, only BRL, RUB and ZAR currencies have weakened more.

EUR (€1.1401) is trading above yesterday’s intraday low (€1.1367) after German Q2 GDP data suggested that the slowdown in Q1 was temporary. The single unit still faces resistance from Italian discussions on their 2019 budget. Italy Deputy PM Di Maio believes that Italy is not at risk of financial market attack.

GBP (£1.2783) saw its best levels of the session erode (£1.2809) despite its ILO Unemployment falling to its lowest level since 1975.

And cryptocurrencies are stung by ETF Delay – Bitcoin and ethereum continue to fall as reports from earlier this month that the application of a Bitcoin exchange traded fund has been postponed is keeping global institutional money on the sidelines. Bitcoin is down-3.6% to around +$6,035.

5. Eurozone avoids Q2 Slowdown, supported by German growth

Data this morning shows that Germany’s economic growth accelerated in Q2, guaranteeing the eurozone as a whole avoided a slowdown. Nevertheless, expect global trade tensions to cloud the outlook for businesses.

The Federal statistics office reported Germany’s GDP grew at a quarterly rate of +0.5%, or +1.8% in annualized terms. It also raised its Q1 growth estimate to an annualized +1.5% from +1.2% growth reported in May.

And because of Germany’s expansion, the agency has also raised its growth estimate for the eurozone as a whole to +1.5% in annualized terms from +1.4% reported in late July.

Forex heatmap

NFP could lift dollar higher

Friday August 3: Five things the markets are talking about

President Trump’s unpredictability on trade is keeping capital markets on the back foot and a theme that is not expected to change anytime soon.

The ‘big’ dollar remains better bid ahead of this morning U.S jobs report (08:30 am EDT), supported mostly by the markets confusion surrounding the escalating Sino-U.S trade conflict.

Nevertheless, this morning’s NFP report is forecasted to show a healthy labor market, with +193K new jobs and an unemployment rate of +3.9%. Many will focus on wage growth, a print of +2.8% could support another dollar leg up as the market prices out four rate increases this year.

The only thing that seems certain is that China will be expected to retaliate if President Trump follows through on a threat to increase tariffs to +25% from +10% on +$200B in Chinese imports.

Worries over protectionism has this week punished global stocks despite a stronger earnings season, supported lower sovereign yields and pushed G10 currency pairs to new weekly lows outright. The Chinese yuan is on track to complete an eighth week decline – its longest losing streak in 25-years.

Elsewhere, Turkish assets and lira remain under pressure after the U.S imposed sanctions on two government ministers over the detention of an evangelical pastor.

In commodities, oil prices have touched a new two-week low on U.S crude inventories supply concerns, while gold prices remains choppy.

1. Stocks close out the week mixed

In Japan overnight, the Nikkei managed to make a small gain partly due to a sharp rise in Suzuki motors (+8.6% on earnings). The Nikkei average ended +0.06% higher, while the broader Topix fell -0.54% to a three-week closing low on Sino-U.S trade tensions.

Down-under, Aussie shares closed out lower, pressured by the latest exchange of trade threats between the U.S and China, a major market for Australia’s resources exports. At close of trade, the S&P/ASX 200 was -0.10% lower. In S. Korea, the Kospi was +0.77% higher.

In Hong Kong and China, stocks edged lower, dragged down by fears of slowing growth on the mainland, a vaccine scandal that weighed on healthcare shares and persistent worries over the Sino-U.S. trade war. The Hang Seng index fell -0.1%, while the China Enterprises Index lost -0.4%. In China at the close, the Shanghai Composite index was down -1%. For the week, the index lost -4.6%, its worst performance in five months, while the blue-chip CSI300 index was down -1.65%. It lost -5.9% for the week.

In Europe, regional bourses trade sideways despite misses in macro-data. Geopolitical concerns continue to be main theme, with concerns on trade and Brexit negotiation. Market focus turns to non-farm payrolls (NFP).

U.S stocks are set to open small down (-0.1%).

Indices: Stoxx50 +0.3% at 3,479, FTSE +0.4% at 7,609, DAX +0.4% at 12,601, CAC-40 +0.2% at 5,473; IBEX-35 +0.2% at 9,713, FTSE MIB +0.3% at 21,476, SMI -0.1% at 9,149, S&P 500 Futures -0.1%

2. Oil prices edge lower on long-term bearish factors, gold at a record low

Oil prices are down in early trading as the market re-focuses on the ‘bearish’ longer term factors following yesterday’s rally on a report that U.S crude stocks in a key facility fell to their lowest in nearly four-years.

Brent crude futures are at +$73.15 per barrel, down -30c from yesterday’s close, while U.S West Texas Intermediate (WTI) crude futures are at +$68.70 per barrel, down -26 cents from their close.

EIA data yesterday showed that inventories at the key Cushing storage hub in Oklahoma fell by -1.3M barrels, the lowest level in four-years.

However, overall U.S crude oil inventories actually rose by +3.8M barrels last week to +408.74M barrels.

Saudi Arabia, Russia, Kuwait and the U.A.E have increased production to help to compensate for an anticipated shortfall in Iranian crude supplies once planned U.S sanctions come into effect.

Note: Earlier today, China, Iran’s biggest customer, has rejected a U.S request to cut imports from the OPEC member.

Ahead of the U.S open, gold prices have fallen to their lowest print in over a year amid a strong U.S dollar – another loss would be the fourth consecutive weekly. Spot gold is down -0.1% at +$1,206.05 an ounce. For the week, the yellow metal is down about -1.4%. U.S gold futures are -0.5% lower at +$1,214.10 an ounce.

3. Most sovereign yields fall

Turkish data this morning showed that domestic inflation has rallied to a 15-year high of +15.8% year-on-year last month. Numbers like this certainly strengthens the case for further interest rate hikes, however, the central bank faces pressure from the government not to do so.

In Italy, budget concerns have sent the 10-year BTP yields back above the +3.05% to a 10-week high, while lower down the curve, Italian two- and five-year BTP yields have backed up +22 to +25 bps to +1.27% and +2.32% respectively.

BoE’s Governor Carney in an interview this morning stated that interest rates would not hit the +5% pre-crisis level for a long time. He reiterated that “one” rate hike per year could be seen as a rule of thumb and that the possibility of a no-deal Brexit was uncomfortably high.

The yield on U.S 10-year notes fell -1 bps to +2.98%. In Germany, the 10-year Bund yield fell -3 bps to +0.43%, while in the U.K the 10-year Gilt yield dipped -2 bps to +1.377%.

4. Dollar gets the green light

The ‘big’ dollar is maintaining a firm tone heading into the U.S open.

EUR/USD (€1.1572) has dipped to test new one-month lows as Italian bond yields backed up as Italy Finance Minister Tria holds a top-level budget meeting.

GBP (£1.2997) remains a notable underperformer among G10 currencies despite the fact that BoE officials yesterday ‘unanimously’ voted to hike +25 bps. The market is interpreting the BoE’s decision as a “dovish” hike. Others are arguing that the BoE is heading towards a policy mistake amid heightened Brexit uncertainty.

TRY ($5.0783) managed to hit a fresh record low overnight ($5.1100+). However, slightly better Turkish CPI data helped to push the Lira off its record lows.

China’s Yuan is poised for its longest weekly losing streak on record on continued concerns over a potential trade war. The CNY currency is heading for its eighth weekly decline with USD/CNY approaching the $6.90 area.

Note: CNY is off its worst levels overnight after a large Chinese bank was seen selling USD. It traded as low as ¥6.8965 before paring some of those losses to ¥6.8715.

5. U.K services PMI falls

Data this morning showed the purchasing managers’ survey on U.K. services-sector activity falling to 53.5 in July, missing expectations for 54.7. This morning’s miss reinforces market concerns about weakness in the British economy over Brexit uncertainty.

According to Markit, who compile the survey, “service providers commented that Brexit uncertainty had held back new project wins, reflecting risk aversion and a wait-and-see approach to investment spending among international clients.”

Forex heatmap

BoE hike a close call

Thursday August 2: Five things the markets are talking about

The Bank of England is more likely than not to hike interest rates +25 bps to +0.75% this morning (07:00 am EDT), but this has only recently become a closer call.

June’s BoE meeting minutes showed that three out of nine MPC members voted to raise rates, opening the door wide for a hike at today’s meet – futures are pricing a +91% odds.

Note: With those odds, the danger with today’s decision is if the BoE don’t go, then sterling (£1.3080) should plummet, otherwise the priced-in hike should have a limited impact.

However, for the ‘doves’ since then, June inflation has been lower than expected, earnings growth has slipped, and political and Brexit uncertainties are very much more heightened.

For the ‘hawks,’ the U.K economy continues to grow in line with, or slightly above, and employment is on the rise, two good reasons that should provide sufficient justification for a rate rise.

Elsewhere, global equities are a sea of ‘red’ ahead of the U.S open as President’s Trumps latest threats to free trade again has rattled markets – Trump is considering increasing proposed levies on +$200B in Chinese imports to +25% from +10%.

The ‘big’ dollar has found support, while sovereign bonds trade mixed as central banks policy decisions dominate proceedings. In commodities, oil prices touch a new two-week low on U.S crude inventories supply concerns, while gold prices remain choppy.

1. Stocks have little support

Global stocks are on the back foot amid heightened concerns over the escalating trade dispute between the U.S and China.

In Japan, equities again felt the impact from the slide in the broader Asian markets following Trump’s latest proposal on China imports. The Nikkei share average has pulled back from Wednesday’s two-week highs, as Chinese stocks fell sharply. The index ended the day down -1.03%, while the broader Topix fell -1%.

Down-under, Aussie shares slid overnight, pulled down by global miners – BHP and Rio Tinto. The S&P/ASX 200 index fell -0.6%. In S. Korea, the Kospi index also weakened on trade escalation worries. At the close, the index was down -1.6%, pressured mostly by major electronics and steel sector shares.

In China and Hong Kong, stocks extended their previous day’s losses as trade war fears, along with a Chinese vaccine scandal and signs of slowing domestic growth continue to undermine investor confidence.

At the close, the Shanghai Composite index was down -2% and the blue-chip CSI300 index fell -2.3%.

In Hong Kong, the Hang Seng index and the China Enterprises Index both ended down -2.2%.

In Europe, most regional bourses see red on geopolitical worries. Germany’s export-heavy DAX has already fallen -1.2% and this despite a declining EUR (€1.1617).

U.S stocks are set to open ‘deep’ down (-0.4%).

Indices: Stoxx50 -1.1% at 3,470, FTSE -0.8% at 7,588, DAX -1.8% at 12,516, CAC-40 -0.7% at 5,461; IBEX-35 -1.0% at 9,700, FTSE MIB -1.30% at 21,507, SMI -0.4% at 9,136, S&P 500 Futures -0.4%

2. Oil steadies to trade higher after losses, gold choppy

Ahead of the U.S open, crude oil prices have steadied after losses over the past two-days from a surprise increase in U.S crude inventories and renewed concerns over Sino-U.S trade friction.

Brent crude futures are up +16c, or +0.2%, at +$72.55 a barrel, after dropping -2.5% yesterday. U.S West Texas Intermediate (WTI) crude futures have rallied +6c, or +0.1%, to +$67.72 a barrel. They fell -1.6% yesterday.

Yesterday’s EIA report showed that U.S crude inventories rose +3.8M barrels last week as imports jumped. The market was expecting a drawdown of -2.8M barrels.

However, providing some support on pullbacks is ongoing tensions between the U.S and Iran.

Gold prices are small better bid, recovering from the yesterday’s session fall, supported by a weaker USD/JPY (¥111.44). Spot gold is up +0.2% at +$1,218.23 an ounce, after losing -0.65% Wednesday. U.S gold futures are little changed at +$1,226.70 an ounce.

3. Sovereign yields fall

Fears of an escalating trade dispute between the U.S and China is triggering a fall in some sovereign bonds yields.

In the Eurozone, German and French yields in particular have pulled back from their two-month highs as demand for safe-haven debt grows on trade fears.

In Germany, the 10-year Bund yield has eased -1 bps to +0.48%, while in the U.K, the 10-year Gilt yield has backed up +1 bps to +1.37%, the highest in seven-weeks.

Stateside, with the Fed leaving short-term interest rates unchanged yesterday, an upbeat assessment of the U.S economy’s performance would suggest another rate increase is likely at the next meeting in September. The market is pricing in an additional two rate rises by year-end.

4. Turkish lira at a new record low

With global risk appetite dwindling on global trade concerns is benefiting the U.S dollar. Also providing support for the greenback are rate differentials, aided by the Fed emphasizing yesterday, the U.S economy’s strength in a statement following its expected ‘no rate hike’ decision.

Overnight, the Turkish lira (TRY) has slid to a new record low outright of $5.0822 and is looking to go even lower. Year-to-date, brings its loss outright above -24% after the White House announced yesterday it would sanction the country over the detention of a U.S pastor.

Turkish inflation figures for July will be released tomorrow, and the market expects another acceleration. If so, this would be another negative factor for the TRY after the Central Bank of the Republic of Turkey (CBRT) recent decision not to hike their key interest rate.

GBP (£1.3071) is softer ahead of today’s anticipated “dovish” rate hike by the BoE.

In Japan, the BoJ demonstrated its flexibility in it policy performing an unplanned purchased in the 5-10-year JGB range during the Asian session that helped to cap rising JGB yields. Officials commented that it acted to meet target of keeping the 10-year JGB curve around 0.00% with the operation. USD/JPY (¥111.57) is a tad softer on ‘risk aversion’ trading.

Finally, the offshore yuan has hit its weakest level outright in more than 14-months ahead of the open after China said it would retaliate against the U.S on trade. The Chinese currency lost -0.6% to ¥6.8654.

5. Euro area industrial producer prices rise

Data this morning from Eurostat show that in June, industrial producer prices rose by +0.4% m/m in both the euro area (EA19) and the EU28. Year-over-year, prices rose by +3.6% in the euro area and by +4.4% in the EU28.

Digging deeper, the increase in the euro area is due to rises of +1.1% in the energy sector, of +0.4% for intermediate goods and of +0.1% for durable consumer goods, while prices remained stable for capital goods and for non-durable consumer goods. Prices in total industry ex-energy rose by +0.2%.

In the EU28, the increase is due to rises of +1.2% in the energy sector, of +0.4% for intermediate goods and of +0.1% for capital goods, durable and non-durable consumer goods. Prices in total industry ex-energy rose by +0.2%.

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Trade war angst trumps Fed rate decision

Wednesday Aug 1: Five things the markets are talking about

Over the past fortnight, fixed income, forex and the commodities market have become rather boring and range bound. Will today’s Fed monetary policy announcement be the facilitator to end this market consolidation?

Futures prices would suggest rather strongly that, nope, there is nothing new to be seen this afternoon. It’s what you would call a “continuity” meeting, with little fanfare and maybe, but unlikely, a comment on trade tensions.

Capital markets may have to wait until Friday’s non-farm payroll (NFP) for some action, but that could even be a stretch as market participants historically head for the hills for holidays. Only liquidity tends to be a real concern this time of year. U.S payrolls are predicted to show a healthy labor market, with +190K new jobs.

Dominating today’s U.S central bank meet is conflicting signs over the state of the Sino-U.S trade relations. It’s again pulling markets in different directions on rumours that the Trump administration is expected to announce this morning plans to propose tariffs of +25% instead of the initially proposed +10% on +$200B of imported Chinese goods.

Both equities and commodities are struggling on these headwinds to trade after China threatened to hit back if the U.S hikes tariffs. The dollar has found some traction, while JGB’s lead sovereign debt lower.

1. Stocks mixed reaction

In Japan, the Nikkei rallied overnight to trade atop its two-week high, supported by strong earnings for blue chips such as Sony and Sharp and the yen’s slide (¥112.02) to a 10-day low outright. The Nikkei ended the day up +0.86%, it’s highest since July 20, while the broader Topix closed out +0.94% higher.

Down-under, in a muted session, Aussie stocks finished slightly lower as the heavily weighted banks weighed. A late retreat left the S&P/ASX 200 settle down -0.07% after Tuesday’s +0.03% gain. In S. Korea, the Kospi index edged up +0.51% overnight while the market awaits the outcome today’s Fed meeting, despite fears of an escalation in U.S-China tariff war.

In China, stock selling accelerated, leaving the market a noted regional underperformer earlier today. After posting its best month since January with a +1% gain, the Shanghai Composite slid -1.8% to log its worst day in three-weeks, while the Shenzhen Composite fell -1.7%. Weighing again were vaccine makers and as the Sino-U.S trade war looked set to escalate with the threat of higher U.S tariffs.

In Hong Kong, shares ended lower also, dragged by property developers, and as weak data and an escalating trade war dimmed the outlook for growth in the mainland. At close of trade, the Hang Seng index was down -0.85%, while the China Enterprises Index lost -0.5%.

In Europe, regional bourses trade mixed in a range bound trade with the FTSE 100 an outlier trading over -0.6% lower, weighed down by mining names.

U.S stocks are set to open little changed.

Indices: Stoxx600 -0.2% at 390.8, FTSE -0.8% at 7681 DAX -0.1% at 1278, CAC-40 +0.1% at 5518, IBEX-35 -0.3% at 9840, FTSE MIB -0.5% at 22101, SMI Closed, S&P 500 Futures flat

2. Oil under pressure on U.S inventories, OPEC supply, gold lower

Oil prices have slipped again this morning pressured by a market report yesterday that U.S stockpiles of crude rose unexpectedly and by higher OPEC production, adding to indications of abundant supply.

Brent crude prices fell -85c to +$73.36 a barrel, while U.S crude is down -73c at +$68.03.

Note: Last month, Brent fell more than -6% and U.S crude slumped about -7%, the biggest monthly declines for both benchmarks in 24-months.

Yesterday, the American Petroleum Institute (API) said crude inventories rose by +5.6M barrels last week. The market was expecting a decrease of -2.8M.

Expect dealers to take their cues from today’s EIA report at 10:30 am EDT.

Ahead of the U.S open, gold prices are lower, pressured by a stronger U.S dollar on rising trade war fears and ahead of today’s Fed rate announcement. Spot gold is down -0.2% at +$1,220.77 an ounce. The yellow gained slightly on Tuesday on a weaker USD/CNH after a report that the U.S and China were trying to restart negotiations to defuse a potential trade war. U.S gold futures are -0.3% lower at +$1,220.10 an ounce.

3. Sovereign yields look to back up

Fed fund futures are currently pricing in an 80% chance of a rate hike in September and a “hawkish” FOMC statement that echoes the optimism of Fed Chair Powell will leave the market convinced that there will be at least one and possibly even two more rounds of tightening this year – December is the final candidate.

Today’s Fed statement will most likely highlight the underlying strength of the economy and the uptick in inflation and a ‘hawkish’ Fed should also raise the markets hopes that Friday’s non-farm payroll (NFP) report will be strong with wage growth rising and the unemployment rate falling.

Elsewhere, Japan’s benchmark 10-year JGB yield has backed up to +0.131%, an 18-month high as the fixed income dealers test the BoJ’s resolve after the central bank said it will allow for greater flexibility in yield moves.

Earlier this morning, the Reserve Bank of India (RBI) raised its repurchase rate by +25 bps to +6.50% as expected and leaves its cash reserve ratio (CRR) at +4%. The decision was not unanimous – 5:1 vote. Tomorrow, in the U.K, Governor Carney is expected to hike interest rates by +25 bps despite ongoing Brexit worries.

4. Will the Fed impact the dollar?

Today’s Fed rate announcement is not expected to have a material impact on the USD outright. No rate rise is expected until September (odds of +80% already baked in) as domestic U.S data has not changed much since the forecast update at the June meeting.

For the Fed, its challenge going forward is communication – how will Powell and company move away from regular rate rises without their actions being interpreted as a sign of a weaker growth outlook?

The Fed has been raising rates every three-months, but with rates currently between +1.75% and +2.0%, they are encroaching on the “neutral” rate of +3% quickly.

Note: There is no press conference today, maybe it will be explained away next month.

Elsewhere, summer holidays are kicking in and that leads to ranges consolidating, something we have been witnessing over the past fortnight. EUR (€1.1679) CHF ($0.9920) and GBP (£1.3113) are little changed outright and today’s FOMC decision is seen as unlikely to buckle the trend.

However, USD/JPY (¥112.00) continues to move higher, supporting the “carry-trade” after Tuesday’s BoJ rate decisions and the bank’s pledge to keep interest rates “extremely low” for an extended time.

5. U.K manufacturing starts Q3 on softer footing

Data this morning from Markit showed that U.K Manufacturing PMI were at a three-month low in July. There were weaker increases in both output and new orders and intermediate goods production falls for first time in two- years. Price pressures also remained elevated as a strong increase in average input costs led to the steepest rise in selling prices in four-months.

The seasonally adjusted IHS Markit/CIPS PMI fell to 54.0 in July, down from 54.3 in June and well below the highs achieved around Dec/Jan of this year. The PMI remains comfortably above its long-run average of 51.8.

Last month saw the weakest rate of expansion in U.K manufacturing output in 16-months, as production growth was hindered by an easing in the pace of increase in new orders.

Digging deeper, the domestic market was the main focus of the slowdown in new business growth, as new export work increased at the fastest pace for six months.

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