If in doubt, look to the Fed for direction

Tuesday September 25: Five things the markets are talking about

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

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

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

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

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

Note: The market is looking for a third +25 bps rate hike and is pricing in another one for December. Investors await Fed chair Powell’s views on trade and tariffs tomorrow.

1. Stocks mixed results

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

4. Bitcoin’s pullback quickens

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

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

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

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

5. Swedish PM Lofven ousted in no-confidence vote

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

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

SEK is down -0.18% at €10.3374.

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

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%).

Forex heatmap

Trump trade war worries

Monday September 10: Five things the markets are talking about

Trade talks, tariffs threats, EM contagion fears and central bank decisions are dominating asset price moves this month.

Add geopolitical risks and U.S impeachment possibilities, market volatility is expected to remain elevated for some time.

Global equities are trading mixed, with Euro stocks drifting while U.S futures are a tad higher after losses in Asia as the market continues to weigh the possibility of escalation of a Sino-U.S trade war.

The ‘big’ dollar has extended last week’s gains, while U.S yields have come under pressure again. In commodities, oil has rebounded from its biggest weekly loss in two-months on speculation of a crude-supply shortage.

Elsewhere, the Swedish Krona (€10.4565) has edged higher after yesterday’s inconclusive general election – neither the Social Democrat-led nor the opposition Alliance bloc won enough votes to form a majority government.

On the central bank front, the Bank of England (BoE) and European Central Bank (ECB) will dominate proceedings this week (Sept 13), while the Fed will release its Beige Book in preparation for its FOMC meet later this month. Japan will publish its revised Q2 GDP.

On tap: U.K GDP & manufacturing production (Sept 10), U.S PPI & AUD employment (Sept 12), ECB & BoE monetary policy announcement (Sept 13) and U.S retail sales (Sept 14)

1. Stocks mixed results

A sell-off in Chinese stocks pushed a number of Asian bourses to a 14-month trough this morning as the market braces itself for a potential escalation in the Sino-U.S tariff row.

However, there were a few exceptions. In Japan, the Nikkei share average snapped a six-day losing streak after robust revised GDP data trumped trade war worries. The Nikkei share average rose +0.30%, while the broader Topix gained +0.20%.

Down-under, Aussie shares ended flat as health care, energy gains were offset by financials and materials losses. The S&P/ASX 200 index fell -0.03% at the close of trade, its eighth straight session of losses. The benchmark declined -0.3% on Friday. In S. Korea, stocks ended a three-day losing streak. The Kospi edged higher and was up +0.31%.

In Hong Kong, equities ended lower as the market braces for trade war escalation. The Hang Seng index ended down -1.3%, while the China Enterprises Index lost -1.2%.

In China, stocks ended lower on new tariff threats as Apple suppliers were hit by another Trump tweet. At the close, the Shanghai Composite Index was down -1.2%, while the blue-chip CSI300 index was down -1.45%.

In Europe, regional bourses trade higher, tracking U.S futures higher after a weaker session in Asia. In Particular, Italy is outperforming after Italian Finance Minister said that Italy would improve its budget balance.

U.S stocks are set to open deep in the ‘black’ (+0.4%).

Indices: Stoxx600 +0.3% at 374.90, FTSE +0.1% 7285, DAX 0% at 11961, CAC-40 +0.2% at 5260, IBEX-35 +0.6% at 9223, FTSE MIB +1.8% at 20816, SMI +0.8% at 8909, S&P 500 Futures +0.4%

2. Oil higher as U.S drilling stalls and Iranian sanctions bite

Oil prices have rallied overnight as data shows that U.S drilling stalled and as investors anticipated lower supply once new Iranian sanctions kick-in from November.

Brent crude oil has rallied +$1.09 a barrel, or +1.4%, to +$77.92, while U.S light crude is +7c higher at +$68.45.

Data from Baker Hughes on Friday showed that U.S drillers cut two oilrigs last week, bringing the total count to 860.

Note: The number of rigs drilling for oil in the U.S has stalled in the last four months, which suggests an increase in well productivity.

Outside the U.S, Iranian crude oil exports are declining ahead of a November deadline for the implementation of new U.S. sanctions.

Ahead of the U.S open, gold prices have fallen further on Fed rate hike views and as Sino-U.S trade war worries supports the ‘big’ dollar. Spot gold is down -0.2% at +$1,193.15, having declined -0.4% in Friday’s session. U.S gold futures fell -0.2% to +$1,198.60 an ounce.

3. BTP/Bund yields tighten

The gap between Italian and German 10-year borrowing costs is at its tightest in six-weeks, after Italy’s Economy Minister Giovanni Tria predicted yields would drop as the government laid out its budget for 2019.

Tria said yesterday that Italian bond yields would fall as the new government began to implement policies to boost the economy with prudent fiscal measures.

Note: Italian debt rallied this month after the government indicated that Italy’s upcoming budget would stay within E.U fiscal rules.

Italian yields are down -11 to -16 bps across the curve.

The BTP/BUND 10-year bond yield spread has tightened to +234.1 bps, its tightest level in six-weeks, and -55 bps below last week’s widest levels.

Elsewhere, the yield on 10-year Treasuries fell -1 bps to +2.93%.

4. Dollar in demand on pullbacks

Global trade tensions sees the USD in demand on pullbacks as President Trump tweeted that the U.S has more potential tariffs against China in the works if needed.

EUR/USD (€1.1583) off its worst level as Italian official continued their pacifying comments on the 2019 budget. Techies note that €1.1750 remains the key resistance for now.

On the emerging market front, currency pairs again remain on the defensive. USD/INR hit a fresh record high at $72.68 that prompted India to perform some verbal intervention. The rupee weakness is attributed to the release of the Q2 current account balance that recorded its widest deficit in five-years.

5. U.K economy accelerated in July

Data this morning showed that economic growth in the U.K accelerated in July, as warm weather powered consumer spending and construction.

According to the ONS, the U.K economy expanded +0.3% on month in July – a faster pace than the +0.1% monthly expansion recorded in June.

Note: Growth in the three-months through July was +0.6% compared with the previous three-months, or +2.4% on an annualized basis.

The data would suggest that the U.K economy is set for another quarter of growth despite little progress in Brexit negotiations.

Digging deeper, ONS data showed that the U.K’s goods trade deficit with the rest of the world narrowed in July, to +£10B from +£10.7B in June, as exports grew faster than imports.

Forex heatmap

Will it be a Valentines Day Massacre for the Dollar?

Wednesday February 14: Five things the markets are talking about

Are financial markets justified going from a growth story to an inflation narrative?

Today’s U.S consumer price index (08:30 am) is being touted as one of the most significant economic releases in a number of years as capital markets seek to understand the recent plunges in global equities and sovereign bonds.

With investors already on edge, they are expected to renew this months convulsion on any sign that U.S inflation is exceeding expectations at a rate that may entice the Fed to quicken its plans for tightening monetary policy.

Already this month, after a stronger U.S non-farm payroll (NFP) print and wage numbers, investors have sent U.S Treasury yields aggressively higher and instigated a rout in equities that pushed them into the first correction in 18-months.

Note: Market expectations are looking for the core-CPI (ex-food and energy) to rise +1.7% in January y/y compared with the +1.8% increase in December. U.S retail sales are also out this morning and are expected to have increased for a fifth consecutive month.

A higher CPI will give the USD strength, lead to higher yields and lower equity prices, but a tepid headline print could cause more of a problem, especially with record short U.S 10-year treasury position and a market focusing on President Trump’s proposed budget and the rise in U.S twin deficits.

Note: Lunar New Year celebrations for the Year of the Dog begin, affecting China, Hong Kong, Taiwan, Singapore, Malaysia and Indonesia. Chinese mainland markets are closed Feb. 15-21.

1. Stocks mixed reaction

In Japan, the Nikkei share average dropped to a fresh four-month low overnight as investor sentiment was again sapped by worries about U.S inflation data due this morning. The Nikkei ended -0.4% lower, its lowest closing since early October. The broader Topix fell -0.8%.

Down-under, the Aussie S&P/ASX 200 index fell -0.3%, following a +0.6% rise on Tuesday. In S. Korea the Kospi closed out the overnight session up +1.1%, helped by a +3% jump in Samsung.

In Hong Kong, shares rebound sharply ahead of Lunar New Year holiday. Trading will resume on Feb 20. At close of trade, the Hang Seng index was up +2.27%, while the Hang Seng China Enterprises index rose +2.14%.

In China, stocks rebounded overnight, but volumes were thin, as many traders had already left for the weeklong Lunar New Year holiday. Chinese markets will reopen on Feb. 22. At the close, the Shanghai Composite index was up + 0.46%, while the blue-chip CSI300 index was up +0.8%.

In Europe, regional indices trade higher across the board following a rebound in Wall Street yesterday and strength in U.S futures this morning.

U.S stocks are set to open in the black (+0.4%).

Indices: Stoxx600 +0.7% at 373.2, FTSE +0.7% at 7216, DAX +0.7% at 12286, CAC-40 +0.6% at 5139, IBEX-35 +0.5% at 9693, FTSE MIB +0.2% at 22071, SMI +0.9% at 8832, S&P 500 Futures -+0.4%

2. Oil dips on looming oversupply and weak U.S dollar, gold higher

Oil prices have dipped overnight, pressured by lingering oversupply including rising U.S inventories. However, the prospect of Saudi output dropping next month, economic growth hopes and a weaker U.S dollar all combined to limit losses.

Brent crude futures are at +$62.68 per barrel, down -4c. Brent was above +$70 a barrel earlier this month. U.S West Texas Intermediate crude futures are at +$59.06 a barrel, down -13c from yesterday’s close. WTI was trading above +$65 in early February.

On Wednesday, the Saudi energy ministry said that Saudi Aramco’s crude output in March would be -100k bpd below this month’s level while exports would be kept below +7m bpd.

Stateside, yesterday’s API report showed that U.S crude inventories rose by +3.9m barrels in the week to Feb. 9, to +422.4m.

Note: That is due to soaring U.S crude production, which has jumped by over +20% since mid-2016 to more than +10m bpd, surpassing that of top exporter Saudi Arabia and coming within reach of Russia, the world’s biggest producer.

Oil traders will take their cue from today’s EIA print (10:30 am EDT) and U.S inflation release.

Ahead of the U.S open, gold prices have rallied for a third consecutive session overnight to hit a one-week high, buoyed by a weaker U.S dollar, while the market awaits U.S inflation data for clues on the pace of future Fed rate increases. Spot gold is up +0.3% at +$1,332 an ounce.

3. Sovereign yields little changed

Earlier this morning, Sweden’s Central Bank (Riksbank) kept their repo rate unchanged at -0.5%. Deputy governor Henry Ohlsson voted to raise rates, but the central bank’s signals on inflation were more downbeat. The inflation forecast for this year was downgraded to +1.8% from +2%. The statement indicated that policy makers would start raising the rate in H2 of 2018. Policy makers stressed that was important not to raise the rate too early and was committed to stimulus to prevent inflation setbacks.

Elsewhere, fixed income seeks guidance from today’s U.S CPI release. The yield on U.S 10-year Treasuries fell less than -1 bps to +2.83%. In Germany, the 10-year Bund yield declined -2 bps to +0.74%, while in the U.K, the 10-year Gilt yield dipped -1 bps to +1.618%. In Japan, the 10-year JGB yield decreased -1 bps to +0.07%, the lowest in more than five weeks.

4. Dollar on soft footing

The USD remains on soft footing ahead of key Jan CPI data for the U.S.

The EUR/USD is steady, trading atop of the €1.2350 area after various European GDP data highlighted better economic growth prospects (see below).

USD/JPY tested ¥106.85 overnight for 15-month lows. The pair came off its worst level to approach 107.50 just ahead of the N.Y session after Japanese officials reiterated that they had no comments on forex levels.

In S. Africa, political optimism that President Zuma would resign has sent the ZAR currency to its best level in nearly two-years outright. The South African Democratic Alliance (DA) leader Maimane (opposition) has stated that its motion to dissolve parliament was processed by Speaker. USD/ZAR is at $11.85 ahead of the open stateside.

The Swedish krona has been volatile after the Riksbank interest rate decision. The krona briefly rose soon after the announcement, but has since pared those gains EUR/SEK last trades flat on the day at €9.9163, compared with €9.8952 before the decision.

5. Euro-zone economy ends 2017 on a high note

Note: There were a number of European GDP releases in the Euro session highlighting better economic growth prospects – Germany mixed; Netherlands beat and Italy a miss.

Industry helped drive the euro-zone’s +0.6% expansion in Q4. This morning’s ‘flash’ estimate of Q4 GDP is the second release and confirms that quarterly growth slowed a tad from Q3’s +0.7% to +0.6%.

There is no breakdown until the next release; however, expenditure evidence would suggest that weaker consumer spending growth was the main driver of the slowdown, while investment expanded after Q3’s contraction and net trade again made a positive contribution to growth.

Digging deeper, industry appears to have made a stronger contribution to GDP growth than in Q3. Following the consensus-beating +0.4% monthly rise in IP in December.

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Equities Slump Deepens; Dollar Steady

Monday February 5: Five things the markets are talking about

Global stocks have extended their biggest decline in two-years overnight while the ‘big’ dollar steadies outright against G10 currency pairs. Sovereign treasury yields continue to creep higher, while crude oil prices again come under pressure as U.S explorers raised the number of rigs drilling for crude to the most since August.

This week is again dominated by monetary policy decision with four central banks meetings in the coming sessions – today, the Reserve Bank of Australia (RBA), Wednesday, the Reserve Bank of New Zealand (RBNZ) and the Reserve Bank of India (RBI) and its ‘super’ Thursday for the Bank of England (BoE) as it also publishes its quarterly inflation report.

Other data releases will focus on December industrial production (IP) and January composite PMI’s. China will release January data for its merchandise trade balance and its consumer and producer price indexes. North of the U.S border, Canada will close out the week reporting its January labor force survey. It’s December international trade balance is reported on Tuesday.

1. Stocks see red

In Japan, the Nikkei share average fell sharply on overnight as fear that U.S inflation may be finally gathering pace pound global equities. The Nikkei tumbled -2.5%, its biggest one-day drop since Nov 9, 2016, when President Trump won the U.S election. The broader Topix slumped -2.2%.

Down-under, Aussie shares fell overnight, dragged down by financial and materials. The S&P/ASX 200 index slid -1.6% ahead of Wednesday’s Reserve Bank of Australia (RBA) rate decision.

In Hong Kong, stocks ended lower on overnight, but recouped much of their earlier losses sparked by Friday’s slide on Wall Street. The Hang Seng index slumped -1.09%, while the Hang Seng China Enterprises index fell -0.43%.

In China, stocks bucked the region’s tumble as the Shanghai Composite index ended the session up +0.73%, while the blue-chip CSI300 Index also reversed its earlier losses, closing up +0.1%.

In Europe, regional indices are trading lower across the board, but off the session lows as markets have faded a large part of the earlier move lower, on the back of a slight pullback in Euro Bond yields as well as a bounce in U.S futures.

U.S stocks are expected to open little changed.

Indices: Stoxx600 -1.0% at 384.1, FTSE -1.0% at 7366, DAX -0.5% at 12715, CAC-40 -0.9% at 5317 , IBEX-35 -0.6% at 10145, FTSE MIB -0.7% at 23048 , SMI -1.0% at 9132, S&P 500 Futures flat

2. Oil trades atop one-month lows, gold prices higher

Oil prices are under pressure for a second consecutive session overnight, as rising U.S output and a weaker physical market added to the pressure from a widespread decline across equities and commodities.

Brent crude futures are down -36c at +$68.22 a barrel, while U.S West Texas Intermediate (WTI) crude has fallen -13c to +$65.32.

Oil is caught up in the markets general risk-off move, not helped the strength of the U.S dollar in the past two trading sessions.

Adding to the pressure on oil, which hit its highest price in nearly three-years in January, has been evidence of rising U.S crude production, which could threaten OPES’s efforts to support prices.

Data from the U.S government last week showed that output climbed above +10m bpd in November for the first time in nearly fifty-years, as shale drillers expanded operations.

Ahead of the U.S open, gold prices have inched higher as declining equities lend support to the yellow metal even though robust U.S. jobs data potentially increased the chances of more interest rate hikes this year. Spot gold is up +0.1% at +$1,334.23 per ounce, after declining -1.2% on Friday in its biggest one-day fall since early December.

3. Sovereign yields continue to back up

Investors on both sides of the Atlantic are dumping government debt, but for different reasons. In the U.S, investors see more inflation coming; while in the eurozone, they see stronger economic growth.

On Friday, the 10-year Treasury yield closed at +2.852%, the highest yield in two-years, compared with +2.410% at the start of the year. German 10-year sovereign Bunds have edged up to +0.701% from 0.430% over the same period.

Note: Inflation-linked Treasuries’ (TIP’s) show that almost two-thirds of the U.S bond selloff that started at the beginning of December is explained by inflation expectations.

Elsewhere, the RBA looks set to continue lagging the trend toward higher interest rates globally. It’s first policy meeting this year on Tuesday will likely see the RBA’s official cash rate steady at +1.5%, with interest in whether its guidance will be more upbeat reflecting a stronger job market.

Aussie policy makers continue to face the problem of weak wages growth, soft inflation reads and an elevated AUD (A$0.7934). Forecasts for the first interest rate hike have been pushed back lately.

4. Dollar under constant pressure

The U.S. dollar remains relatively contained after rebounding at the end of last week, when a strong non-farm payroll (NFP) suggested the currency’s weakness might have gone too far, too fast.

The EUR/USD (€1.2426) has managed to eek out a small gain overnight as optimism continued to flow about a grand coalition in Germany – political parties have said to seek a grand coalition by tomorrow (Feb 6th).

GBP/USD (£1.4102) is little changed despite the Jan. U.K PMI Services reading missed expectations (see below).

USD/JPY ‘s strong correlation with U.S interest yields seems to have broken down as the pair tested ¥109.80 in the session overnight despite the BoJ’s rhetoric that it would continue advocating an easy monetary policy.

Bitcoin (BTC) is down -6.7% at $7,637.

5. U.K services expansion slides to 16-month low, Europe expands

In the U.K, services PMI fell to 53, from 54.2 in December, below the expected consensus for an increase to 54.5. This morning’s data is now following weaker-than-expected manufacturing and construction PMI data last week.

Note: This January slowdown pushes the all-sector PMI into ‘dovish’ territory as far as the Bank of England (BoE) monetary policy is concerned. The BoE announces its latest interest rate decision and inflation report on Thursday.

Elsewhere, the composite PMI for the eurozone in January was revised up to 58.8 from 58.6, hitting its highest level in a dozen years and further proof that the eurozone economy started this year on a very strong footing.

At a national level, Italy stood out, recording its highest reading in a dozen years, as businesses hired at the fastest pace in 17-years.

Note: The ECB will be encouraged to expect acceleration in wages growth that would help it meet its inflation target in the coming years.

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