Monday October 22: Five things the markets are talking about
Global equities remain better supported this Monday morning after Chinese stocks surged overnight on senior officials verbal intervention.
The ‘mighty’ U.S dollar has eased a tad along with treasuries, while Italian bonds have rallied.
The EUR had found some early support on the back of a ratings decision by Moody’s Investors Service late last Friday who removed the immediate threat of a downgrade to ‘junk.’ The market now awaits on S&P’s review this Friday.
Nevertheless, risks remain, from tension surrounding the Khashoggi murder and the ongoing Sino-U.S trade showdown to Italian budget fears and President Trump’s unpredictability ahead of U.S midterm elections.
On tap for this week, the Bank of Canada (BoC) is expected to increase its policy rate by +25 bps to +1.75% on Wednesday (Oct 24) despite last Friday’s disappointing inflation and retail sales readings.
Elsewhere, the European Central Bank (ECB) is expected to leave policy unchanged, but questions regarding Italy and its budget issues are expected to be front and center.
In Scandinavia, Sweden’s Riksbank and Norway’s Norges bank take center stage mid-week.
Stateside, earnings season gathers pace with notable highlights including Amazon, Alphabet, Intel, Verizon, Microsoft, Twitter, McDonald’s, and Caterpillar.
1. Stocks in the black
Japan’s Nikkei edged higher, supported by a rally in Chinese stocks on the promise of additional stimulus measures, triggering buying in firms exposed to China. The Nikkei share average rallied +0.37%, moving off a six-week low hit during last Friday’s session. The index is now down around -7.5% since hitting a 27-year high on Oct. 2. The broader Topix edged +0.15% higher.
Down-under, Aussie stocks ended lower on Monday, as political concerns rattled investors after the governing coalition looks set to lose its one-seat majority in parliament following a weekend by-election. The S&P/ASX 200 index closed -0.6% lower. In S. Korea, the Kospi stock index climbed on Monday supported by a strong Chinese market. The index rallied +0.5%.
In China, stocks surged overnight in the wake of coordinated statements of support by senior regulators, and as China prepares to overhaul its income tax law for individuals. The benchmark Shanghai Composite index was +4.2% higher, while the blue-chip CSI300 index jumped +4.4%.
The gains extended to Hong Kong, where the Hang Seng index added +2.3% and the China Enterprises Index ended +2.6% higher.
In Europe, indices trade higher across the board. Italy’s FTSE MIB outperforms after Moody’s cut the countries rating to the lowest investment grade, but put the outlook as stable, helping BTP futures rally.
U.S stocks are set to open in the ‘black’ (+0.1%).
Indices: Stoxx600 +0.22% at 362.02, FTSE +0.26% at 7,066.00, DAX +0.52% at 11,614.01, CAC-40 +0.24% at 5,096.82, IBEX-35 +0.73% at 8,957.30, FTSE MIB +0.66% at 19,205.50, SMI +0.30% at 8,892.50, S&P 500 Futures +0.18%
2. Brent oil back above $80 as Iran sanctions loom
Brent crude oil prices remain better bid as markets are expected to tighten once U.S sanctions against Iran’s crude exports come into effect in November.
Brent crude oil futures are at +$80.26 a barrel, up +48c, or +0.6%, above Friday’s close. U.S West Texas Intermediate (WTI) crude futures are at +$69.60 a barrel, up +48c, or +0.7%.
Note: The U.S sanctions on Iran, the third-largest producer in OPEC, are set to start on Nov. 4.
OPEC agreed in June to boost supply to make up for the expected shortfall in Iranian exports, however, recent data suggests that OPEC is struggling to add barrels as an increase in Saudi supply was offset by declines elsewhere.
Nevertheless, relief may come from the U.S, where offshore drillers added four oilrigs in the week to Oct. 19, bringing the total count to 873, according to Baker Hughes data on Friday. After months of stagnation, U.S crude production is expected to rise.
However, undermining sentiment is weaker China growth data and the ongoing Sino-U.S trade dispute. The full impact of the trade war is expected to hit markets early next year and provide a considerable drag on oil demand.
Ahead of the U.S open, gold prices have edged higher overnight towards their three-month peak hit last week, as the ‘big’ dollar eased and worries over rising political tensions slowing global economic growth lent support to the ‘yellow’ metal. Spot gold is up +0.1% at +$1,226.52 an ounce, while U.S. gold futures are also up +0.1% at +$1,229.50 an ounce.
3. Italian yields drops by most in 4-months on Moody’s decision
Italian sovereign yields dropped across the curve after ratings agency Moody’s kept the country’s sovereign ratings outlook ‘stable’ while delivering an expected downgrade last week. The market was worried that the outlook would be ‘negative.’
Note: S&P’s review is expected this Friday (Oct 26). It now rates the country two notches above junk at BBB.
Italy’s five-year BTP yield dropped -36 bps to a two-week low of +2.63%, while the benchmark 10-year yield was -26.5 bps lower at +3.39%, its biggest daily drop in four-months. The BTP/Bund 10-year yield spread tightened to +284 bps.
Elsewhere, the yield on the U.S 10-year note rose +1 bps to +3.20%, while Germany’s 10-year Bund yield increased + 2bps to +0.48%. In the U.K, the 10-year Gilt yield climbed +1 bps to +1.588%.
4. Dollar quiet across the board
The EUR/USD is a tad lower at €1.1515 after testing a high of €1.1550 overnight on the back of a relief rally in the 10-year BTP/Bund spread. Nevertheless, event risk persists ahead of the deadline for Italy to respond to the E.U Commission’s initial objections over the 2019 budget plan.
Expect Thursday’s ECB meeting to be closely watched, especially Draghi’s press conference, where the market is looking for more color on how the ECB would reinvest maturing QE proceeds post December this year.
GBP/USD is -0.3% lower at £1.3030 as Brexit talks again reached an impasse. However, PM Theresa May believes that +95% of the Brexit withdrawal deal is “now settled.” It’s believed that the PM is facing a rebellion by more than 40 Tory MP’s if she does not back down to fresh demands from Brexiteers’
Note: 48 votes are necessary for a leadership challenge
5. Italy says it’s ready to discuss budget with E.U authorities
The Italian government is ready to sit and discuss its budget targets with E.U, Deputy Prime Minister Luigi Di Maio said this morning, restating that the “populist” coalition had no plan to leave the euro.
Italy has sent a letter to the commission explaining its reasons for sticking to the +2.4% goal, and that the government was ready to “sit at the table”.
Note: Italy wants to hike its budget deficit to +2.4% from this year’s +1.8%. Last week, the E.U Commission labeled Italy’s 2019 draft budget an “unprecedented breach of EU fiscal rules.”
Canadian inflation slowed significantly last month as temporary factors that lifted the cost of gas and air travel dissipated.
Canada’s CPI climbed +2.2% y/y, following a +2.8% increase in August and a +3% climb in July.
The market was looking for a solid +2.7% gain in September.
On a month-over-month basis, CPI declined -0.4%.
Digging deeper, the Bank of Canada (BoC) three preferred measures supporting inflation also weakened – core-inflation prices rose in a range from +1.9% to +2.1% for an average of +2.0%, down from the previous month’s +2.1% average.
Despite this morning miss, the headline annual inflation rate in Canada has come in +2%+ for eight consecutive month.
Canada retail sales miss
Canadian retail sales fell unexpectedly in August, led mostly by gas stations receipts declines.
Canada retail sales fell -0.1% in August, m/m, to a seasonally adjusted +C$50.76B. The market was looking for a +0.3% rise.
In volume terms, retail sales declined by a steeper -0.3% in August.
The previous month’s data were revised downward, and indicated receipts rose +0.2% vs. +0.3% estimate.
On the release, the CAD came under immense, trading at C$1.3030 before the headlines to C$1.3116.
Next up, the BoC monetary policy announcement is next Wednesday (Oct 24). Despite a weaker retail sales and inflation, the market is currently pricing in another +25 bps hike by Governor Poloz.
Employment in Canada increased by 28,800 jobs from August to September according to the September ADP® Canada National Employment Report. Broadly distributed to the public each month, free of charge, the ADP Canada National Employment Report is produced by the ADP Research Institute®. The report, which is derived from actual ADP payroll data, measures the change in total nonfarm payroll employment each month on a seasonally-adjusted basis.
“The labor market was quite strong in the month of September,” said Ahu Yildirmaz, vice president and co-head of the ADP Research Institute. “Although the goods producing sector struggled this month, we saw significant growth in many industries. Trade, for example, continued its steady growth adding the most jobs the sector has seen all year.”
The August total of jobs added was revised up from 13,600 to 42,700.
Read more Newswire
The U.S. Treasury Department is poised to release its much-awaited foreign-exchange policy report to Congress on Wednesday afternoon, according to an administration official.
The semi-annual review of currency regimes of the U.S.’s 12 major trade partners and Switzerland will be released on Treasury’s website late in the day in Washington, the official said, declining to provide timing. The person spoke on the condition of anonymity.
Treasury is poised to render a verdict on President Donald Trump’s claim that China is manipulating its currency. While the U.S. hasn’t designated China as a currency manipulator since 1994, Wall Street is bracing for the prospect that Treasury will do so this week. Such a move wouldn’t trigger penalties, but it would likely escalate tensions between the world’s two largest economies.
Manufacturing sales fell 0.4% to $58.6 billion in August, following three consecutive monthly increases.
The decline was mainly due to lower motor vehicle sales. Excluding this industry, manufacturing sales rose 0.4% in August.
After taking price changes into account, the volume of sales in the manufacturing sector edged down 0.3% in August.
Motor vehicle industry posts the largest decrease
Sales of motor vehicles fell 8.3% to $4.9 billion in August, following two consecutive monthly increases. The decline was mostly attributable to lower production due to atypical shutdowns in some assembly plants in August. In constant dollars, motor vehicle sales fell 8.4%, which shows that the decrease in current dollars mainly reflected a drop in sales volumes rather than lower prices in the industry.
Primary metal industry sales fell 2.9% to $4.4 billion in August, a third consecutive monthy decline. The decrease in August reflected lower sales in the non-ferrous metal (except aluminum) production and processing industry. Conversely, seasonally adjusted sales in the iron and steel mills and ferro-alloy manufacturing, steel product manufacturing, and alumina and aluminum production and processing industries grew in August.
Sales in the wood product (-3.4%) and food (-0.6%) industries also fell in August.
These decreases in current dollars were partially offset by increases in the aerospace product and parts (+13.5%), plastic and rubber product (+3.8%), machinery (+2.0%) and chemical product (+1.1%) industries.
Sales down in three provinces
Sales were down in three provinces in August, with Ontario posting the largest dollar decrease.
After two straight monthly increases, sales in Ontario fell 2.0% to $26.6 billion. The decline was mainly attributable to lower sales in the motor vehicle (-8.9%), primary metal (-8.4%) and motor vehicle parts (-1.8%) industries.
In Alberta, sales fell 0.8% to $6.6 billion, following three consecutive monthly increases. Most of the decrease stemmed from lower sales in the petroleum and coal products (-3.5%), electrical equipment, appliance and component (-24.6%) and primary metal (-9.2%) industries.
The largest monthly increase was in Quebec, where sales rose 1.3% to $14.2 billion. The gain was mainly attributable to an 18.9% increase in the aerospace product and parts industry and, to a lesser extent, gains in the plastic and rubber product (+8.6%), computer and electronic product (+12.2%) and petroleum and coal product (+3.4%) industries.
Inventory levels rise
Inventory levels rose 1.1% to $83.9 billion in August. Inventory increased in 14 of 21 industries, with the largest gains in transportation equipment (+3.4%), food (+1.9%) and plastic and rubber product (+5.6%).
These increases were partially offset by lower inventory levels in the primary metal (-1.4%) and wood products (-2.3%) industries.
The inventory-to-sales ratio rose from 1.41 in July to 1.43 in August. The ratio measures the time, in months, that would be required to exhaust inventories if sales were to remain at their current level.
Unfilled orders increase
In August, unfilled orders rose 0.8% to $94.8 billion, after edging down 0.2% in July. Most of the gain came from a 0.8% increase in the aerospace product and parts industry. Unfilled orders were also up in the computer and electronic product and the fabricated metal product industries.
After two consecutive monthly decreases, new orders were up 1.1% to $59.3 billion in August. An increase in new orders in the aerospace product and parts and machinery industries were behind this gain.
The capacity utilization rate edges up
The capacity utilization rate (not seasonally adjusted) of the manufacturing sector edged up 0.7 percentage points, from 79.5% in July to 80.2% in August. Following a 14.6 percentage point decline in July, the capacity utilization rate for the transportation industry increased from 73.4% in July to 81.5% in August. Shutdowns at several auto manufacturing plants were responsible for the decrease in July.
The capacity utilization rate of food manufacturers fell 2.2 percentage points to 81.0% in August. This decrease was attributable to lower production in most food industries.
The capacity utilization rate of the primary metal industry, which includes aluminum and steel, edged down 0.3 percentage points to 77.8% in August.
U.S. new-home construction fell in September on a decline in the South that may reflect disruptions from Hurricane Florence, government figures showed Wednesday.
Highlights of Housing Starts (September)
Analysts had forecast a decline in housing starts after Hurricane Florence, which made landfall in North Carolina on Sept. 14, caused damage and flooding throughout the Carolinas. Those states are part of the report’s South region, which accounts for about half of starts and showed a 13.7 percent drop from the prior month. Hurricane Michael, which struck Florida and other southeastern states last week, will probably affect activity in October.
While the impact of the storms on housing data is likely to be temporary, the decline in starts largely reflected slower construction in multifamily housing, a category that tends to be volatile. In addition, permits for single-family homes rose 2.9 percent last month, the most in a year, on gains in the Northeast and West, indicating builders have a steady pipeline of construction.
That indicates housing could contribute to the economy toward the end of the year as consumer demand, helped by a solid job market, lower taxes and post-storm rebuilding, overshadows headwinds including rising mortgage rates and property prices.
A decline in lumber prices from a record earlier this year may also be providing some comfort to developers. A gauge of homebuilders’ confidence rose in October for the first time in five months, according to a National Association of Home Builders/Wells Fargo report released Tuesday.
Tuesday October 16: Five things the markets are talking about
The ‘big’ dollar came under pressure yesterday and is finding it difficult to gain much traction this morning as investors taking profit on U.S assets outweighs concerns about Italy, Brexit and a Sino-U.S trade war. Furthermore, twin U.S deficits and prospects of a halt in Fed’s rate hike cycle are also weighing on the dollar.
Elsewhere, it has been mixed picture across regional stock markets overnight as investors await the next wave of corporate earnings and further developments across the aforementioned geopolitical issues.
Note: Any hint of a slowdown or stronger growth could affect the pace of Fed’s rate hikes.
Oil prices continue to fluctuate within striking distance of recent highs amid tensions between Saudi Arabia and the U.S over the disappearance of Jamal Khashoggi, a prominent journalist with U.S citizenship, while the precious ‘yellow’ metal holds its gains.
On tap: FOMC minutes are due Wednesday (02:00 pm EDT), with investors focused on projections for further interest rate rises.
1. Stocks mixed results
In Japan, the Nikkei rebounded overnight, supported by short covering in index heavyweights (automakers and SoftBank), but retailers came under pressure on worries about domestic personal consumption and slowing demand from China. The Nikkei share average closed +1.3% higher, after tumbling -1.8% yesterday. The broader Topix rallied +0.7%.
Down-under, Aussie shares rebounded overnight, as mining and financials bounced back from Monday’s -1% drop and six-month low, but rising tensions between Saudi Arabia and the West and weaker PPI data in China capped broader market gains. The S&P/ASX 200 index rose +0.6%. In S. Korea, the Kospi stock index closed flat on Tuesday as global uncertainties capped gains during the day.
In China, stocks ended lower overnight, after data showed factory-gate inflation had cooled for a third consecutive month in September amid lean domestic demand. The blue-chip CSI300 index ended -0.8% weaker, while the Shanghai Composite Index also closed -0.8% lower. In Hong Kong, the Hang Seng was up +0.1%.
Note: Chinese inflation was boosted by food while prices were mostly subdued elsewhere. China Sept CPI y/y came in as expected at +2.5% vs. +2.5%e (a seven-month high): PPI y/y was +3.6% vs. +3.5%e.
In Europe, regional bourses trade mostly higher across the board with the Italian FTSE MIB outperforming following the submission of its draft budget to the E.C, while the U.K’s FTSE underperforms on Brexit uncertainty.
U.S stocks are set to open in the ‘black’ (+0.3%).
Indices: Stoxx600 +0.4% at 361, FTSE -0.2% at 7012, DAX +0.2% at 11638, CAC-40 +0.1% at 5099, IBEX-35 +0.9% at 9004, FTSE MIB +1.1% at 19500, SMI +0.3% at 8678, S&P 500 Futures +0.3%
2. Oil dips on expectations of higher U.S stocks, gold unchanged
Oil prices have eased a tad amid expectations of an increase in U.S crude inventories, but signs of a fall in Iranian oil exports for October are limiting losses.
Brent crude for December delivery has fallen -6c, or -0.07%, to +$80.72 per barrel, while U.S West Texas Intermediate (WTI) crude for November delivery is down -14c at +$71.64 a barrel.
U.S crude stockpiles are forecasted to have risen last week for the fourth consecutive week, by about +1.1M barrels, ahead of reports from the API (data is due at 4:30 pm today) and the U.S DoE’s EIA (will be released at 10:30 am EDT tomorrow).
In the first two weeks of October, Iran has exported +1.33M bpd of crude to countries including India, China and Turkey. That is down from +1.6M bpd during the same period in September.
Note: October exports are a sharp drop from the +2.5M bpd in April before President Trump withdrew from a multilateral nuclear deal with Iran. In May Trump ordered the re-imposition of economic sanctions on the country. The sanctions will come into force on Nov. 4.
Also supporting prices is today’s comments from OPEC’s Secretary General Barkindo who said, “global spare oil capacity was shrinking,” adding “producers and companies should increase their production capacities and invest more to meet current demand.”
Ahead of the U.S open, gold prices are holding steady near yesterday’s three-month high as a number of risk-averse investors seek refuge in the metal amid rising political tensions and economic uncertainty.
Spot gold was little changed at +$1,226.71 an ounce – it touched +$1,233.26 yesterday, its highest print since mid July, as global equities slid on rising tensions between the Saudi’s and the West. U.S gold futures are flat at +$1,230.40 an ounce.
3. German Bund yields edge higher
A cautious, risk-on mood currently prevails in eurozone sovereign bond markets so far this morning, with yields of German Bunds and of other core eurozone bonds up, and Italian bond yields down.
This would suggest that market risk sentiment may be improving following last week’s sudden correction, but the balance remains a tad precarious in the current political environment. German 10-year Bund yield has backed up +1.4 bps to +0.51%.
Note: The +0.50% level in Bund yields remains pivotal and with more debt product coming to market today (Germany offers +€4B in the September 2020-dated Schatz) should be able to back up sovereign yields a tad more.
Elsewhere, the yield on 10-year Treasuries has backed up +1 bps to +3.17%, the highest in a week. In the U.K, the 10-year Gilt yield has decreased -1 bps to +1.603%, the lowest in almost two-weeks, while in Italy, the 10-year BTP yield has declined -2 bps to +3.522%.
4. G7 currency pairs are little changed
Major currencies (€, £, ¥ and C$) are relatively unchanged ahead of the U.S open.
Dealers and investors have little technical or fundamental data to work with at current levels. In fact, the market is looking for guidance, which may come in the shape of the U.S Treasury forex report, which is likely to be released this week and where the U.S could name China a currency manipulator.
If the U.S were to name China a currency manipulator it would further pressure China on trade and add to the Sino-U.S trade tensions.
EUR/USD is flat at €1.1579 and other major currency pairs are not moving by much either. GBP/USD is up slightly at £1.3163 as leaders struck a conciliatory tone a day after Brexit negotiations broke down and USD/JPY is up +0.3% at ¥112.07
Elsewhere, the performance of several petro-forex (NOK, CAD, RUB) has been held back due to various unique factors that have not translated into a growth boost for these currencies. The ruble has been driven by U.S sanctions, and the Canadian dollar has been held back by NAFTA re-negotiations.
TRY (-0.20% at $5.7865) has retreated after seven days of gains after the country released U.S pastor Andrew Brunson on Friday.
5. U.K wage growth fastest in a decade
U.K data this morning showed that wage growth quickened over the summer at the fastest pace in almost a decade, adding to signs of inflationary pressure.
The ONS said that average weekly earnings in Britain, ex-bonuses, grew +3.1% in the three-months through August.
The figures will likely reinforce market expectations that the BoE remains on course tighten monetary policy over the next 24-months to keep overall price-growth in check, assuming the U.K.’s exit from the E.U goes well.
Other data showed that U.K unemployment in the three-months through August was unchanged on the previous three-months at +4%, while the number of people in work, +32.4M, remained close to its record high.
Note: The BoE hiked interest rate in August and signalled that they expect to do so again two or more times over the next couple of years to bring inflation back to their +2% annual goal.
A weaker pound since the Brexit referendum has to push up the price of imports, squeezing U.K citizens’ purchasing power.
U.S. retail sales barely rose in September as a rebound in motor vehicle purchases was offset by the biggest drop in spending at restaurants and bars in nearly two years.
The Commerce Department said on Monday retail sales edged up 0.1 percent last month after a similar gain in August. Economists polled by Reuters had forecast retail sales increasing 0.6 percent in September.
Retail sales in September rose 4.7 percent from a year ago.
Excluding automobiles, gasoline, building materials and food services, retail sales jumped 0.5 percent last month. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product.
Data for August was revised down to show core retail sales were unchanged instead of the previously reported 0.1 percent gain. Consumer spending is being driven by a robust labor market, with the unemployment rate near a 49-year low of 3.7 percent. Tight labor market conditions are gradually pushing up wage growth.
The solid core retail sales increase in September pointed to strong consumer spending that should offset anticipated drags on economic growth from a widening trade deficit and persistent weakness in the housing market. Growth estimates for the third quarter are above a 3.0 percent annualized rate. The economy grew at a 4.2 percent pace in the second quarter.
Last month, auto sales surged 0.8 percent after declining 0.5 percent in August. Receipts at service stations fell 0.8 percent, likely reflecting a moderation in gasoline prices.
Sales at clothing stores rebounded 0.5 percent after tumbling 2.8 percent in August. Online and mail-order sales soared 1.1 percent in September after rising 0.5 percent in the prior month.
Receipts at furniture stores increased 1.1 percent. But Americans cut back on spending at restaurants and bars, with sales dropping 1.8 percent. That was the biggest decline since December 2016.
While the Commerce Department said it was impossible to determine the impact of Hurricane Florence on the data, disruptions caused by the storm could have hurt sales at restaurants and bars last month.
Sales at building material stores nudged up 0.1 percent in September. Spending at hobby, musical instrument and book stores increased 0.7 percent last month.
Monday October 15: Five things the markets are talking about
Following a weekend of warnings on global economic fragility from G10 finance leaders at an IMF meeting in Bali, has global equities starting this new week on the back foot, with regional bourses in Asia and Europe seeing red, while U.S equity futures are pointing to deep declines.
Sovereign yields are lower in this cautious climate, while yen has pushed higher along with gold. Crude oil has advanced as tensions rise between the U.S and Saudi Arabia over a missing journalist.
Politics and data are never a good mix and this week is awash with both.
Italy is to submit its contentious budget to the E.C. Already; the proposed budget has potentially broken specific thresholds, which would require a lot of debating from both parties. Expect Italian BTP yields again to come under pressure, backing up towards the psychological +4%.
The E.U meets on Wednesday and will get an update on the status of negotiations with the U.K’s Brexit. Expect the Irish border to be the ‘hot topic du jour. If there is insufficient progress, the possibility of a special summit next month to finalize an agreement looks dead in the water. Dealers expect the pound to remain volatile in the short-term.
The U.S Treasury report about the international economy and the FX market is to be released Tuesday. To neutral observers, China does not meet the threshold of “manipulation.” However, Trumps interpretation may be very different.
On the data front, the U.S releases retail sales this morning (08:30 am EDT) and FOMC minutes on Wednesday.
Across the pond, the U.K presents its labour report tomorrow, (Oct 16) inflation Wednesday (Oct 17) and retail sales Thursday (Oct 18).
In Canada, Friday’s upcoming data includes retail sales, and CPI – neither of the reports are expected to dissuade the market of pricing in a +25 bps rate hike at next weeks Bank of Canada (BoC) monetary policy decision.
1. Equities see red
In Japan overnight, the Nikkei closed at a two month low as automakers and other manufacturers were hit by news that the Trump administration would seek a provision about currency manipulation in future trade deals. The Nikkei share average ended down -1.8%, the weakest closing point since mid-Aug, while the broader Topix dropped -1.6%, the lowest close in seven-months.
Down-under, the ASX 200 fell to a six-month low overnight, led by the banking sectors growing concerns about the hit to earnings from an inquiry into misconduct. The S&P/ASX 200 index fell -1%. In S. Korea, the Kospi stock index fell -0.77% as institutions cut their exposure to riskier assets. The country’s biggest automaker Hyundai Motor slipped -1.7%, marking its lowest trading level in eight-years.
In China and Hong Kong, stock markets again slipped overnight following last week’s deepest dive in eight-months, as investors await the latest twist in the Sino-U.S trade dispute. The Shanghai Composite index closed lower by -1.5%, while in Hong Kong the Hang Seng closed -1.4% lower.
In Europe, regional bourses trade lower across the board, tracking U.S futures and Asian indices lower. The FTSE and sterling (£1.3140) trade a tad lower after the E.U and U.K paused Brexit talks until after this week’s mini-summit.
U.S stocks are set to open deep in the ‘red’ (-0.8%).
Indices: Stoxx600 -0.6% at 356.8, FTSE -0.3% at 6976, DAX -0.4% at 11474, CAC-40 -0.6% at 5066, IBEX-35 -0.3% at 8876, FTSE MIB -0.2% at 19225, SMI % at -0.8%, S&P 500 Futures -0.8%
2. Oil prices rise on Saudi tensions, gold higher
Oil prices remain bid this Monday morning as tension over the disappearance of a Washington post journalist and Saudi critic, Jamal Khashoggi, fuelled supply worries, although concerns over the long-term demand outlook dragged on sentiment.
Brent crude oil jumped +$1.49 a barrel to a high of +$81.92 before easing to +$81.13, up +70c. U.S crude (WTI) was last up +40c at +$71.74.
Saudi Arabia has been under pressure since Khashoggi, a U.S. resident, disappeared on Oct. 2 after visiting the Saudi consulate in Istanbul.
President Trump has threatened “severe punishment” if it is found that the journalist was killed in the consulate.
On Sunday, the Saudi’s said it would retaliate to any action taken against them over the Khashoggi case. The market is tentatively concerned that the Saudis may use oil as a tool for retaliation.
Despite prices starting the week better bid, there are still lower that last week’s high print.
Also limiting price gains is a report from the IEF last Friday stating that the market looked “adequately supplied for now” and cut its forecasts for world oil demand growth this year and next.
Ahead of the U.S open, gold prices have jumped +1% to hit a three-month high as global stocks resumed their fall and investors wrestled with the impact of the ongoing Sino-U.S. trade war and higher U.S interest rates. Spot gold is up +0.9% at +$1,228.24 an ounce, while U.S gold futures are up +0.8% at +$1,231.80 an ounce.
3. Italian and Portugal yields fall
Portuguese and Italian government bond yields have fallen this morning, with prices outperforming euro zone peers after ratings agency Moody’s upgraded Portugal’s credit rating back to investment grade.
Portugal’s 10-year bond yield fell -4 bps to +2.01% after Moody’s lifted its credit rating to Baa3 on Friday.
The positive periphery sentiment from Portugal has spilled over into Italy’s battered bond market. Italian 10-year BTP yields are down -4.5 bps to +3.53%.
Note: Expect Italian yields to trade rather volatile this week as Italy presents its budget to the E.C.
Elsewhere, the yield on U.S 10’s fell -1 bps to +3.15%. In Germany, the 10-year Bund yield has dipped -1 bps to +0.49%, the lowest in more than a week. In the U.K, the 10-year Gilt yield has eased -2 bps to +1.614%, the lowest in more than a week.
4. Dollar’s safe haven flows ease
Risk aversion flows initially provided a bid for the traditional safe-haven currencies of JPY (¥111.75) and ‘big’ USD, however, market sentiment has eased a tad ahead of the U.S open.
GBP (£1.3147) opened below the psychological £1.31 handle on concerns that a Brexit agreement might be slipping away after the U.K and E.U negotiators were said to have called ‘a pause’ in their Brexit talks and would now wait for the outcome of a summit mid-week (Wed) before any resumption.
TRY ($5.8208) is firmer by over +1% outright for its seventh session gain on optimism that relations between Turkey and U.S would improve following the release of U.S Pastor Brunson.
Bitcoin prices have spiked +6.5% this morning, jumping above +$6,600. While the catalyst behind the move higher is not clear and with few ready to label bitcoin a “true store of value” in turbulent times, BTC has held up better than most of late.
5. Embarrassing losses in Bavarian election shake Merkel’s coalition
Germany’s grand coalition could become even further unstable after coalition members suffered humiliating results in an election in the southern state of Bavaria.
Chancellor Merkel’s Bavarian allies slumped to their worst election results in almost 70 years and her junior coalition partners, the center-left Social Democrats (SPD), saw support in Bavaria halved.
The SPD had hoped that infighting over immigration between Merkel’s Christian Democrats (CDU) and the Bavarian Christian Social Union (CDU) allies would give them a boost in Bavaria.
But instead, the party saw support fall to just under +10%, prompting a discussion over the sustainability of its alliance with Merkel’s conservatives at the national level.
Note: SPD members are still bitter over their leaders’ decision to join a Merkel-led government.
Merkel’s authority may be called into question as soon as in two-weeks in an election in the western state of Hesse – the state is ruled by Merkel’s CDU in a coalition with the Greens, but polls suggest she is losing further support.
Friday October 12: Five things the markets are talking about
Volatility, in particular, for equities, has notched aggressively higher this week, now that sovereign bond yields are beginning to price out cheap money.
Stronger than expected U.S economic data and weak European underlying inflation in key countries is being blamed as the specific trigger for this week’s ‘bearish’ bout.
However, Chinese trade data released earlier this morning showed better-than-expected growth in Chinese exports has, at least temporarily, helped ease investor concerns about the damage to China’s economy from U.S tariffs and other trade friction.
China’s trade surplus with the U.S widened to a record +$34.1B in September as exports to the American market rose by +13% y/y, despite a worsening tariff war.
Global equities have staged a robust recovery; the ‘big’ dollar trades steady, U.S Treasury yields back up and crude oil prices recover while still heading for the biggest weekly drop in three-months.
Nevertheless, a gradual Fed rate increase remains the order of the day, especially after yesterday’s muted U.S CPI data – the market is pricing in a +25 bps move in December.
Since the Fed’s last meeting in September all data has been in line with the Fed’s depiction of an economy in which low unemployment will be coupled with inflation running near +2% for the foreseeable future.
1. Stocks sell off ends in Asia
Chinese stocks, among the biggest losers in a global market selloff this week, rallied overnight, as investors reassessed the impact of the Sino-U.S trade spat on the country’s economy and its markets.
In Japan, the Nikkei ended higher on Friday as investors took heart from gains in Chinese equities on upbeat export data, which generated buying in manufacturers exposed to China. The Nikkei share average gained +0.5%. On Thursday, the index slid -3.9% and for the week the index was down -4.6%, its biggest weekly drop since March. The broader Topix traded flat.
Down-under, Australia’s ASX 200 lagged most of Asia Pacific overnight as the heavily weighted energy and financial sector held the index back. It ended +0.2% higher, but fell -4.7% for the week. In S. Korea, its stock market rebounded from one of its biggest drops in seven-years. The Kospi rallied +1.5%, its first gain this month. The index fell -4.7% for the week.
In China, the main stock indexes bounced higher overnight after suffering massive losses this week, as investors went bargain hunting on the back of stronger Chinese exports data. At the close, the Shanghai Composite index was +0.9% higher, after touching near four-year lows yesterday. The index was down -7.6% for the week, its worst weekly performance in eight months. The blue-chip CSI300 index closed +1.49% higher.
In Europe, regional indices trade higher across the board rebounding from multi-month lows following a rebound in U.S index futures and Asian Indices.
U.S stocks are set to open deep in the ‘black’ (+0.8%).
2. Oil rebounds, but pares gains on adequate supply, gold lower
Oil has rallied overnight; rebounding after two-days of heavy declines, though prices pared gains after an IEA report deemed supply adequate and the outlook for demand weakening.
Brent crude has rallied +76c to +$81.02 a barrel, having dropped by -3.4% yesterday. U.S crude (WTI) has added +71c to +$71.68.
Note: Brent is still on course for a -3.7% decline this week, the biggest weekly fall in about four-months.
Oil found support from data showing that China’s daily crude imports last month hit their highest in four-months and from a rebound in equities.
Gains were pared, after a monthly report by the IEA said the oil market looked “adequately supplied for now” after a big rise in production and trimmed its forecasts for world oil demand growth this year and next. “This is due to a weaker economic outlook, trade concerns, higher oil prices and a revision to Chinese data,” said the IEA.
Ahead of the open, gold prices are under pressure as global equities rally, but the ‘yellow’ metal trades within striking distance of its 10-week high print in yesterday’s session. Spot gold is down -0.4% at +$1,218.86 an ounce, after rallying +2.5%yesterday, as this weeks equity rout sent investors rushing to safe-havens. U.S gold futures are down -0.4% at +$1,222.30 an ounce.
3. Yields back up on relief
Eurozone government bond markets show signs of relief as equity markets rebound. The 10-year Bund yield is trading +2.3 bps higher at +0.54%, pulling the yields of other core and semi-core issuers higher.
Note: Bunds yields are down from five-month highs reached earlier this week at +0.58%.
Eurozone periphery government bond yields trade lower, indicating a lower level of concern, at least for the day. Italy’s 10-year BTP yield is trading -4.5 bps lower at +3.53%.
Note: Italian 10-year bond yields rose to five-year highs earlier this week on tension between Rome and the E.U over Italy’s expansionary budget plans.
Elsewhere, the yield on 10-year Treasuries has backed up +3 bps to +3.18%, the biggest advance in a week. In the U.K, the 10-year Gilt yield has gained +2 bps to +1.694%. In Japan’s 10-year JGB yield has climbed less than +1 bps to +0.15%.
4. Dollar stable, EM pairs rally
USD initially tested multi-week lows as a weak Wall Street soured its recent bullish sentiment. Nevertheless, the greenback is off its worst levels as the equity sell-off has eased.
After jumping to an 11-day high of €1.1611 overnight, the dollar has stabilized and EUR/USD trades slightly higher, last by +0.1% at €1.1593. However, expect Italian fiscal risks and the direction of U.S yields to continue to drive the EUR/USD.
Emerging-market currencies are having another good day after weathering the global equity selloff this week. The South African rand is up +1.1% at $14.483, and the Mexican peso has gained +1.5% at $18.8718. The Turkish lira has paired some of its gains, but its trading +2% at $5.9451 – up +5% on the week.
The PBoC set yuan at weakest level since March 2017, a day after U.S Treasury staff advised Secretary Steven Mnuchin that China was not manipulating its the exchange rate. The midpoint for the dollar was ¥6.9120.
GBP/USD (£1.3215) is trading within striking distance of its three-week highs on hope for a Brexit agreement at the upcoming E.U leader summit next week. There is speculation that PM May is close to an agreement, but obstacles remain, as she requires the DUP Party ally and rebel Tory members support.
5. Eurozone factory output rebounds
Data this morning showed that industrial production in the eurozone rebounded strongly in August, as surges in Italy and the Netherlands offset weakness in Germany to suggest economic growth across the currency bloc continues at a modest pace.
The E.U’s statistics agency said industrial production was +1% higher in August than in July, and up +0.9% on year. The market was looking for a monthly gain of just +0.2%.
It was the first rise in production since May, following two straight months of decline.
Today’s healthy rebound will likely reassure the ECB that the economy is on course to grow more slowly this year than last, but still at a rate that will lead to new jobs being created, thereby pushing wages and inflation higher.
Note: The IMF trimmed its eurozone growth forecast for this year to +2% from +2.2%, noticeably downgrading its growth projection for Germany to +1.9% from +2.2%.