Futures Tread Water As Ukraine Tries To Steal The Jackson Hole Scene

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While today's key events were supposed to be the Jackson speeches first by Janet Yellen at 10:00am Eastern and then by Mario Draghi at 2:30 pm, Ukraine quickly managed to steal the spotlight yet again when moments after the first Russian humanitarian aid convoys entered Ukraine allegedly without permission, Kiev first accused Russia of staging a direct invasion, even if moments later it changed its tune and said it had allowed the convoy in to "avoid provocations." In other words, your daily dose of Ukraine disinformation, which initially managed to push futures down some 0.3% before futs regained virtually all losses on the subsequent clarifications. Expect much more conflicting, confusing and very provocative headlines out of Kiev as the local government and the CIA try to get their story straight.

In terms of overnight markets, Asian equities and credits are mostly firmer ahead of Jackson Hole. The Shanghai Composite ad HSCEI indices are both around 0.2% as they recover somewhat from yesterday’s disappointing flash manufacturing PMI. Chinese stocks are poised to close higher for the 6th consecutive week in what would be its longest streak since March 2012. Elsewhere in Asia the Nikkei is flat on the day while the Hang Seng and the KOSPI are +0.4% and +0.5%, respectively. Turning to credit, Asian IG cash continues to grind tighter amid very light supply. Key benchmarks are about 1bps tighter as we type. The UST 10-year yields are a touch firmer at 2.40% while the Dollar index is unchanged.

After initially opening flat, European equities drifted slightly lower ahead of the US crossover on position squaring ahead of Fed Chair Yellen’s appearance at Jackson Hole. The financials sector is slightly supporting the indices as European bank stocks look forward to ECB’s Draghi speech in Wyoming, expected to stress the broad divergence in monetary policy between the US and the Eurozone. Vodafone (+1.1%) shares traded in minor positive territory this morning after AT&T bid chatter was recycled in UK press. US stock futures trade relatively flat ahead of the open, with record highs still well within reach. In pre-market news, Apple (AAPL) are reportedly suffering from supply chain issues, with the drive for a thinner iPhone model is causing backlight issues, with the supply chain source remaining unsure on whether this could delay release.

There is nothing of note on today's US econ release docket: it will be a very quiet day for data which sets up the spotlight nicely for Yellen and friends at Jackson Hole.

Bulletin headline summary from RanSquawk and Bloomberg:

  • After a flat open, Bund futures broke above yesterday’s highs of 150.40 as markets remain wary over Russia’s aid convoy making its way to Luhansk – reportedly escorted by a small group of pro-Russian rebels without Kiev’s approval
  • European equity markets trade slightly lower on position squaring ahead of various central bank speeches in Jackson Hole, Wyoming later today
  • Speeches from Fed Chair Yellen (1500BST/0900CDT) and ECB Governor Draghi (1930BST/1330CDT) are expected to stress the policy divergence between the Federal Reserve and the ECB

FIXED INCOME

European fixed income futures opened flat amid particularly light newsflow and thin volumes. Nonetheless, Bund futures broke above yesterday’s highs as Russia warned that any disruption to the aid convoy heading toward Luhansk, eastern Ukraine would not be tolerated. Still, volumes below 100k in Sep-14 Bund futures kept price action relatively erratic. Despite this, witness reports suggest the aid convoy is being escorted by a small number of pro-Russian rebels, without Ukraine’s consent is keeping markets wary of the developments. Core fixed income markets remain somewhat supported by the particularly chunky month-end extensions, particularly in the US:

Prelim Barclays month end extension for Pan-Euro Agg at +0.03y (Prev. 0.12yrs, 12m average +0.03yrs)
Prelim Barclays month end extension for Sterling Agg Tsy at +0.08y
Prelim Barclays month end extension for US Treasuries +0.12yrs (Prev. 0.08yrs, 12m average +0.09yrs)

EQUITIES

After initially opening flat, European equities drifted slightly lower ahead of the US crossover on position squaring ahead of Fed Chair Yellen’s appearance at Jackson Hole. The financials sector is slightly supporting the indices as European bank stocks look forward to ECB’s Draghi speech in Wyoming, expected to stress the broad divergence in monetary policy between the US and the Eurozone. Vodafone (+1.1%) shares traded in minor positive territory this morning after AT&T bid chatter was recycled in UK press. US stock futures trade relatively flat ahead of the open, with record highs still well within reach. In pre-market news, Apple (AAPL) are reportedly suffering from supply chain issues, with the drive for a thinner iPhone model is causing backlight issues, with the supply chain source remaining unsure on whether this could delay release.

FX

The USD continued to retreat from 11-month highs this morning, allowing EUR/USD and GBP/USD to pull back toward 1.3300 and 1.6600 respectively. Elsewhere, USD/JPY trades slightly lower as the pair continues to retreat way from 104.00 after a failure to break that level yesterday. Looking ahead, Canadian CPI will likely dictate the USD/CAD range, with a slew of option expiries at 1.0920-25 (280mln) and 1.1000 (1.23bln) at the 10am (1500BST) NY cut particularly close to market.

COMMODITIES

WTI and Brent crude futures fell ahead of the NYMEX open, with WTI futures prices retreating to the mid-point of yesterday’s range, on track to mark a sharp weekly loss of over USD 1.50/bbl. Spot gold still sits below the 200DMA at USD 1,284.49, however has benefited this morning from renewed risk surrounding eastern Ukraine and a moderately softer USD.

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DB's Jim Reid, or rather his team while he is on vacation, concludes the rest of the overnight events

The Jackson Hole symposium is the main event for today. If that wasn’t enough we also have an all star line up of central bank governors this year. All eyes will clearly be on the Yellen’s key note address but this time round we’ll also hear from Draghi at lunchtime, Kuroda from the Bank of Japan, and Broadbent from the Bank of England. It was 2011 when we last had both the Fed Chair and ECB President at Jackson Lake Lodge so today’s line up is certainly eye-catching especially given the policy divergence amongst the themselves. The theme of this year's symposium is "Re-Evaluating Labour Market Dynamics". Yellen will kick things off with her opening remarks at 8.30am local time (3pm UKT) followed by a luncheon address from Draghi at 12.30pm (7.30pm UKT). Broadbent, Kuroda and Tombini are panellists at a panel discussion titled ‚Labour Markets and Monetary Policy? the next day which could be an interesting one given Carney’s recent comments on wages.

So what can we expect from Yellen? Our US economists expect the Fed Chair to provide us with an updated assessment on the infamous ‘Yellen dashboard’ in evaluating the ongoing labour market slack and how they have yet to normalise relative to 2002-2007 levels. Some of these alternative measures she monitors include duration of unemployment, quit rate in JOLTS data, labour force participation etc. Any sound bite that touches on the debate of cyclical versus structural drivers of labour force participation will also be closely followed. Unlike some of the previous Jackson Hole symposiums, this is likely not one that will serve as a precursor of any monetary policy changes but the tone of Yellen's speech may still have a market impact and set the mood for busier times ahead in September. Given markets are seemingly expecting nothing but another dovish display from Yellen the risk is perhaps skewed to the other side.

In terms of overnight markets, Asian equities and credits are mostly firmer ahead of Jackson Hole. The Shanghai Composite ad HSCEI indices are both around 0.2% as they recover somewhat from yesterday’s disappointing flash manufacturing PMI. Chinese stocks are poised to close higher for the 6th consecutive week in what would be its longest streak since March 2012. Elsewhere in Asia the Nikkei is flat on the day while the Hang Seng and the KOSPI are +0.4% and +0.5%, respectively. Turning to credit, Asian IG cash continues to grind tighter amid very light supply. Key benchmarks are about 1bps tighter as we type. The UST 10-year yields are a touch firmer at 2.40% while the Dollar index is unchanged.

Staying on macro matters we thought global supply chain manager Li & Fung’s latest results yesterday offered some interesting anecdotes. The company’s performance for the first 6 months was hampered by ongoing macroeconomic weakness, geopolitical and weather events in its key destination markets (US and Europe). Price discounting remains a theme in US retail even beyond the end of June. The company also noted a reduction of foreign tourist flow by Russian tourists into Europe which is affecting retail markets there. This fits consistently well with some of the ECB’s geopolitical concerns outlined at its previous policy meeting.

Back to yesterday markets had a positive day as strong US data outweighed the mixed European PMI reads. The Eurozone Composite PMI disappointed, falling to 52.8 vs expectation of 53.4. As our European economists noted yesterday, the disappointment was driven by the periphery as the combined Italian, Spanish and Irish index fell by 1.8 points compared to a fall on the combined German-French composite PMI index of 0.1 points (implied consensus -0.4). Other then this regional divergence, there was a continued divergence between the Eurozone services and manufacturing read as the former came in just below expectation (53.5 vs 53.7) whilst the latter came in at 50.8 vs expectation of 51.3. In terms of what these reads mean for Europe, according to our economists these reads are still consistent with between +0.3% and +0.4% qoq GDP growth in Q3 GDP.

Across the Atlantic, it was a strong day for US data with every data point of note beating expectation. The initial jobless claims came in lower than expected at 298k (vs 303k consensus). On the activity side the Markit manufacturing PMI came in at an impressive 58 (vs 55.8 consensus), the highest read in the indexes 3 year history, the Philly Fed reached its highest level in over 3 and a half years at 28, and finally the string of good US housing data continued with July existing home sales coming in at +2.4% MoM against expectations that it would slip -0.5%.

Despite the mixed European PMI data stocks in Europe were up with the Stoxx 600 up +0.66% led by strong gains on the FTSE MIB (+2.06%), IBEX 35 (+1.30%) and CAC (+1.23%). Credit also performed yesterday with iBoxx Main and Xover -1bp and -3bps tighter. Yesterday’s peripheral outperformance even given the PMI’s suggests the moves were largely driven by rising expectations for European QE activism which probably adds more importance (if any were needed) to Draghi’s luncheon speech later today. Over in the US, the stronger data were clearly helpful which saw the S&P 500 (+0.29%) close at a new all time high of 1992. In US credit, the CDX IG and HY moved -2bp and -6bps tighter, respectively.

Whilst on Credit it’s worth noting that weekly US HY fund flows turned positive for the first time in 7 weeks. According to EPFR data the asset class received inflows of US$2.7bn during the week that ended 20 August vs an outflow of US$781m in the previous week and US$8.2bn the week before that. European HY outflows have also slowed down with the latest weekly outflows coming in at US$193m versus US$654m in the previous week and US$934m the week prior to that.

Moving on to geopolitical updates, US strikes have continued in Iraq in support of Kurdish and Iraqi forces fighting IS near the city of Mosul (BBC). In Ukraine, guards at the country’s border have begun to inspect the Russian aid convoy’s trucks. Ukrainian President yesterday also announced that he may dissolve parliament as early as Sunday to set up parliamentary elections in late October (Reuters). Focus this weekend will be his meeting with Merkel at home followed by the Russia-Ukraine summit in Minsk next Tuesday in an effort to de-escalate the conflict.

Looking ahead to today it will be a very quiet day for data which sets up the spotlight nicely for Yellen and friends at Jackson Hole.