Markets Digest Wristwatch, NIRP Monetization, Catalan Independence News; Push Yields, USDJPY Even Higher

Overnight the most notable move has been the ongoing weakness in rates, with USTs reversing earlier Tokyo gains after BoJ Deputy Governor Iwata, in addition to commenting on a lot of things that didn't make much sense,  said he didn’t see any difficulties in money market operations even if BoJ bought bought government debt with negative yields, as InTouch Capital Markets notes. As a reminder, yesterday we noted that in a historic first the "Bank Of Japan Monetizes Debt At Negative Rates." As Bloomberg notes, this may be interpreted that BoJ may target negative yields to penalize savers, which "all boosts the appeal of yen-funded carry trades." In other words, first Europe goes NIRP, now it's Japan's turn! So while this certainly lit the fire under the USDJPY some more, which overnight broke about 106.50 and hit as high as 106.75 on Iwata's comments, it does not explain why the 10Y is currently trading 2.52% - after all the fungible BOJ money will eventually make its way into US bonds and merely add to what JPM has calculated is a total $5 trillion in excess liquidity sloshing in the global market. 

But while bond yields and the USDJPY remain in focus, and tied to the hip as the correlation algos have now linked the two, it is futures which are left in the cold, and after dropping 4 points overnight, ES is now just 1.75 points higher and well below the "psychological" 2000 level, perhaps on ongoing digestion of the "wristwatch" news. Keep an eye on the AUDJPY which appears to be the new carry pair of choice when it comes to "levering" the US stock market.

In Europe, the Scottish indepedence fears once again shift to Spain where local bonds underperform, pushing the SP/GE spread wider by 4.5bps as the looming Catalan National Day tomorrow reignites fears that the Catalan President Mas heads into Catalonia’s independence referendum with an invigorated campaign, echoing the tension seen between the Scots and the UK just 8 days away from the Scottish independence poll. Germany successfully sold EUR 4.15bln in their new 10yr Bund line, with the sale well covered, despite concerns that Germany was set to suffer the 8th technically uncovered auction of the year after yesterday’s poor linker sale. However, the build in concession ahead of the auction drew sufficient bidders. Looking ahead, the US Treasury look to sell USD 21bln in 10yr Notes.

European shares fall with the telcos and travel & leisure sectors underperforming and chemicals, oil & gas outperforming. French finance minister says deficit will widen for first time in 5 years.

Asian equities traded lower. Taking the lead from the US session, the Nikkei, Hang Seng, and Shanghai Composite are down -0.2%, -1.8% and -0.7%, respectively. Chinese markets are under some pressure after Premier Li’s hinted that M2 growth dropped further in August. Credit spreads are also wider with the Aus and Asia iTraxx around 2bp wider on the day. Brent crude is stabilsing at around US$99.2/bbl overnight after having dipped below the US$100 mark over the last 24 hours for the first time since August last year.

In terms of the day ahead we have wholesale inventories and new mortgage applications in the US. We also have a US$21bn 10yr UST auction today. In Europe, we have payrolls and IP stats in France and also some ECB officials scheduled to speak later (Nowotny, Buch and Mersch). On the geopolitical front, the EU will discuss today whether to move ahead with the Russian sanctions.

Market Wrap

• S&P 500 futures up 0.1% to 1987.7
• Stoxx 600 down 0.5% to 343.1
• US 10Yr yield up 1bps to 2.51%
• German 10Yr yield up 7bps to 1.06%
• MSCI Asia Pacific down 0.8% to 146.5
• Gold spot down 0.2% to $1253.5/oz

Bulletin Headline Summary from Bloomberg and RanSquawk

• Continued expectations of policy divergence between the US and the Eurozone lift Treasury yields and keep the USD bid, as the USD-index sits just below 2013 highs
• Spanish assets underperform as investors remain fraught that Catalonia’s independence bid is getting a lift from Scotland’s publicity
• All eyes turn to appearance from BoE’s Carney and ECB’s Praet, with a USD 21bln 10yr Note auction following at 1200CDT/1800BST
• Treasuries decline, 10Y yields ~2.52%, highest in over a month and just below 100-DMA, amid speculation Fed may be less dovish at next week’s meeting.
• U.S. to sell $21b 10Y in reopening today; WI yields 2.525% vs. 2.439% at August sale
• Fed officials are considering whether to alter their guidance on the likely path of interest rates to give them more flexibility to react to changes in the economy
• Obama is preparing to expand the U.S. offensive against Islamic State extremists, including targeting the group’s havens inside Syria and moves to block foreign fighters from entering Syria and Iraq
• Ukraine’s Poroshenko said Russia has withdrawn more than two thirds of its troops from his country as EU governments meet to consider imposing tougher sanctions against the Kremlin
• As Scotland votes next week on whether to break up the U.K. after more than three centuries, a group of about 100 Catalans will gather to watch the outcome  unfold and ponder the implications for their own bid for freedom from Spain
• The BOJ bought JPY500b of Treasury discount bills yesterday, including securities with a negative yield, as it pushes ahead with monetary easing
• Facing the prospect of the first growth-free fiscal year since the 2009 global recession, Japan’s policy makers are keeping faith that a weaker exchange rate will  help the world’s third-largest economy
• China will send 700 soldiers to help protect oil facilities in South Sudan, where civil war has raged for almost nine months, Foreign Ministry spokesman Mawien Makol Arik said
• The U.S. should stop its “close in” aerial and naval surveillance of China, a senior Chinese military officer told Obama’s national security adviser,  the PLA Daily reported
• DoubleLine Capital LP’s Jeff Gundlach said in a webcast that 10Y yields may climb to 2.65%, with the biggest risk in a rise in yields on German and French debt
• Sovereign yields higher. Asian, European stocks fall, U.S. equity-index futures mixed. WTI crude higher, gold falls, copper little changed

US Event Calendar

• 7:00am: MBA Mortgage Applications, Sept. 5 (prior 0.2%)
• 10:00am: Wholesale Inventories m/m, July, est. 0.5% (prior 0.3%)
• Wholesale Sales m/m, July, est. 0.6% (prior 0.2%) Central Banks
• 9:45am: Bank of England’s Carney speaks in Parliament
• 11:00am POMO : Fed to purchase $350m-$450m TIPS in 2019-2044 sector
• 12:00pm: Canada to sell 2Y bonds
• 1:00pm: U.S. to sell $21b 10Y notes

FIXED INCOME

Spanish bonds underperform, with the SP/GE spread wider by 4.5bps as the looming Catalan National Day tomorrow reignites fears that the Catalan President Mas heads into Catalonia’s independence referendum with an invigorated campaign, echoing the tension seen between the Scots and the UK just 8 days away from the Scottish independence poll. Germany successfully sold EUR 4.15bln in their new 10yr Bund line, with the sale well covered, despite concerns that Germany was set to suffer the 8th technically uncovered auction of the year after yesterday’s poor linker sale. However, the build in concession ahead of the auction drew sufficient bidders. Looking ahead, the US Treasury look to sell USD 21bln in 10yr Notes.

EQUITIES

European cash equity markets trade flat to slightly softer, with political union break-up fears keeping on stocks under pressure. The FTSE-100 slightly outperforms as gains in Barratt Developments and Kingfisher post-earnings counter weakness elsewhere.

Following Apple’s release of two iPhone models, a payment system and the Apple Watch, Goldman Sachs have lifted their price target for Apple to USD 115 from USD 107, reiterating their buy rating.

FX

The USD’s dominance has prevailed once more, with the USD-index continuing to approach 2013’s best levels of 84.75 as higher Treasury yields spur strength in the greenback. For the third consecutive session USD/JPY hit a six-year high as carry trade unwind also weakened the AUD, as selling from corporate and macro names pushed AUD/USD further below the 200DMA at 0.9182. Finally, the TRY suffers for the third consecutive session after Turkish Q2 GDP fell below expectations

COMMODITIES

WTI and Brent crude futures trade little changed as initial USD-inspired weakness is pulled back ahead of the NYMEX open. Should Brent crude fall further today, it will drop for the fifth consecutive session as concerns over weak global demand and the lack of response from OPEC over falling prices dampens demand. Spot gold trades slightly softer as the USD’s rise toward 2013 highs keeps USD-denominated commodities under pressure. Today sees September 2014 Brent options expiring.

* * *

DB's Jim Reid Concludes the overnight recap

Bonds had a pretty weak day yesterday as government bond yields rose on both sides of the pond although European yields did finish the day off their intraday highs. Indeed the 10yr government bond yields in Germany, Spain, and Italy closed 4bp, 11bp, and 7bp higher at 0.996%, 2.200%, and 2.367% respectively having been 3-7bps higher at the lows. This was also the first time 10yr Bund yields traded above 1% since 22 August. It is also ironic that Gilts (+1bp) were one of the best performing global government bond markets yesterday given that the surging YES momentum in next week's referendum continues to send shock waves through the likely impacted areas. PM David Cameron has cancelled his weekly commitments in London and is headed to Scotland today to campaign against the separation. In an updated note on this topic, DB’s George Buckley has summed up the latest on the poll. He looks at the kind of additional powers that may be offered to Scotland if it remains in the Union, what to expect post polls, Referendum Day logistics, and the political & market fallout in the event that the answer turns out to be “Yes”. His base case remains for a 'No' vote although a high turnout, participation of 16-17 year olds, and the closeness of current polls all inject additional degree of uncertainty.

We couldn't really pin-point a single driver for the yesterday’s moves in Bonds. In reality there could have been some profit taking following the recent gains but generally sentiment was also weighed by comments from ECB’s Liikanen who said that the ECB hasn’t made any decision on the scale of ABS and Covered bond purchases. Adding to that, Bloomberg news saw a draft document who noted that France and Germany are not interested in providing state guarantees for the program. Delays in Russian sanctions by the EU may have also helped unwind some safe-haven flows.

Demand for US Treasuries also waned with the 10yr yield rising for its fourth consecutive trading session (its longest weakening streak since June). The 10yr closed 3bps higher at 2.504% but is trading slightly better at 2.491% in the Asian session overnight. A report from the San Francisco Fed published on Monday seems to suggest that the market maybe underestimating the pace of potential US rate hikes. There's also increased market chatter about whether the FOMC will signal a more hawkish stance at next week's meeting. We also have a rather busy Treasury auction calendar this week. Overall this softness is not helping the US HY market with bonds extending the recent weakness once again. The FINRA US HY corporate bond price index has lost around 1% since the end of August. On the retail side, the iShares iBoxx $ HY Corp Bond ETF has also lost around 1.6% over the same period.

Away from bonds, yesterday was also a weak day for both US and European equities. Indeed it hasn’t been a good start for September for US equities with the S&P 500 (-0.65%) finishing lower in five out of the six last trading days. Indeed both the Dow and the S&P 500 saw their biggest daily fall in 5 weeks yesterday. It was a negative day for all sectors with Financials, Telco and Utilities all down over 1%. Apple shares reversed early gains following its new iPhone and smart watch launch event yesterday.

Away from the DM world, Brazil’s Baa2 rating was placed on Negative outlook by Moody’s yesterday. One of the key reasons was the absence of growth in Brazil which is adding additional fiscal headwinds. That moved Brazil’s 5yr CDS spreads about 10bp wider on the day although we’d note that Moody’s rating were already 1 notch higher than S&P who still rates Brazil at BBB-/Stable. Its certainly interesting that Brazil’s stock markets had been one of the better performers in Americas this year (+14% YTD).

A quick look at the overnight session, Asian equities are mostly trading lower as we type. Taking the lead from the US session, the Nikkei, Hang Seng, and Shanghai Composite are down -0.2%, -1.8% and -0.7%, respectively. Chinese markets are under some pressure after Premier Li’s hinted that M2 growth dropped further in August. Credit spreads are also wider with the Aus and Asia iTraxx around 2bp wider on the day. Brent crude is stabilsing at around US$99.2/bbl overnight after having dipped below the US$100 mark over the last 24 hours for the first time since August last year.

In terms of the day ahead we have wholesale inventories and new mortgage applications in the US. We also have a US$21bn 10yr UST auction today. In Europe, we have payrolls and IP stats in France and also some ECB officials scheduled to speak later (Nowotny, Buch and Mersch). On the geopolitical front, the EU will discuss today whether to move ahead with the Russian sanctions.

Comments

[Headbanger]

What, no ebola news?

[GetZeeGold]

Get sick with Ebola and you get a free plane ride to the US.

Act now and double your frequent flyer miles.

[Newsboy]

False Flag Ebola Suicide Bomber from ISIS, The Movie Lately we have been seeing lots and lots of emerging scenarios, which could justify war, and all running at the same time. We have the situation in Ukraine, set up by the US at great expense, and with at least 6  years of lead time (according to Wikileaks files just released  http://www.zerohedge.com/news/2014-09-09/ukraines-choreographed-civil-war-revealed-wikileaks ). MH-17 initial report is so vague as to be readable as consistent with an antiaircraft missile attack, and we already know better, but this is all we get until the full report comes out next summer  http://www.zerohedge.com/news/2014-09-09/mh17-was-struck-multiple-high-energy-objects-outside-aircraft-crash-report-reveals China is feeling her oats as a rising superpower, and it is how China has self identified for the past 3000 years.
The South China Sea thing could need a war for that deep oil and gas. Justifications are being laid. Poor Philippines; poor Vietnam (bitter irony); poor Taiwan and Indonesia. Really, really in our faces are those beheadings and mass slaughters by ISIS/ISIL/IS.
Joe Biden says we'll follow them to the gates of heck, or something. Those guys are so totally bad that they would do anything, and anything we would do to kill all of them is a necessary service to the whole world. The Saudi King said they would be attacking Europe in a month, and the US in 2 months. Where did these guys come from, nightmare world? They are like al Qaeda with a Freddy Kruger mask! Then there is Ebola, which makes you die painfully and slowly with fever and bloody diarrhea, and bleeding from your eyeballs, and it comes like a thief in the night... Imagine you are Dick Cheney. Ok, ok, that's a bit too much to ask. I have an idea for a made-for-TV-movie that's an edge-of-your-seat, suspense thriller-diller.

Here's the story line: ISIS really, really wants to hurt the US, the great Satan, for decades of destruction, but can't get nuclear weapons, or any way to get them into the US. Ricin doesn't go very far, and would only kill a few people, like in that Japanese subway thing. ISIS needs something undetectable that won't show up on airline scanners, but that can still kill millions of people if they get it into the US. Hey, Ebola virus would work, and somebody could volunteer to be an Ebola suicide bomber, or even not volunteer... You get some guys from western countries, secret volunteers for ISIS, like we hear about, and tell them they have a secret mission. Some guys go to Washington DC with lots of money and have unprotected sex with 4 prostitutes a day until further orders. Unlimited ATM card, It's for Allah. Other guys go shoot heroin 4 times a day, drawing up twice what they will use, flashing a little blood back into it when they hit the vein, injecting real slow, then saying it's too strong, and leaving the half full syringe on the table while they crawl to the corner. Like Lee Oswald, these guys can just think they are establishing cover identities. Before they fly to Great Satan Land, they need a protective injection, a vaccination IV. The trick is, that it is pooled plasma from Liberian Ebola patients, frozen and flown over. By the time they get sick in 2-3 weeks, still establishing their cover identities, they could easily have infected 100 denizens of Washington DC. They would have infected the folks most likely to further infect others. These guys could even be shot in an alley when they get sick, before all the bleeding. That would get some infection going in the coroner's office. Ebola would never be suspected. Who is the first to figure it out? Who breaks it to the American people? What emergency measures have to be taken, to assure the continuity of government? Who must be brought to justice for this unbelievably heinous perfidy? Who gets nuked? Who gets quarantined? Where? Where do we put all those potentially infected people who had sex with prostitutes and used IV drugs in Washington DC? Where do we put everybody who they live with?
Where can our elected representatives and top civil servants and military leaders go to safely carry on the work they must do to bring us through this crisis? Nothing must stand in the way of that mission! Where do treatments come from to protect us, and those masks, and rubber gloves, and goggles, and isolation suits?

Anyway, it's just an idea for a made-for-TV-movie, but who could turn it off once they got into it, huh? It pulls everything together, doesn't it?
You don't even need any big name actors. It's all in the plot.

Do you know of anybody who could fund a project like this?

[negative rates]

You know after they passed the pocket watch, it was all insanity from there on out.

[TabakLover]

Bears should beware of the Scot independence "vote".  Lots of yes = disaster talk.  The vote will be 'no'........by hook or by crook.......and the markets will rejoice on that news.   

[Eyeroller]

Yes = more conservative representation percentage in UK once Scotland is gone, as they are left-leaning.

Hence all the yes = disaster talk.

[jubber]

The Russia/Ukraine news may actually put a damper on the US$ surge of late, which would put a spanner in the works if that happens, DX is actually off the highs this morning, a move down in USJPY would certainly have some repercussions....lets see how the market digests the news as it comes out, both GBP & Euro are up  against the US$ so far today

[firstdivision]

Squeeze it like you're choking your dick. http://finviz.com/futures_charts.ashx?t=6B&p=m5

[earleflorida]

'how does one deflate `stagflation' with a samurai sword?'

[negative rates]

Just sign up for the John Belushi plan, rub ur eyes, and put it on cruise control.

[Dewey Cheatum Howe]

Catalonia maybe the catalyst that swings the Scottish vote.

As of now the little I've read on this the general trend seems to be the following the highlands/rural areas mostly in the north lean independence while the big cities in the south lean towards staying in the UK.

If Catalonia referendum doesn't go through I suspect the vote as far population demographics among those 2 group will split pretty much the same whatever it is as far as yes and no. More importantly it seems to portend a greater general trend in other countries that pay lip service to freedom and liberty for starters.

Catalonia referendum going through could be that unforseen swing factor that shakes up things.

[AdvancingTime]

Any vote by any area stirs the issue of more areas trying to shake free of the bonds they have within countries from which the want more. Borders are a creation of man and not visible to the birds flying above. Much bloodshed and many wars could be avoided if the issues of regime change or borders could be handled in a more rational and constructive way, but do not expect this to happen. Borders and political control is a problem that haunts man since before the written word.

Recently President Obama and other officials have talked about the legal sanctity of sovereign borders, but in reality this is an argument of convenience masking deeper issues. When it comes down to it we are just pawns in this sad power game. If you doubt this just ask some of the many people displaced from their homes in Syria. More on the subject of sovereign borders in the article below.

http://brucewilds.blogspot.com/2014/03/the-issue-of-sovereign-borders.html

[TabakLover]

Show one"vote" in the last 6 years that has not gone the way TPTB wanted.

[TuPhat]

Did you mean  a vote that counts?  There is no such thing.

[CRYBABY]

Been a trader for 25 years....looking at markets in detail now is a highly sobering exercise. There is so much mis-allocation of capital, and malinvestment, that the thought of the global balance sheet damage to come is truly horrific. Will be nothing short of catastrophic.....I'm gonna start tucking into my 12 bottles of 2000 Monbrison for starters.....I've got some damn good single malt somewhere too ;-) Don't like being sober......

[AdvancingTime]

 The recent drum beats and flames of war have distracted many people from focusing on the economy. The markets are extended beyond beyond, all this comes at a time when the IMF is calling for more QE. It seems this might be a good time to review the reasons this is economically unsound and a bad idea while markets are setting new record highs and economies continue to struggle.

The policies of the last six years have yet to produce the desired and expected results promised. As a consolation many economist, bankers, and those who have benefited greatly tell us we would be in far worse shape if we had not taken this course. Now it seems Central Banks and the IMF are clueless on how to proceed and a policy going forward. More on the lack of a clear path in the article below.

http://brucewilds.blogspot.com/2014/09/central-banks-and-imf-clueless-on...

[Temerity Trader]

None of this matters if the Fed create infinite $$ with no downside at all.  Many declare it will lead to hyperinflation. There is zero evidence of that and prices on many goods are slowly deflating thanks to China and its factory overcapacity. The Fed bankers are anxious to wind down their bond purchases and maybe up rates 25Bps in a year from now, but that is only to give them room to reverse course and cut again at the first sign of trouble. Their models have been 95% accurate, the only failures being their inability to re-inflate the housing bubble and only low-paying job creation. $1.1T in student loans is putting a drag on housing; seems loan forgiveness will get real consideration soon. On the jobs front, companies still won’t expand and hire high-paid U.S. workers, they instead use cheap Fed $ to buy back their stock. A higher min wage will only get more low skilled jobs replaced by machines.

Can government debt go to infinity?  So far, massive government deficit spending is keeping unemployment from doubling very quickly. Government largeness is appreciated by millions who take the handouts or are employed at state, local and federal jobs. There appears to be no turning back without causing riots in the streets.  On the path we are presently on the deficits will grow even faster and there will be fewer workers to pay in to support social security for those getting checks. Maybe there really is no limit to debt?

Stocks are near all-time highs exactly as planned, and millions are thrilled to see their 401k’s soar.  If there really are no limits to printing and deficit spending, then those all in the equity markets are correct, risk has been removed. The combination of off-the-charts Fed intervention combined with government debt, have put stocks on a permanently high plateau. The Keynesians were right and the bears have been demolished. On the other hand, if there are limits, and if we are there, faith in Fed will end and this will turn real ugly. Place your bets.

[CRYBABY]

The inflation we are experiencing is manifesting itself in a different, far more dangerous form. Traditional price inflation has generally been "demand side led"..exempting supply side related energy shocks. Don't forget we have NEVER had this kind of CB balance sheet expansion....so the increase in base money manifests itself in asset price inflation..equities, bonds, and prime real estate. As/when velocity of money picks up (don't ask me for a timeframe)..we will start to see a rise in more general price levels.

[Salzburg1756]

New to the net:

NIRP http://negativeinterestrates.com/?p=43