Overnight the emerging market rout continued, with the India Sensex down another 3.18%, the Philippines tumbling 4%, Jakarta down 3.7% and Dubai crashing 7%. A driving factor continues to be the fear over an imminent air campaign launched at Syria, leading both WTI and Brent higher by 1%, and gold finally breaking out above the $1400 tractor beam, and printing at $1412 at last check, a hair away from a 20% bull market from the lows.
In other news, the market is once again "surprised" to learn that Summers, who as we have been showing for over three weeks is the frontrunner for the Fed chair [25], is the frontrunner for the Fed chair according to CNBC [26]. Of course, there is nothing preventing this from being the latest trial balloon (and nothing that suggest Summers will actually be hawkish as conventional wisdom seems to think: the guy basically works for the financial sector) but futures aren't waiting to find out, and US traders are walking in this morning to a red screen with ES down just over 10 point and sliding. Any minute now the great unrotation from stocks into bonds (10 Year was 2.77% at last check) is about to be unleashed. And if Obama actually goes to war (without talking to Congress of course), watch the bottom fall from the market.
It is shaping up to be one of those days:
[27]
Key overnight news bulletin from Bloomberg
- Treasuries gain with JPY and gold as U.S. and its allies move closer to decision on military strikes against Syria’s government.
- India’s rupee tumbled more than 2% to a record low on concern the nation’s current-account deficit will worsen as oil prices climb amid Middle East violence; among major currencies, AUD, NZD fall most vs USD and JPY
- Germany’s Ifo business climate index rose to 107.5 in August, more than forecast and the highest level in 16 months
- Merkel shouted down anti-euro hecklers at a campaign rally in eastern Germany, saying that she won’t let up on demands for economic overhauls across Europe if she wins a third term
- The goal of a single rule book for Europe’s banks is splintering even before it’s implemented as northern countries move ahead with tougher requirements to ward off the next boom-to-bust cycle
- Western Asset Management Co. and OppenheimerFunds Inc. are raising funds to profit from the record shift of cash into leveraged loans, the only part of the U.S. corporate debt market to avoid losses since Treasury yields started surging.
- Turkey may struggle to narrow its current-account deficit as mounting tensions with Egypt make it harder for traders to reach the Middle East, the destination for about a fifth of Turkish exports
- U.S. $98b of note auctions begin today with $34b 2Y notes, which yield 0.40% in WI trading; drew 0.336% in July, 0.43% in June
- Sovereign yields mostly lower, EU peripheral spreads wider, led by Greece; Euro Stoxx Banks -2.5%. Nikkei -0.7%, Shanghai Composite gains 0.3%. European stocks, U.S. equity index-futures fall. WTI crude, copper higher fall
Summary of market catalysts the key events with RanSquawk:
- America has issued the strongest signal yet that it intends to take military action against Syria over an alleged chemical weapons attack.
- German IFO - Business Climate (Aug) M/M 107.5 vs. Exp. 107.0 (Prev. 106.2) - IFO says economy has moved up a gear and export optimism is rising.
- CNBC have reported, citing sources, that Obama is to name Larry Summers as the next Fed Chairman, although he is still being vetted for the job.
Market Re-Cap
The release of better than expected German IFO has failed to encourage flows into riskier assets, as safehaven flows continue to dominate amid growing expectations of potential military action by the US. As a result, USD index traded higher, with EUR/USD and GBP/USD both nursing losses of around 50pips. The move lower by GBP/USD saw the pair move below the technically important 200DMA line at 1.5513, while EUR/USD came close to making a test on the shorter 21DMA line at 1.3316. The bid tone in USTs, which in turn encouraged squaring of long USD/JPY positions saw JPY gain ground across the board in Asia and in turn pushed the pair below the 21DMA line at 97.86.
In terms of other asset classes, the flight to quality boosted the price of both gold and silver. Also, comments from South Africa's NUM spokesman, who said that prospects for gold strike remain high, aided the move higher. Potential spill over effects on the neighbouring Turkey saw spot TRY rate print all time record high this morning, with the domestic stock market under pressure as a result. Of note, local stock markets in Dubai and Saudi Arabia have also come under significant selling pressure.
Going forward, market participants will get to digest the release of the latest German IFO survey, S&P/CS housing data from the US, as well as the consumer confidence and then the API report after the closing bell on Wall Street.
Asian Headlines
China's vice finance minister Zhu Guangyao said there was no need for the government to stimulate China's economy and that growth could be supported through structural adjustments. Zhu further stated that China can reach the 7.5% growth target.
EU & UK Headlines
German IFO - Business Climate (Aug) M/M 107.5 vs. Exp. 107.0 (Prev. 106.2)
- German IFO Current Assessment (Aug) M/M 112.0 vs. Exp. 111.0 (Prev. 110.1)
- German IFO Expectations (Aug) M/M 103.3 vs. Exp. 103.1 (Prev. 102.4)
IFO says economy has moved up a gear and export optimism is rising.
Moody's said adjustments in Euro area periphery continue, pre-crisis GDP is unlikely in the medium term and doesn't expect the Euro area periphery to reach these levels before 2016-2017. Moody's further added that the Euro area periphery's positive trade balance since 2011 is the main driver of changes in the current account.
Spanish T-bill auction results:
- Spain sells EUR 1.01bln of 3-month bills, bid/cover 4.5 (Prev. 4.03), avg. yield 0.155% (Prev. 0.442%)
- Spain sells EUR 3.06bln of 9-month bills, bid/cover 1.9 (Prev. 2.27), avg. yield 1.089% (Prev. 1.152%)
Italian bond auction results:
- Sells EUR 2.983bln in 2015 CTZ b/c 1.46 vs. Prev. 1.56, avg. yield 1.871% vs. Prev. 1.867%
- Sells EUR 736mln in 2018 I/L 2.30 vs. Prev. 2.32, avg. yield 2.3% vs. Prev. 2.91%
- Sells EUR 265mln in 2026 I/L 3.23 vs. Prev. 2.32, avg. yield 3.3% vs. Prev. 3.75%
Barclays prelim month-end extensions Euro agg at +0.03yrs
Barclays prelim month-end extensions UK Gilts +0.07yrs
CNBC have reported, citing sources, that Obama is to name Larry Summers as the next Fed Chairman, although he is still being vetted for the job.
Barclays prelim month-end extensions for US Treasuries at +0.11yrs
Equities
The release of better than expected German IFO has failed to encourage flows into riskier assets, as safehaven flows continue to dominate amid growing expectations of a potential military action by the US. The move lower was led by financials and basic materials sectors, with iTraxx sub fin index up around 7bps.
In terms of equity specific news flow, MPs in the UK are stepping up their campaign for a break-up of Royal Bank of Scotland amid suspicions in Westminster that RBS and Treasury officials will try to scupper a good bank-bad bank split. Also, Daily Mail reported that Britain's biggest banks could be forced to pay billions of pounds in fines after accused by Brussels of squeezing out new rivals.
FX
The risk averse sentiment supported flows into the greenback, with EUR/USD and GBP/USD both nursing losses of around 50pips in spite of the release of better than expected German IFO survey. The move lower by GBP/USD saw the pair move below the technically important 200DMA line at 1.5513, while EUR/USD came close to making a test on the shorter 21DMA line at 1.3316. The bid tone in USTs, which in turn encouraged squaring of long USD/JPY positions saw JPY gain ground across the board in Asia and in turn pushed the pair below the 21DMA line at 97.86.
Senior government officials said that India is considering currency swaps with some countries according to Indian TV channels.
Flight to quality related flows also benefited CHF, with EUR/CHF testing the key 200DMA line at 1.2275 in early trade.
RBA's Edwards said that AUD is still too high to aid economic transition.
Commodities
US secretary of state Kerry said Syria chemical attack is undeniable but US allies are compiling and reviewing additional information on Syrian chemical weapons attack and Syria's refusal to allow access to and shelling of chemical weapons attack site are signs regime has something to hide.
- The US-Russia meeting on Syria is said to be postponed and to be rescheduled, according to a State Department Official.
Warplanes and military transporters have begun arriving at Britain's Akrotiri airbase in Cyprus, less than 100 miles from the Syrian coast, in a sign of increasing preparations for a military strike against the Assad regime in Syria.
China oil demand to grow about 3% in 2013, 2014 according to HSBC.
NOC says Libya's Elephant field shut down by protesters yesterday and that Libyan oil output dropped to less than 200,000bpd.
Russia has added about 6.3 tons of gold to reserves in July and country's monthly gold purchases are now at highest since April. Furthermore, Turkey added gold to reserves in July while Mexico sold gold from reserves in July, according to IMF data.
South Africa's NUM spokesman says prospects for gold strike remain high.