Uncertain Market Digests Splintering Of Syria Pro-War Alliance

Overnight, the market continued to digest news out of the UK that the formerly solid pro-war alliance has splintered following a historic vote by the House of Commons, leaving Obama to "go it alone." The result was a rather sizable slamdown in both crude and gold, accelerating as Europe opened for trading, and pushing gold back under $1400. This happened even as data out of Europe showed that European unemployment remained at a record high 12.1%, while inflation missed expectations and printed at 1.3%, or below 2% for the seventh month. German retail sales continued to deteriorate, dropping -1.4% on expectations of a 0.6% rise, after dipping -1.5% in June as well. Was this it for the European third dead cat bounce, as the core once again resumes sliding lower?

Earlier in the session, headline data out of Japan showed that inflation had risen at the fastest pace since 2008 [35]. However, before the deflation monster is proclaimed dead, the core-core figure (excluding foods and energy) of the Tokyo CPI was down 0.4% yoy, unchanged since June for three months, suggesting that prices are still largely driven by energy-related costs. In other words cost-push inflation is rampant, which is the worst possible scenario and means the BOJ's QE is going to all the wrong place.

Heading into the North American open, stocks in Europe are seen lower across the board, with oil & gas related stocks underperforming as market participants reassessed expectations of military strike in Syria after UK House of Commons voted 285 to 272 against government motion late yesterday. Demand for stocks was also dampened by month-end related flows which supported German Bunds this morning. Nevertheless, President Obama is reportedly prepared to move ahead with a limited military strike on Assad forces even without the support of its key allies. As a result, energy prices fell, with WTI seen lower by almost USD 1.00 and gold prices under pressure in spite of reports that South African National Union of Mineworkers notified chamber or Mines that strike over pay is to start on Sep 3rd. Going forward, market participants will get to digest the release of the latest Chicago PMI, as well as the final U. Michigan survey reading.

Overnight headline bulletin from Bloomberg

Treasuries head for fourth straight monthly loss as markets increasingly expect Fed to announce tapering of asset purchases in September; focus shifts to next week’s nonfarm payrolls report, est. 175k from 161k.
Britain’s House of Commons last night defeated PM Cameron’s motion seeking authorization in principle for a strike on Syria
Hollande said that France is ready to act in Syria and that every country will decide independently on its actions in the country, according to an interview published in Le Monde newspaper
Japan’s Government Pension Investment Fund, the world’s largest manager of retirement savings, posted its smallest gain in three quarters in the period ended June on record domestic bond losses
U.K. mortgage approvals rose 60,624 in July, the most since March 2008, compared with a revised 58,238 the previous month, the BOE said today and median forecast for 58,800 in a Bloomberg survey
Economic confidence in the euro area rose to 95.2 in August from 92.5 the previous month, the highest level in two years
Josef Ackermann’s abrupt resignation as chairman of Zurich Insurance Group AG came after Chief Financial Officer Pierre Wauthier mentioned him in his suicide note, the company said
Sovereign yields mostly lower, EU peripheral spreads little changed. Euro Stoxx Banks -0.5%. JPY falls through 98 level. Nikkei +0.9%, leading most other Asian markets higher; Shanghai Composite -0.2%. European stocks, U.S. equity index-futures gain. WTI crude, gold, copper fall

Asian Headlines, courtesy of RanSquawk

Japanese National CPI (Jul) Y/Y 0.7% vs. Exp. 0.7% (Prev. 0.2%)
National CPI Ex Food and Energy (Jul) Y/Y -0.1% vs. Exp. -0.2% (Prev. -0.2%)
Tokyo CPI (Aug) Y/Y 0.5% vs. Exp. 0.5% (Prev. 0.4%)
Japanese Industrial Production (Jul P) M/M 3.2% vs. Exp. 3.6% (Prev. -3.1%) - fastest rise since June 2012.

EU & UK Headlines

UK Mortgage Approvals (Jul) M/M 60.6K vs. Exp. 58.8K (Prev. 57.7K, Rev. 58.2K) - highest since March 2008.

UK M4 Money Supply (Jul) M/M 0.6% (Prev. 0.1%)
UK M4 Money Supply (Jul) Y/Y 1.8% (Prev. 1.5%) - highest since August 2010
UK M4 Ex IOFCs 3M Annualised (Jul) 3.3% vs. Exp. 4.5% (Prev. 4.7%, Rev. to 4.9%)

Eurozone Unemployment Rate (Jul) M/M 12.1% vs. Exp. 12.1% (Prev. 12.1%)

Eurozone CPI (Aug) Y/Y 1.3% vs. Exp. 1.4% (Prev. 1.6%)
Eurozone CPI Core (Aug A) Y/Y 1.1% vs. Exp. 1.1% (Prev. 1.1%)

Eurozone Business Climate Indicator (Aug) M/M -0.21 vs. Exp. -0.36 (Prev. -0.53, Rev. -0.52)

German Retail Sales (Jul) M/M -1.4% vs. Exp. 0.6% (Prev. -1.5%, Rev. -0.8%)
German Retail Sales (Jul) Y/Y 2.3% vs. Exp. 1.8% (Prev. -2.8%, Rev. -2.4%)

ECB's Nowotny says rate cut possible under current guidance.
Analysts at Citi note that hedge funds are mostly short German and French government bonds, while central banks have corresponding long positions.

ECB's Weidmann said publishing minutes could increase pressure on Eurozone central banks.

Barclays prelim month-end extensions Euro agg at +0.03yrs
Barclays prelim month-end extensions UK Gilts +0.07yrs

US Headlines

Fed's Lacker said reiterates opposition to more QE and favours reducing MBS buying first in any QE tapering.
Said Bernanke succession has no impact on FOMC policy and sees future GDP of about 2%.
Barclays prelim month-end extensions for US Treasuries at +0.11yrs.

Equities

The price action across various asset classes was largely dominated by month-end related flows, with the upward bias by EUR/GBP on the back of touted demand from EU based central bank in turn resulted in GBP/USD underperforming EUR/USD.

Standard Chartered cut its India 2013/14 GDP forecast to 4.7% from 5.5% and sees USD/INR at 68 in Q3 and at 64 in Q4.

Commodities

UK House of Commons voted 285 to 272 against government motion that strong humanitarian action is required in Syria which may include military action. Following the vote, UK PM Cameron said he will respect will of House of Commons and the UK government will act accordingly, while there were also comments from UK defence secretary Hammond who stated there will be no British military intervention in Syria and expects military action against Syria to go ahead despite Britain dropping out.

CME lowered natural gas Henry Hub futures initial margins for specs by 10.6% to USD 2310 per contract from USD 2585.

Credit Agricole said gold has further to decline and demand in India may drop on curbs.

Credit Agricole added that central bank gold buys won't offset investors sales and forecasts gold to average USD 1,315/oz this year and average USD 1,094/oz next year.

South Africa's National Union of Mineworkers to give gold producers 48-hour strike notice Friday, according to spokesman. South African gold strike to start September 3rd, according to Chamber.

India imposes additional 5% margin on gold, silver, crude oil futures contracts from September 2nd, according to markets regulator.

* * *

Finally, here is the Deutsche Bank overnight summary from Jim Reid

Markets have had another choppy week driven by geopolitical tensions, emerging markets weakness and thin liquidity. On the geopolitical side, President Obama is reportedly prepared to move ahead with a limited military strike on Assad forces even without the support of its key allies. This comes after the rejection by the UK House of Commons of Prime Minister Cameron’s motion urging an international response to the Assad regime. Although the vote is non-binding, Cameron has said that he will be respecting the will of the House of Commons. French officials also are calling for a delay in action until UN inspectors conclude their report (Washington Post). Newswires suggest that a US strike could occur as soon as UN inspectors leave the country on Saturday. Meanwhile, Russia is sending two warships to the east Mediterranean, Interfax news agency said on Thursday, but Moscow said it was part of a normal rotation and denied this meant it was beefing up its naval force there.

Ahead of this, the White House will release a declassified intelligence report today which details the evidence that the Syrian government used chemical weapons against civilians. According to Reuters, the US and its allies have “no smoking gun” proving the Assad personally ordered his forces to use chemical weapons against the rebel-held Damascus suburb. US security sources and sources close to allied governments say evidence suggests that the initial decision to use chemical weapons may have been made by a field commander rather than in an order from the highest level of the Syrian government. A critical piece of the intelligence is an intercepted telephone call between Syrian
military officials, one of whom seems to suggest that the chemical weapons attack was more devastating than was intended (NY Times).

DB’s US equity strategists looked at 12 significant post cold war air strikes by the US since 1985. The average pullback in the S&P500 was 5.9% from its prior 3-month high (the S&P500 is now down ~5% from its high of 1709.67). In only 3 instances the pullback turned into a correction (>10%), but 2 of those instances included a change in the fundamental outlook: August 1998 (Russian default), October 2001 (9/11). On average the S&P was up 7.0% within a month after the air strike from its low.

For the time being, oil continues to trade lower (-0.7% in Asia, adding to 1.8% losses yesterday) as expectations of an imminent strike in Syria are dialed down. Some are arguing that even if a strike does go ahead, the scope of the military intervention will remain limited without broader support among US allies. As we type, S&P500 futures are trading about 6 points higher (+0.35%). Asian markets are generally firmer this morning with the Nikkei (-0.2%) underperforming the rest of the region led by weakness in oil stocks. Outside of Japan, the rest of the Asian region are seeing higher levels in both equities and credit.

Overnight, Japan released its latest inflation numbers showing national CPI rose 0.7% yoy in July which was in line with consensus estimates. CPI excluding fresh food rose by a consensus beating 0.7% (vs consensus 0.6%) which is the fastest pace of price rises since Q4 2008. Japan's industrial production for July rose a seasonally-adjusted 3.2% MoM, fully offsetting June’s anaemic decline of -3.1%. Japanese finance minister Aso said today that encouraging economic indicators will positively influence the government’s sales tax decision which PM Abe is expected to decide on during the month of September.

In the US, it was a fairly choppy session yesterday with equities seeing strength early before fading into the close while US treasuries did seemingly the opposite. Indeed, 10yr yields on US treasuries reached an intra-day high of 2.83% following the release of upward revisions to US Q2 GDP (2.5% vs 2.2% expected and 1.7% previously). But yields soon firmed before closing virtually unchanged at 2.76% with reports of position squaring before the US Labor Day long weekend and ahead of next week’s all-important payrolls data. US jobless claims were in line with estimates (331k versus 332k expected) and kept the 4- week moving average of jobless claims at multi-year lows. On the micro front, there was plenty of market focus on Vodafone’s announcement that it is in talks with Verizon Communications about selling its 45% stake in Verizon Wireless. According to the WSJ, the stake could fetch around $130bn which helped Vodafone’s stock jump 8.2% and its CDS rally 6bp to 70bp. In other interesting headlines, the latest weekly fund flow data released overnight show $2bn in outflows out of EM debt funds in the week to August 28th which is a significant pick up in pace than that recorded during the summer weeks. The driver of the pickup in outflows was from local currency funds which recorded its second largest outflows since May.

Turning to the day ahead, the focus will remain on the US response to Syria with the White House set to release an intelligence report today and UN inspectors withdrawing from Syria over the weekend. In terms of data releases, we have July personal spending/ income data and the Chicago PMI in the US. The European Commission’s economic sentiment index, July retail spending reports in Germany and Spain and Italian unemployment are the highlights on the European data docket.