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 [39], 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 [40]." 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 [41]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.

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.

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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.