Market Continues Headless Chicken Dance As Uncertainty Soars

The key overnight events were already discussed previously, but here they are again: the wholesale selloff in Asia (which subsequently shifted to Europe), the accelerating outflows from India (moment ago the SEBI website announced a net INR13.7 billion selling in Indian stocks yesterday and the near record collapse in the Indian Rupee to new record lows, and the ongoing uncertainty over Syria and what it will do to crude prices (if SocGen is right, nothing good). In brief: a market conditioned and habituated to a world in which Bernanke promises "to make everything ok" suddenly finds itself in the throes of uncertainty and following 4 years of dumb trend-following,  has no idea what to do.

But wait that's not all: lost in the shuffle was perhaps the most important periodic report out of Europe, its monthly update om M3 (money creation) and private sector loans (debt creation). It was here that the disconnect continued, as July Y/Y M3 rose by 2.2%, slightly less than the 2.3%, but above the 2.0% expected. Yet it was Private Sector Loans that once again grew at a record low pace, declining by yet another 1.9%, compared to -1.6% in June. In other words, the European credit engine continues to contract (i.e., deleverage), and as long as that continue there can be no growth, despite any amount of propaganda.

Overnight news bulletin from Bloomberg:

  • Treasuries fall, ending a four-day rally that took 10Y yields to the lowest since Aug. 15. Week’s auctions continue with $35b 5Y notes, yield 1.59% in WI trading; stopout yield at that level would be highest since July 2011
  • 2Y notes sold yesterday stopped through 1pm WI level, with bid-to-cover increasing for a third straight month to highest level since April
  • The U.S., France and Britain moved closer to military action against Syria, putting forces into place and laying out the justification, after the Syrian government allegedly used chemical weapons last week
  • India’s rupee plummeted the most in two decades to a record as a surge in oil prices threatened to worsen the current account and push the economy toward its biggest crisis since 1991
  • Fed on course to taper asset purchases this year, according to review of published research
  • Italian Prime Minister Enrico Letta faces a test of his political survival skills as he squares off against Berlusconi, whose support is keeping the coalition government afloat
  • China will widen the scope of its consumption tax to include more luxury goods, the official Xinhua News Agency reported, a sign that some high-end brands may become more expensive for purchasers on the mainland
  • BOE Governor Mark Carney to address business leaders at 1:45pm in Nottingham, England; will test his ability to push back rate expectations amid growing evidence the U.K. recovery is gainging traction
  • Tokyo Electric Power Co. has accumulated the largest pool of radioactive water in the history of nuclear accidents. The utility must now decide what to do with it: dump in the ocean, evaporate into the air, or both
  • Sovereign yields mixed, EU peripheral spreads wider, Euro Stoxx Banks -0.4%. Nikkei -1.5%, leading Asian markets lower as JPY declines through 97 level. European stocks lower, U.S. equity index-futures gain. WTI crude, gold rise; copper lower

Key market highlights from RanSquawk

  • SocGen said Brent crude may rise by USD 5-10/bbl in 'coming days' on Syria and that Brent may rise to USD 150/bbl if the Syria crisis cuts supplies.
  • US Defense Secretary Chuck Hagel said American forces are "ready" to launch strikes on Syria if President Barack Obama chooses to order an attack.
  • Bank of England's Carney is expected to bolster the BoE's rates pledge in speech today at 1345BST in Nottingham, UK.
  • Going forward, market participants will get to digest the release of the latest US pending home sales report, as well as the weekly DoE data.

Market Re-Cap

Stocks in Europe resembled a sea of red today as market participants continued to fret over potential implications of military intervention in Syria on prices of oil and consequent impact on global growth. On that note, analysts at SocGen suggested that Brent crude may rise by USD 5-10/bbl in 'coming days' on Syria and that Brent may rise to USD 150/bbl if the Syria crisis cuts supplies. Overnight in Asia, the disorderly outflows from EM continued, with the Indian Rupee (INR) posting biggest single-day drop since Sept 1995 which in turn saw the spot rate rise to a fresh record high of 68.7550. Still, in spite of the risk off sentiment, USD/JPY traded higher, as market participants sought value following sharp losses yesterday, with interest rate differential flows also benefiting the move higher as market participants booked profits which saw USTs trade lower during the EU session. The marginal pressure on USTs also comes ahead of the USD 35bln 5y note auction later on today. Going forward, market participants will get to digest the release of the latest US pending home sales report, as well as the weekly DoE data.

Asian Headlines

PBOC official Wang Yu said China should further widen CNY's trading band and increase the currency's flexibility. Wang added that the PBOC should keep reasonable and moderate liquidity in the banking system and should also widen the deposit rate range.

EU & UK Headlines

DIW Institute says German economy to grow 0.4% in Q3.

Eurozone M3 3M avg. (Jul) 2.5% vs. Exp. 2.4% (Prev. 2.8%)
- Eurozone M3 (Jul) Y/Y 2.2% vs. Exp. 2.0% (Prev. 2.3%).
- July private sector loans -1.9% vs -1.6% in June.

Of note:
- Spanish Banks holdings of government bonds fall by EUR 5.8bln in July.
- Italian Banks holdings of government bonds fall by EUR 6.3bln in July.
- French Banks holdings of government bonds fall by EUR 21.7bln in July.

Italy sells EUR 8.5bln in 6-month T-Bills, b/c 1.47 (Prev. 1.47) and avg. yield 0.886% (Prev. 0.799%). This comes ahead of more supply from the Italian Treasury on Thursday.

EU's Rehn says sees proposal 'possibly in autumn' on closing Greek gap. He added that it is 'premature' to put figures on Greek financing gap and that possible gap, Greek debt sustainability to be weighed.

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

US Headlines

Nearly two dozen House members have signed onto a letter demanding President Obama consult Congress — and wait for its authorization — before launching military strikes against Syria.

Barclays prelim month-end extensions for US Treasuries at +0.11yrs


Stocks in Europe resembled a sea of red today as market participants continued to fret over potential implications of military intervention in Syria on prices of oil and consequent impact on global growth. However the Italian domestic stock index outperformed and traded in the green this morning, largely due to surprise earnings beat by Banca Popolare Milano.


The greenback remained supported by broad based GBP weakness ahead of the much anticipated speech by Carney, as well as month-end demand for EUR/GBP, which also saw GBP/USD continue to consolidate below the 200DMA. Modest EUR weakness, which saw EUR/USD make a test on the 10DMA line at 1.3359, also supported the USD index which is set to make a test on the 21DMA line at 81.42.


SocGen said Brent crude may rise by USD 5-10/bbl in 'coming days' on Syria and that Brent may rise to USD 150/bbl if the Syria crisis cuts supplies.

US Defense Secretary Chuck Hagel said American forces are "ready" to launch strikes on Syria if President Barack Obama chooses to order an attack. According to reports, the US is to also release proof of Syria gas attack on August 29th. There were also reports that Syria evacuated troops from a Damascus military base and reports that 20 were injured in a Damascus suburb gas attack.

According to Sky News sources, a UK government motion on Syria is to be put to parliament and is expected to call for appropriate measures but include no timetable for action.

US API US Crude Oil Inventories (Aug 23) W/W 2500K vs. Prev. -1200K
Cushing Crude Inventory (Aug 23) W/W -863K vs. Prev. -1100K
Gasoline Inventories (Aug 23) W/W -1100K vs. Prev. -3700K
Distillate Inventory (Aug 23) W/W 3K vs. Prev. 1800K
South Africa AMCU union rejected the gold Co.s wage-raise offer.

Indonesia has proposed several amendments to a controversial 2014 ban on unprocessed mineral exports. Under the proposed revision, mining companies with smelters under construction would be allowed to export unprocessed minerals, but would be charged a progressive duty on the shipments depending on how close to completion their projects are.


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Finally, here is DB's Jim Reid with the full overnight narrative

There have been very few places to hide as risk assets across the spectrum take a beating from the combination of Syrian tension, a spike higher in oil prices and EM concerns. The ongoing debate over the next Fed Chair and the looming backdrop of potential Fed tapering is not helping market sentiment and neither is the low liquidity in the final week of the Northern Hemisphere summer. Indeed with the upcoming Labor Day holidays in the US, we may see current liquidity conditions persist for at least another few days.

For the moment it’s Syria which is taking much of market’s focus. The latest is that US military forces are ready to go if and when President Obama gives the green light for an airstrike, per comments from Defense Secretary Chuck Hagel.

The White House has indicated that it may release an intelligence report on last week’s suspected chemical weapons attack over the next few days and the UK parliament is set to be recalled on Thursday to discuss possible military responses. Bloomberg is reporting that the brother of President al-Assad is suspected of authorizing the chemical weapons attack last week, citing a United Nations official. Maher al-Assad, the younger brother of the president, commands the regime’s Republican Guard and controls the Syrian Army’s 4th Armored Division, an elite unit that the opposition says launched the Aug.21 attack on the eastern suburbs of the Syrian capital.

As we wrote yesterday, our resident geopolitical analyst, Frank Kelly, believes that the goal of any Western air stirke is not to remove Assad’s government but rather to severely weaken it and give the clear message that no further chemical/biological weapon attacks will be tolerated. Targets will include Syrian Air Force bases, field command headquarters, communications centers, electrical facilities etc. although Syrian chemical/biological storage sites will not be targets. How Syria and its allies react to that will clearly be followed closely but Frank sees a high risk that Iran will stop negotiations with the US/EU on nuclear issues. The ultimate risk in his mind is what happens if and when the Assad government is toppled as US policy makers are deeply concerned about who would take power.

As we turn to markets this morning, there has been very little cheer in Asian trading with risk aversion seeing the Nikkei lose 2.1 % off the back of a 1.5% gain in the yen against the USD. EM equities have opened sharply lower as seen in Thailand’s SET (-2.5%), Philippines PSE (-5.3%) and Indonesia’s JCI (-3.0%). In what is becoming an almost daily occurrence, USDINR hit another record high overnight (+2.5%, 67.8) as markets continue to question India’s external balance amid the sharp rise in crude and gold prices. There are some pockets of better risk sentiment - S&P500 futures are trading slightly firmer at 1630 or 0.1% higher, the Asian and Australian IG credit indices are off the day’s wides and 10yr UST yields are slightly higher (+1bp, 2.72%).

The most direct spillover effect from the escalating Syrian tension has been in crude oil prices. Oil is up another 2.7% in Asian trading, adding to yesterday’s 3.63% spike. Brent prices are now 20% above April’s YTD lows. DB’s US economists write that in the past, broad swings in gasoline prices have significantly impacted consumer spending in relatively short order. Energy demand is fairly inelastic, whereby in the relatively short term households have only a limited capacity to change consumption habits in response to price changes. Thus, rising energy costs divert disposable income away from nonenergy categories—effectively imposing a “tax increase” on non-energy consumption. Their rule of thumb is a one cent change in gasoline prices reduces annual household consumption by roughly $1 billion. At present, gasoline prices are down $0.22 compared to a year earlier, although the rolling 26-week average is down by a lesser $0.08; thus, the resulting economic stimulus is quite mild (approximately $8 billion). The risk is that this modest nudge could quickly become a serious drag if gas prices spike.

For the moment though, the latest US Conference Board’s consumer sentiment survey came in better-than-expected (81.5 vs 79.0 expected) from 81.0 the previous month. However, the survey’s polling cutoff was Aug. 15th, or just before the recent surge in US rates and before this week’s geopolitical developments. The survey data over the next month or so will provide a better indication as to whether the recent headwinds have affected confidence. Our economists note that in the last business cycle, consumer confidence reached its lowest level in March 2003—as tensions escalated ahead of the Iraq War.

Coming back to markets, the S&P500 (-1.6%) had its weakest day in two months, bringing month-to-date losses to 3.5%. Financials were the worst performer by sector, perhaps weighed by reports that US authorities are demanding JPMorgan Chase pay more than $6bn to settle allegations it missold securities to government-backed mortgage companies in the run-up to the financial crisis (Financial Times). After a fairly weak Asian and European session, emerging market assets were a little more resilient in NY trading, with some positive signs out of Latin America. On the fixed income side, the Brazil 10yr bond rallied 15bp to 10.876% and the Mexican 10yr was essentially unchanged at 6.32%. In currencies, the Brazilian real firmed slightly against the dollar (+0.33%) and although the Mexican Peso was a touch weaker, it did rally strongly into the close.

Looking at today’s calendar, developments in Syria, oil prices and emerging market gyrations are likely going to drive market direction. On the data docket, the latest Euroarea money supply report, US pending homes sales and the latest weekly mortgage applications data are the highlights. The BoE’s Mark Carney delivers his first policy address today in Nottingham.