Today's morning summary is a carbon copy of yesterday's. Some things happened, China continues to make up data to fit its current policy outlook, things in Europe continue to go bump in the night ever louder as we approach the German election despite reflexive diffusion indices - this time Service PMIs - desperately signalling a surge in confidence, Italy has just reminded everyone it is a big political basket case as Berlusconi is said to consider withdrawing his support for the Letta government and calling for elections this year, and so on, but it is still all about Syria. Last night the Senate Foreign Relations Committee has agreed on a resolution on using military force against Syria. The resolution would limit the duration of any US military action in Syria to 60 days, with a 30-day extension possible if Obama determines it is necessary to meet the goals of the resolution. In other words, a "surgical strike" lasting a minimum of 90 days, and then with indefinite additional extensions tacked on. Yet judging by the modest drop in crude and gold, the market may need more than just fighting words at this point to push to th next level of risk aversion.
News highlights from BBG and Ran:
- Senate Foreign Relations Committee is scheduled to vote today on a use-of-force resolution that sets a 90-day limit on U.S. military action against Syria and explicitly doesn’t authorize use of ground troops in combat
- Obama administration officials are hinting they’re prepared to accelerate efforts to arm rebel forces in the effort to oust Assad
- Berlusconi may consider withdrawing his support for the current Letta government in Italy alongside calling for elections this year, according to sources in Italian press.
- Chinese HSBC Services PMI (Aug) M/M 52.8 (Prev. 51.3) - 5-month high.
- Goldman Sachs closes their long EUR/GBP trade with a potential 0.2% loss, citing strong UK data. UK Services PMI (Aug) M/M 60.5 vs. Exp. 59.0 (Prev. 60.2) - Highest since December 2006.
- Treasuries little changed before Fed’s Beige Book report and speeches from Kocherlakota and Williams; markets focused on Friday’s nonfarm payrolls and its implications for QE tapering at this month’s FOMC.
- Nonfarm payrolls est. +180k; a number close to that means tapering will be the likely outcome, according to RBS
- BoJ meeting ends tonight, no policy changes expected, focus on economic assessment, Kuroda commentary on tax debate, for preview see here
- The chief bond strategist at Tokai Tokyo, who predicted Japan’s 10Y yield would plunge to 0.5%, now says it’s likely to reach a record 0.25% as a failure to meet economic targets may cost Prime Minister Abe his job
- Sovereign yields mostly higher, EU peripheral spreads wider. Euro Stoxx Banks -1.7%. Nikkei gains 0.5%, JPY earlier fell to 99.80. Other Asian stock markets mixed. European equities, U.S. equity index-futures decline. WTI crude, copper and gold decline
Market Re-Cap from RanSquawk
The release of better than expected Chinese HSBC Services PMI failed to support investor appetite for risk and instead, safe-haven assets outperformed as market participants positioned for a plethora of risk events (BoJ, BoE, ECB and Non-Farm Payrolls). Yet again, EUR underperformed relative to GBP, as combination of renewed concerns over Italy, as well as risks that the ECB will seek to address the recent rise in money market rates when the council meeting on Thursday saw spread between the 1y/1y fwd EONIA and the ECB refinancing rate narrow to its tightest level since July 2011. At the same time, the release of better than expected UK Services PMI, which rose to its highest level since December 2006, saw the GBP 1y/1y fwd rise to its highest since mid-June at 0.7236.
On the geopolitical front, the Senate Foreign Relations Committee has agreed on a resolution on using military force against Syria. The resolution would limit the duration of any US military action in Syria to 60 days, with a 30-day extension possible if Obama determines it is necessary to meet the goals of the resolution. The resolution, which is expected to come before the committee for a vote today, also bans the use of US ground forces in Syria “for the purpose of combat operations”. Going forward, market participants will get to digest the release of the latest Challenger Job Cuts and US Trade Balance reports, as well as BoC’s rate decision where rates are expected to be kept unchanged at 1.00%.
Chinese HSBC Services PMI (Aug) M/M 52.8 (Prev. 51.3) - 5-month high.
Chinese commerce minister Gao said he is confident in H2 stable economic growth, adding that H2 export growth is to recover and that H2 consumption is to keep steady GDP expansion.
Goldman Sachs revises its Japan GDP forecast higher to annual 3.7% Q/Q.
EU & UK Headlines
UK Services PMI (Aug) M/M 60.5 vs. Exp. 59.0 (Prev. 60.2) - Highest since December 2006.
Germany sells EUR 4.039bln in 1.00% 2018 Bobl (new line), b/c 1.5 (Prev. 1.6) and avg. yield 1.00% (Prev. 0.64%), retention 19.22% (Prev. 17.5%)
Berlusconi may consider withdrawing his support for the current Letta government in Italy alongside calling for elections this year, according to sources in Italian press. Italian FTSE-MIB underperformed its EU peers, trading down by over 1%, whereas other EU based equity indices were seen lower by just 0.5%. Also, IT/GE 10s widened by 5bps.
Eurozone Services PMI (Aug F) M/M 50.7 vs. Exp. 51.0 (Prev. 51.0) - highest since August 2011.
Eurozone Composite PMI (Aug F) M/M 51.5 vs. Exp. 51.7 (Prev. 51.7) - highest since July 2011.
Eurozone GDP SA (Q2 P) Q/Q 0.3% vs. Exp. 0.3% (Prev. 0.3%)
Eurozone Retail Sales (Jul) M/M 0.1% vs. Exp. 0.2% (Prev. -0.5%, Rev. -0.7%)
US House Speaker Boehner said UN & NATO are unlikely to take action on Syria and he will support President's call for action. He added that only the US' can respond to Syria.
- Leaders of Senate Foreign Relations Committee say they reach an agreement on draft authorisation for use of military force in Syria. Draft authorisation sets 60-day limit on military action in Syria. The document says would ban any use of US armed forces on the ground in the country.
- Putin says does not rule out his agreement to military operation in Syria if Damascus found guilty in chemical attack, but only with UN approval.
The release of better than expected Chinese HSBC Services PMI failed to support investor appetite for risk and instead, safe-haven assets outperformed as market participants positioned for a plethora of risk events (BoJ, BoE, ECB and Non-Farm Payrolls). Consumer services sector under performed in Europe, with Ryanair trading down over 10% after the company issued a profit warning.
Analysts at Deutsche Bank have raised 2014 expected EPS and 2013 year-end S&P 500 target to 1750 from 1675.
In addition to that, further PE expansion in 2014 or 2015 would be justified if the Fed stops its asset purchases and longterm real interest rates stay below historical norms or if real EPS growth plus the dividend yield outlook can exceed historical averages.
EUR underperformed relative to GBP, as combination of renewed concerns over Italy, as well as risks that the ECB will seek to address the recent rise in money market rates when the council meeting on Thursday saw spread between the 1y/1y fwd EONIA and the ECB refinancing rate narrow to its tightest level since July 2011. At the same time, the release of better than expected UK Services PMI, which rose to its highest level since December 2006, saw the GBP 1y/1y fwd rise to its highest since mid-June at 0.7236.
Goldman Sachs closes their long EUR/GBP trade with a potential 0.2% loss, citing strong UK data. Elsewhere, analysts at Morgan Stanley cut USD/JPY Q3 forecast to 99.00 and Q4 to 105.00. Separately, raised GBP/USD Q3 forecast to 1.5300, Q4 to 1.5000 and also raised EUR/USD Q3 forecast to 1.3100, Q4 to 1.2800.
Indian PM Singh said India took steps to boost growth and stabilize INR. Singh added they are to raise exit from unconventional policies at the G20 summit and that an orderly exit will avoid damage to the developing world. Australian GDP SA (Q2) Q/Q 0.6% vs. Exp. 0.5% (Prev. 0.6%, Rev. 0.5%).
Goldman Sachs cuts Libya September 2013 oil production forecast to 500,000 bpd from 1mln bpd. Cuts Iraq September oil output estimate by 100,000bpd. Goldman Sachs says pressure on OPEC spare capacity is to peak in September.
Barclays sees a 'modest' decline in oil prices in Q4 2013 and forecasts Brent at USD 105/bbl and WTI at USD 101/bbl in Q4 2013. Barclays forecasts Brent at USD 110/bbl and WTI at USD 104/bbl in 2014.
Libya's crude oil production at 150,000bpd in the last few days, down from 250,000bpd last week according to NOC. This follows Awami's report that Libya's Zawiya oil refinery is shut on crude shortage.
South African NUMSA union spokesman says may be prepared to lower pay hike demands in gold sector, with reports suggesting that it has cut wage increase demand to 10%, but wont welcome government intervention in wage talks. However South Africa's gold companies said that no formal revised wage demand yet
received. Of note, NUM yesterday started strike at gold mining companies, including AngloGold, Gold Fields and Harmony.
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The complete narrative of the overnight events from DB's Jim Reid:
Just how sensitive markets remain to the Syrian situation was shown when US House Speaker John Boehner spoke in support of military action in Syria yesterday. This was enough to drive markets lower into the European close and sent the S&P500 (+0.42% on the day) down 9 points (0.5%) within a matter of minutes. In addition to Boehner, House Majority Leader Eric Cantor and Minority Leader Nancy Pelosi also lent their support to Obama’s plan for military intervention. According to the Associated Press, the Senate Foreign Relations Committee (which Secretary of State John Kerry and Defense Secretary Chuck Hagel presented to on Tuesday) has agreed on a resolution on using military force against Syria. The resolution would limit the duration of any U.S. military action in Syria to 60 days, with a 30-day extension possible if Obama determines it is necessary to meet the goals of the resolution. The resolution, which is expected to come before the committee for a vote today, also bans the use of U.S. ground forces in Syria "for the purpose of combat operations". Republicans and Democrats had said the prohibition was necessary for their support (WSJ). Congressional officials said that a House/senate vote on the resolution was not expected before the middle of next week when Congress officially returns from recess. Despite finding some Congressional support, a Reuters poll found that public support for US military action remains low - some 56% of Americans surveyed said the United States should not intervene in Syria, while only 19% supported action.
DB’s geopolitical analyst Frank Kelly thinks that there are a number of crucial events to watch for this week in relation to Syria. Firstly, while Congress does not officially return from summer recess until September 9th, members of Congress are cutting short their holiday and returning to Washington this week, which will mean we will be probably get a massive up-tick of members giving their views publicly. The French Parliament holds an emergency session on Syria today – recall that the UK and France have been the key diplomatic supporters of the White House’s plan in Syria. Frank also notes that the G20 summit in St Petersburg starting on Thursday may see public sparks between Obama and Putin. In terms of whether Congress will approve the resolution next week, Frank thinks the Senate will pass the resolution with a slim majority but the House vote is now a coin-toss.
Returning to the markets, Asian equities are trading weaker across the board overnight which follows a rather tepid fade into the US close. In Japan, utilities (-0.2%) are amongst the underperformers with TEPCO the biggest decliner after the company detected the highest radiation levels found so far near tanks holding contaminated water at Fukushima. A small earthquake recorded in the Kanto region in Japan is also weighing on sentiment in Japanese equities. Chinese Ashares are also a little weaker despite the release of a 5-month high HSBC Services PMI (52.8 vs 51.3 previous). The AUD is trading 0.4% higher against the USD after stronger than expected Q2 GDP data (0.6% QoQ vs 0.5% expected).
Yesterday’s strong manufacturing ISM data heralded another weak day for US treasuries as expectations strengthened that the Fed will announce a tapering when the FOMC meets later this month. The manufacturing ISM added slightly to an already solid July print, as the August headline rose to 55.7 from 55.4 previously (54.0 expected). The strength in the headline was driven by 60+ readings on both new orders (63.2 vs. 58.3) and production (62.4 vs. 65.0). DB’s Joe LaVorgna notes that the strength in new orders is particularly encouraging, because this series tends to be a leading indicator of overall factory sector activity—the current level points to another headline print of 55.0 or greater in September. In other details of the ISM report, employment slowed modestly (53.3 vs. 54.4), and prices paid crossed back into expansionary territory (54.0 vs. 49.0 previously). Joe concludes that the tone of the August manufacturing ISM report is consistent with his forecast for abovetrend growth in Q3, as well as a decent print on August employment (+190k payrolls and 7.3% unemployment).
Shortly after the ISM, 10yr UST yields reached a high of 2.91%, which is not too far away from the 2.93% high reached on the 22nd of August. The aforementioned Syrian concerns eventually led yields back down to the closing level of 2.86% but yields were still up 8bp on the day. The move up in UST yields were a drag on European bond markets while EM assets also suffered. Indeed, yesterday saw the MSCI Emerging Markets equity index (-0.5%) record its first loss in four sessions with particularly sharp falls in Indian (-3.5%) and Turkish (-2.3%) bourses. In EM currencies, the IDR (-0.65%), TRY (-1.85%) and MXN (-0.4%) continued to slide against the USD. The Brazilian Real fared better (+0.8%) perhaps helped by the combined efforts of the Brazilian government and central bank during recent weeks, including a statement yesterday from the country’s Treasury Secretary that the government will keep working to avoid excessive depreciation of the Real. In credit, the focus was on US and European primary markets which had one of their busiest days of the year as investors returned to their desks from summer holidays.
Turning to the day ahead, the continuing debate in Washington over Syria will likely drive market sentiment over the next 24 hours. In terms of the dataflow, service PMIs in Europe and the UK and Eurozone retail sales are today’s highlight. In North America, watch for US mortgage applications, trade data for July and the BoC’s rate decision.