Just when we thought centrally-planned markets could no longer surprise us, here comes last night's superspike in the USDJPY which has moved nearly 100 pips higher in the past few trading days and moments ago crossed 105.000. The reason for the surprise is that while there was no economic news that would justify such a move: certainly not an improving Japanese economy, nor, for that matter, a new and improved collapse, what the move was attributed to was news that Yasuhisa Shiozaki, who has been advocating for the GPIF to reduce allocation to domestic bonds, may be appointed the Health Minister when Abe announces his new cabinet tomorrow: a reshuffle driven by the fact that the failure of Abenomics is starting to anger Japan's voters. In other words, the GPIF continues to be the "forward guidance" gift that keeps on giving, even if the vast majority of its capital reallocation into equities has already long since taken place. As a result of the USDJPY surge, driven by a rumor of a minister appointment, the Nikkei is up+1.2%, which in turned has pushed both Europe and Asia to overnight highs and US equity futures to fresh record highs, with the S&P500 cash now just 40 points away, or about 4-8 trading sessions away from Goldman's revised 2014 year end closing target.
Oh, for whatever reason but probably just because "banks are providing liquidity", both gold and silver were summarily pounded to multi-month lows seconds ago.
In other Asian markets, the Hang Seng, Shanghai Composite, and the KOSPI are 0%, +1.4% and -0.8%, respectively. European stocks advance amid speculation that slower growth will prompt policy makers to accelerate stimulus. German and Italian shares outperform. The yen came close to a five-year low against the dollar, while the pound falls after a survey showed support for Scottish independence increasing. Treasuries drop ahead of reports this week that economists predict will show U.S. manufacturing and employment expanded in August. Oil and gold fall.
Those seeking de-escalation headlines will have to wait: the tension between Russia and Ukraine continues to build with more finger-pointing seen yesterday. Ukraine’s Defence Minister apparently posted on his Facebook page that Russia has threatened on several occasions across unofficial channels that, in the case of continued resistance, they are ready to use a tactical nuclear weapon against Ukraine. He also added that “a great war has arrived at our doorstep – the likes of which Europe has not seen since WWII”. Russia on the other hand has repeatedly denied these accusations.
In other overnight stories, bank sector lobbyists have warned the Basel Committee on Banking Supervision that its proposed Net Stable Funding Ratio requirement could make it more expensive for banks to facilitate equity market transactions. A letter to the Basel Committee sighted by the FT goes on to say that “By unnecessarily increasing the funding cost for banking organisations’ equity market intermediation activities, the revised NSFR would also potentially force such activities into the largely unregulated shadow banking system, increasing systemic risk.”
Looking at the day ahead, all eyes will be on US manufacturing PMI and ISM manufacturing, as well as any comments from ECB’s Knot.
Bulletin Headline Digest from Bloomberg and RanSquawk
- European equities trade firmly in the green, following on from their Asian counterparts as the Nikkei 225 printed a 5 week high after USD/JPY printed its highest reading since January.
- GBP has underperformed throughout the session amid concerns over the growing momentum in the Scottish referendum ‘Yes’ vote campaign, while the strong UK construction PMI modestly trimmed GBP losses.
- Looking ahead, attention now turns towards, US manufacturing PMI and ISM manufacturing, as well as any comments from ECB’s Knot.
- Treasuries decline, led by long end, curve spreads steepen; markets awaiting ECB meeting and Draghi press conference Thursday, U.S. nonfarm payrolls Friday with Fed meeting set for Sept. 16-17.
- As the ECB gears up to buy “simple, transparent and real” asset-backed debt, the success of its bid to breathe life into the market will depend on how regulators from Basel to Brussels define those terms
- Ukraine warned of an escalating conflict in its easternmost regions as Obama touches down in Estonia tonight to deliver reassurance to Baltic nations and a direct warning to Putin that NATO stands by its military commitment to alliance security
- Japan’s Abe pledged an upgrade of economic and security ties with India, saying Japan would double investment and expand defense cooperation amid concerns about China’s growing influence in the region
- Pakistan’s parliament was holding an emergency session today to try to defuse two weeks of protests that have turned deadly as demonstrators step up efforts to force the resignation of Prime Minister Nawaz Sharif
- Support for Scottish independence rose before this month’s referendum, with a YouGov Plc poll showing the lead for the
- No campaign down to six percentage points as nationalists said the momentum is behind them
- Jack Ma is preparing to list Alibaba Group for an IPO during a record rally for U.S. stocks after doing the same thing seven years ago, when Alibaba.com Ltd. went public in Hong Kong a week after the Hang Seng Index hit an all-time high. By the end of 2008, the Hang Seng had slumped 55% and the company lost more than $20b Sovereign yields higher.
US Event Calendar
- 9:45am: Markit US Manufacturing PMI, Aug. final, est. 58 (prior 58)
- 10:00am: ISM Manufacturing, Aug., est. 57 (prior 57.1); ISM Prices Paid, Aug., est. 58.9 (prior 59.5)
- 10:00am: Construction Spending, July, est. 1.0% (prior -1.8%)
- 10:00am: IBD/TIPP Economic Optimism, Sept., est. 45.5 (prior 44.5)
- 11:00am: U.S. to announce plans for auction of 4W bills
- 11:30am: U.S. to sell $28b 3M bills, $24b 6M bills, $15b 11- day cash management bills
Fixed income markets are seen lower alongside the move higher in equities with Bunds said to have been placed under further pressure after MS closed their long Bund position. Morgan Stanley closed their position as they say that ECB bets look overblown ahead of the ECB's policy meeting on Thursday, adding that markets may have moved too far in pricing in further ECB accommodation as valuations become increasingly demanding. Finally UK Gilts are also seen lower following the highest UK construction PMI reading since January.
European equity markets trade with their third consecutive session of gains as volumes pick-up after the extended US weekend. US stock futures have hit all-time highs (E-mini S&P 2006.25) well ahead of the first Wall St. open this week, alongside the European equity market strength. Markets continue to eye Thursday’s critical ECB rate decision, as traders bet that the ECB could take further easing action. The DAX tops the board, with Volkswagen shares rising over +1.5% after being upgraded at Exane on attractive valuation and a solid earnings pipeline. Financial names are the outperformers, with the sector provided support following a note from JP Morgan who said that EU banks have around 10% upside as they anticipate a positive outcome to the upcoming ECB stress tests.
USD-index gained following a sharp technical move higher in USD/JPY attributed to larger than usual buying at the Tokyo fix, as the pair tripped touted option barriers at 104.50, to print its highest level since January at 104.89. Furthermore, traders eyed the re-shuffling of Japanese PM Abe’s cabinet, due tomorrow, where Abe is expected to reinforce his pro-Abenomics government with some critical ministerial appointments. AUD/USD remains below the 0.9300 handle after the RBA kept its interest unchanged at 2.50% as expected and reiterated its neutral policy. Today’s main release for the session came in the form of UK construction PMI which exceeded expectations (64.0 vs. Exp. 61.5) and thus saw a modest tick higher in GBP/USD, although the pair remains firmly in the red amid concerns of the growing momentum for the ‘Yes’ vote in the Scottish referendum which has seen 1-month GBP/USD volatility reach its highest level since April. The move lower in GBP/USD is also said to have been provided further traction from a UK clearer selling the pair since the open.
Gold fell to near a 1-week low overnight and broke below the 200DMA at USD 1285.82 as broad USD strength outweighed any safe-haven demand concerning tensions in Ukraine. Further price declines in gold could eventuate over the course of the week as investors continue to buy USD ahead of Thursday’s ECB meeting and the possibility of bullion traders remaining sidelined ahead of Friday’s NFP report. In the energy complex, both WTI and Brent crude futures are seen lower amid the stronger USD and a lack of fundamental newsflow elsewhere.
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In conclusion, here is the traditional Jim Reid overnight event recap
Markets were also hibernating a bit yesterday as US Labor Day generally helped keep things fairly quiet. It was also quite clear from my train journey in that not everyone is back to work yet from holidays. However schools are slowly going back so there's likely only a few more days of not being packed in like sardines on my commute.
One of the more interesting stories of yesterday was a €1bn 50 year private placement bond issued by the Spanish Government with a 4% coupon. It’s a measure of how far things have come in a couple of years that such a deal could be launched. It was also a day when 2 year French yields traded below zero for the first time ever. We still live in remarkable financial times. Back to the Spanish deal, although current low levels of inflation make this deal look optically attractive on a real yield basis we thought we'd look at the rolling average 50 year level of inflation in Spain to highlight what real returns might potentially be over the lifetime of the bond. I hope I survive to see it mature but I hope I won't be writing about it then. Anyway the average annual inflation over the last 50 years in Spain is 7.0% and as the graph in today's pdf shows the last time the 50-year rolling average was below 4% was in 1956. Clearly prior to this the average rate of inflation was constantly below this level as inflation has been a modern day (last 100 years) phenomenon tied to the evolution of central banks (the Fed started in 1913) and the gradual demise of precious metal currency systems. So it’s a measure of how buoyant fixed income markets are that investors are prepared to ignore that last half century's inflation record and the current fiat currency world when pricing long-term bonds. This is not a Spain-specific issue but on a slow news day the story stood out. The same would be true for most countries issuing similar long-dated debt today. Indeed yields elsewhere would likely be even lower.
Herein lies our dilemma with bonds. We've been a member of the lower yields for longer camp for a number of years now due to our near-term growth and inflation outlook and our belief that financial repression is rife. However we also think that debt restructuring or inflation will eventually be the only way of successfully reducing debt burdens for many countries with the latter route the most likely. As such whilst bonds are a near-term safe haven they are also likely to be very poor real investments longer term. Timing the big switch in view on this will be one of the defining investment moments of the next few years. Let's hope we're lucky.
Back to more near-term events yesterday’s trading session was dominated by the various manufacturing PMIs around the world. Following on from a soft Chinese PMI (as we detailed in yesterday’s EMR), the final August euro area manufacturing PMI was also a little disappointing. The headline reading was revised 0.1ppt lower to 50.7 (lowest in 13 months). Subcomponents were also softer with new orders and new export orders both weaker than their flash readings. Italy’s manufacturing PMI (49.8 vs consensus of 51.0) also disappointed after dipping below sub-50 for the first time since June 2013. Spain’s manufacturing activity declined for the second consecutive month in August but still managed to stay in expansionary territory (52.8 vs consensus of 53.3). Germany was also weaker than expected but one silver lining was that France surprised on the upside. Following on from this, with the US back from the long weekend, we’ll get ISM manufacturing and the Markit US manufacturing PMI reading today. Markets are expecting both readings to be broadly unchanged over the month at 57.0 and 58.0, respectively. The Prices Paid sub-component of the ISM report is expected to decline to 58.8 from 59.5 though.
Data flow aside the main focus this week will still be on ECB. There was a headline yesterday noting that a phone call between Draghi and Merkel had taken place. No further details were released other than reaffirmation by German government’s spokesperson that the ECB’s independence is extremely important to the country. This comes after a weekend Der Spiegel report which said that Merkel was unhappy with Draghi for apparently proposing a greater emphasis on fiscal stimulus over austerity in order to boost growth.
Meanwhile the tension between Russia and Ukraine continues to build with more finger-pointing seen yesterday. Ukraine’s Defence Minister apparently posted on his Facebook page that Russia has threatened on several occasions across unofficial channels that, in the case of continued resistance, they are ready to use a tactical nuclear weapon against Ukraine. He also added that “a great war has arrived at our doorstep – the likes of which Europe has not seen since WWII”. Russia on the other hand has repeatedly denied these accusations.
Turning to markets the strength in the Nikkei (+1.5%) and the weakness in the JPY (104.8) are a standout as far as overnight markets are concerned. The market seems to be rallying on news that Yasuhisa Shiozaki (who has been advocating for the GPIF to reduce allocation to domestic bonds) may be appointed the Health Minister when Abe announces his new cabinet tomorrow. The market is also outperforming the rest ahead of a two-day BOJ meeting starting tomorrow and there are some chatter of more stimulus on the back of further sales tax hikes.
In other markets, the Hang Seng, Shanghai Composite, and the KOSPI are -0.5%, +0.3% and -0.8%, respectively as go to print. In other overnight stories, bank sector lobbyists have warned the Basel Committee on Banking Supervision that its proposed Net Stable Funding Ratio requirement could make it more expensive for banks to facilitate equity market transactions. A letter to the Basel Committee sighted by the FT goes on to say that “By unnecessarily increasing the funding cost for banking organisations’ equity market intermediation activities, the revised NSFR would also potentially force such activities into the largely unregulated shadow banking system, increasing systemic risk.”
Looking at the day ahead, all eyes will be on the ISM data as well as how US markets will resume following the Labour Day long weekend.