Equity Futures Unchanged As Dollar Surges To Fresh 4 Year Highs

It has been a relatively subdued session, with not much action in either stocks or bonds - European stocks rise for the second day on US market momentum from yesterday; Asian stocks are mixed advance while metals decline with Brent, WTI crude, U.S. equity index futures. The biggest highlight in overnight action, however, was once again the Dollar whick climbed to a fresh 4-year high, on pace to strengthen for 2 straight months for first time since March. The reason: ongoing sentiment that there will be a major dispersion between central banks, with the USD tightening just as other central banks join the liquidity fray. To wit, ECB data showed that lending decline in Europe slowed to -1.5% y/y in Aug. vs -1.6% in July and the latest statement from Draghi who said in Lithuania that economic reform possible without devaluing currency.

We are seeing a slightly more mixed performance in the Asian session overnight. The Nikkei is over 1% higher helped by further weakness in JPY. Chinese equities are just barely firmer too with the Shanghai Composite up about one-tenths of a percent despite news reports of potential change of Governor at the PBOC. The WSJ first reported the story during yesterday’s US session saying that Chinese leaders are discussing replacing the current Governor Zhou Xiaochuan amid disagreements over the direction of financial policy and as part of a wider personnel shuffle that comes after internal battles over economic overhauls. The WSJ said that these changes are expected around a major party meeting in October although no final decision about Zhou has been made. Zhou has been leading the move to liberalising interest rates and market reforms so any changes there would be followed closely by the market. Away from China, equity markets in Korea, Taiwan and Hong Kong are all weaker. In brief: Asian stocks mixed the TOPIX outperforming and Taiwan’s TAIEX underperforming. MSCI Asia Pacific up 0.1% to 143.3. Nikkei 225 up 1.3%, Hang Seng down 0.6%, Kospi down 0.1%, Shanghai Composite up 0.1%, ASX up 0.1%, Sensex down 0.7%. 5 out of 10 sectors rise with consumer, industrials outperforming and energy, financials underperforming.

European equity markets have gained further today after the strong close on Wall Street, however the benchmark DAX remains lower by approx. 0.6% on the week. Gains today have been further cemented by the market’s underlying belief that the ECB will be backed into a corner by the market and conduct sovereign bond purchases in order to lift credit to southern Europe. Airbus Group perform strongly today, as their 20yr jet demand forecast was raised, lifting shares by as much as 2.8%. Nonetheless, retailer H&M temper the gains in Scandinavia as poor a sales update knocked shares lower by close to 4%. 16 out of 19 Stoxx Europe 600 sectors rise; travel & leisure outperform, basic resources, retail underperform. 70% of Stoxx 600 members gain, 26.5% decline. Eurostoxx 50 +0.3%, FTSE 100 +0%, CAC 40 +0.3%, DAX +0.4%, IBEX +0.7%, FTSEMIB +0.4%, SMI +0.4%

Looking at the day ahead, durable goods orders, initial jobless claims, flash Markit services PMI and the Kansas Fed manufacturing survey are the key releases in the US. We also have a 7yr UST auction. In Europe we expect a relatively quiet day for data watchers with the Eurozone money aggregates for August perhaps noteworthy. Draghi will speak this morning on 'Single Market, Single Currency, Common Future' at a ECB conference in Lithuania.

Market Wrap

  • S&P 500 futures little changed 1990.6
  • Stoxx 600 up 0.4% to 345.8
  • US 10Yr yield down 1bps to 2.55%
  • German 10Yr yield down 1bps to 0.99%
  • MSCI Asia Pacific up 0.1% to 143.2
  • Gold spot down 0.7% to $1209/oz

Bulletin Headline Summary from RanSquawk and Bloomberg

  • Central bank policy divergence remains the theme of the week, as the USD marches to four-year highs for the third time in four days
  • RBNZ joins the slew of central banks talking down their currency, as the RBNZ Governor Wheeler deems the NZD’s high value as ‘unsustainable’
  • Looking ahead, attention turns to US Durable Goods Orders, Weekly Jobs data and the USD 29bln 7yr auction – particularly after yesterday’s 5yr sale drew the lowest bid/cover since December
  • Treasuries steady before week’s auctions conclude with $29b 7Y notes; WI yield 2.255%, highest since April. Weekly IG issuance volume near $30b, with September poised to be busiest month of the year.
  • The SEC’s probe into Bill Gross’s Pimco Total Return ETF is investigating whether the firm bought smaller lots of bonds at discounts, then marked them up, according to the person, who asked not to be identified because the probe isn’t public
  • The U.K. government plans to criminalize the manipulation of seven more benchmarks in markets from foreign exchange to gold and oil as it tries to revive confidence in the integrity of London as a financial center
  • Speculation about the retirement of China central bank Governor Zhou Xiaochuan, a champion of shifting the world’s second-largest economy to greater reliance on markets, is resurfacing, focusing attention on potential successors
  • China uncovered almost $10b in fraudulent trade nationwide as part of an investigation begun in April last year, including many irregularities in the port of Qingdao, the country’s currency regulator said today
  • The buffer zone being carved out to bring peace to eastern Ukraine may also cement the conflict’s front lines and preserve Vladimir Putin’s influence over the region for years to come
  • Obama’s blunt words on Islamic terrorism marked a striking shift for his annual address to United Nations, as he moved away from the language of accommodation to rhetoric reminiscent of predecessor President George W. Bush
  • U.S. and Arab warplanes attacked small oil refineries in eastern Syria controlled by Islamic State to undercut the extremist Sunni group’s revenue and impede its mobility, the Pentagon said
  • A group of Syrian women activists delivered a jarring message to top American officials: Syrians aren’t grateful for the U.S.-led airstrikes, which they say have killed innocents and worsened the suffering
  • An Algerian militant group beheaded a Frenchman it kidnapped three days earlier, in retaliation for French airstrikes in Iraq, President Francois Hollande confirmed
  • Sovereign yields lower. USD strengthens to four-year high. Nikkei +1.3, Shanghai Composite little changed. European stocks higher, U.S. equity-index futures mixed. WTI crude, gold and copper lower

Key Events

  • 8:30am: Initial Jobless Claims, Sept. 20, est. 296k (prior 280k)
    • Continuing Claims, Sept. 13, est. 2.440m (prior 2.429m)
  • 8:30am: Durable Goods Orders, Aug., est. -18% (prior 22.6%)
    • Durables Ex Transportation, Aug., est. 0.6% (prior -0.8%, revised -0.7%)
    • Capital Goods Shipments Non-Defense Ex-Aircraft, Aug., est. 0.5% (prior 1.5%, revised 1.4%)
    • Capital Goods Orders Non-Defense Ex-Aircraft, Aug., est.  0.4% (prior -0.5%, revised -0.7%)
  • 9:45am: Markit US Services PMI, Sept., est. 59.2 (prior 59.5)
  • 9:45am: Bloomberg Consumer Comfort, Sept. 21 (prior 37.2)
  • 11:00am: Kansas City Fed Manufacturing Activity, Sept., est. 6 (prior 3)

Central Banks

  • 8:40am: Bank of England’s Carney speaks in Wales
  • 1:20pm: Fed’s Lockhart speaks in Jackson, Mississippi Supply
  • 1:00pm: U.S. to sell $29b 7Y notes

FIXED INCOME

Bund futures trade toward the top-end of the week’s range, with the 10yr yield still sitting below 1.0% on underlying expectations of easing from the ECB. Nonetheless, peripheral European bonds are outperforming, with the GR/GE spread tightening by close to 8bps as the market trims bets that the Greek sovereign’s finances will be damaged by an early repayment of the IMF loan tranche. Ahead of the CBOT open, T-notes trade higher, recouping some of the losses seen yesterday in the wake of the poor 5yr auction, where the bid/cover fell to the lowest level since December.

Pan Euro Agg month-end extensions +0.08yrs (Prev. +0.03yrs), 12-month average +0.07yrs (IFR)

RANsquawk sources report large Sterling month-end extensions, ranging between +0.28yrs to +0.31yrs – Unconfirmed. Note, that this is much higher than the monthly average of +0.05yrs, but broadly in-fitting with this time last year at +0.33yrs.

EQUITIES

European equity markets have gained further today after the strong close on Wall Street, however the benchmark DAX remains lower by approx. 0.6% on the week. Gains today have been further cemented by the market’s underlying belief that the ECB will be backed into a corner by the market and conduct sovereign bond purchases in order to lift credit to southern Europe. Airbus Group perform strongly today, as their 20yr jet demand forecast was raised, lifting shares by as much as 2.8%. Nonetheless, retailer H&M temper the gains in Scandinavia as poor a sales update knocked shares lower by close to 4%.

FX

The USD has outperformed all others this morning, keeping the currency on track to record the best quarterly gain since the period ending Sep'11. Policy divergence between ECB, BoJ, RBA playing down their currencies and most recently, the RBNZ has resulted in many crosses seeing marked weakness against the USD, as the Fed come closer toward lifting their rates in the near future. As such, fell below 1.2700, hitting the lowest level since Nov'12. RANsquawk sources also reported leveraged names buying USD against EUR, GBP, CHF and CAD and as some traders will be out of the market for Jewish New Year lower liquidity may exacerbate moves.

EM currencies are also under pressure with USD/ZAR and USD/TRY all rising sharply. Antipodean commodity currencies have been hit hard with verbal intervention from the RBNZ weighing on NZD/USD (down over a point) alongside the commodity weakness, and continued concerns of the growth momentum in China, dragging AUD/USD lower.

COMMODITIES

USD strength has weighed on Gold, hitting close to YTD lows as Palladium falls to levels not seen since May as the prospect of Fed tightening constricts USD-denominated commodities. WTI and Brent crude futures remain on the backfoot, with the Brent curve still sharply in a contango formation as the Iranian oil minister repeats that OPEC must balance output to keep oil prices stable. As such, the Brent-WTI spread trades close to the tightest level of the year.

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DB's Jim Reid concludes the overnight recap

In terms of markets, after a few weak days, yesterday proved to be a positive day for most risky assets. In the absence of any major news or developments, dovish sound bites from ECB’s Draghi and Fed’s Evans (more below) helped set the first daily gain in European and US equities this week. The S&P 500 (+0.78%) rose for the first time in four days and went on to post its best gain in over a month. Indeed it was a good day for most S&P 500 sub-sectors with Health Care (+1.68%) and Consumer Staples (+1.22%) enjoying the best of the day’s gains. The Dollar’s winning stream continues to gain momentum with the Greenback appreciating about 0.5%-0.6% against the EUR, JPY and GBP over the last 24 hours. Interestingly the commodity complex wasn’t tested by the stronger Dollar with Brent and Copper both moderately higher yesterday. Treasuries were weaker with the 10yr up around 4bps to 2.564% probably as some of the flight-to-quality flows were unwound.

We are seeing a slightly more mixed performance in the Asian session overnight. The Nikkei is over 1% higher helped by further weakness in JPY. Chinese equities are firmer too with the Shanghai Composite up about four-tenths of a percent despite news reports of potential change of Governor at the PBOC. The WSJ first reported the story during yesterday’s US session saying that Chinese leaders are discussing replacing the current Governor Zhou Xiaochuan amid disagreements over the direction of financial policy and as part of a wider personnel shuffle that comes after internal battles over economic overhauls. The WSJ said that these changes are expected around a major party meeting in October although no final decision about Zhou has been made. Zhou has been leading the move to liberalising interest rates and market reforms so any changes there would be followed closely by the market. Away from China, equity markets in Korea, Taiwan and Hong Kong are all weaker as we head to print.

Staying within the region, the Asian Development Bank noted in a report overnight that domestic demand for some of the major Southeast Asian countries have moderated. The ADB revised its GDP growth forecast for the region a smidgen lower 5.3% from 5.4% previously but highlighted that China is on track to meet its forecast of 7.5% in 2014 and 7.4% in 2015. China is still a key variable for many globally and in particular those who are directly connected via the commodity export trade. Iron ore prices had a flat day yesterday even though the commodity has fallen to lows not seen since 2009 as economic momentum in China continues to show limited impetus. Chinese authorities seem also adamant that no stimulus is on the cards in the near term which adds uncertainty to the outlook especially on commodity prices. We saw this with the revision the trajectory of coal prices in 2015 yesterday from the Australian authorities. With the ongoing theme of China growth worries the AUD has depreciated markedly from 0.933 at the start of the month to 0.8833 currently – the lowest since February this year.

Turning to EM, the Dollar strength had a bigger impact on EMFX yesterday than on EM credit and rates themselves. Nevertheless, Russia’s 10yr USD bond yield fell 14bps as the situation over there continues to de-escalate. On the local rates front all eyes are still on Brazil and polls ahead of the presidential election next month. There wasn’t any fresh polls overnight but the 10yr Brazilian government bond yield came down another 16bps yesterday.

Moving on to the middle east, US and allied Arab jet fighters bombed a dozen of small oil refineries in eastern Syria yesterday which was understood to be part of a$2million a day revenue stream for the Sunni Muslim extremist group (LA Times). The BBC reported that the UK Parliament will be recalled on Friday to discuss its possible role in air strikes as an ally.

Back to the central bank speeches yesterday, being his dovish self Draghi said that monetary policy will remain accommodative for a long time and added that the risk of doing too little is higher than the risk of doing too much. From the Fed we heard from Evans who said the FOMC should be “exceptionally patient” before hiking rates even to the point of allowing a modest overshoot of its inflation target. The sound bites from Fed’s Mester and George were less dovish though. Mester said the Fed should end its crisis era policies and should also move away from qualitative forward guidance and repeated her view that it was time for the Fed to drop the “considerable time” phrase from the statement. The Fed’s George wanted the Fed to begin raising rates soon or risk inflation although emphasised that her objective is to not to raise rates quickly.

On that note we’d highlight Joe LaVorgna’s daily yesterday in which he noted that given the departure of the two most hawkish members of the FOMC next year (Fisher and Plosser) the FOMC becomes much more dovish next year. This at the margin could have important implications for the timing of the initial hike.

Data probably played second fiddle yesterday but US new home sales (+504k v 430k) did surprised us on the upside for August. European data remains weak with the latest German IFO Business Climate (104.7 v 105.8) and Expectations (99.3 v 101.2) both below consensus. For the latter this was also the weakest print since December 2012.

Looking at the day ahead, durable goods orders, initial jobless claims, flash Markit services PMI and the Kansas Fed manufacturing survey are the key releases in the US. We also have a 7yr UST auction. In Europe we expect a relatively quiet day for data watchers with the Eurozone money aggregates for August perhaps noteworthy. Draghi will speak this morning on 'Single Market, Single Currency, Common Future' at a ECB conference in Lithuania.