Tumbling Dollar Sends USDJPY Under 100, Oil Over $46 As Gold Spikes; Futures Flat

Overnight, John Williams' latest uberdovish paper "Monetary Policy in a Low R-star World", which we profiled yesterday, and which suggests lower rates for far longer, made the rounds and has led to a steep 0.8% drop in the Bloomberg Dollar spot Index, which sank to its weakest since June while the yen strengthened 1.2 percent, slipping briefly below 100 against the greenback, dropping as low as 99.95 for the first time since June 24, pushing oil and gold higher, and Asian shares lower.


The dollar is losing ground as lackluster data in the world’s biggest economies fuel speculation the Fed will refrain from raising interest rates. The Citigroup Inc. U.S. Economic Surprise Index, which measures whether data beat or miss analyst forecasts, reached the lowest in more than a month.  As a result, the latest surge in the Yen, noted overnight when various stops were tripped, sent the Nikkei sharply lower by 1.6%, and has put further pressure on the BOJ to come devalue its currency. “The yen is being driven by the dollar’s weakness, spurred by increasing expectations the Federal Reserve won’t raise rates this year,” said Nicholas Teo, a strategist at KGI Fraser Securities in Singapore. “This complicates things for Japanese policy makers seeking to stimulate Japan’s economy. If the Fed doesn’t move this year, there’s a risk of steeper moves next year. That’s very dangerous.”

“The unevenness seen over the last couple of weeks in U.S. data has diminished the relative appeal of pursuing dollar strength,” said Ned Rumpeltin, the European head of foreign-exchange strategy at Toronto Dominion Bank in London. Minutes of the last Fed meeting due this week “will be an important platform to signal whether they hope to keep the potential for a 2016 rate hike on their agenda, although markets think that chance is fairly remote right now.”

The pound jumped as U.K. inflation accelerated in July more than economists predicted. Precious metals advanced while European stocks slipped.

Global stocks were modestly lower pressured by rising local currencies, and edged away from one-year peaks on Tuesday as a stellar rally stalled, while the dollar hit a one-month low against the yen as recent weak U.S. economic data was seen limiting the scope for a near-term rate hike. Asian shares rose to a one-year peak, lifted by a rise in U.S. stocks to record highs a day earlier and expectations that monetary policy around the world will remain lower for longer than anticipated to support growth. But, in a sign that the rally in world shares may be losing momentum, Chinese stocks pulled back from seven-month highs following a sharp correction in bank shares and Japan's Nikkei fell more than 1.5 percent to its lowest level in just over a week as the yen firmed.

Meanwhile, the skepticism over the low-volume levitation remains: “If you look at the previous days, we had upturns every couple of days, but not based on healthy volumes -- that’s very often a sign that the reaction in the other direction could follow,” said Soeren Steinert, an associate director for equities trading at Quoniam Asset Management, which oversees the equivalent of $29 billion. “There’s an increasingly lower probability of a Fed rate hike this year, and that’s priced in. Brexit you don’t hear about any more. And the earnings season is over, so what’s the trigger for the upside?”

Quoted by Reuters, Michael Hewson, chief market analyst at CMC Markets said that "Equity markets are looking a bit frothy and what's dragging them down is a bit of softness in the oil price and yen strength.  Investors are a bit nervous but ultimately in a low-yield world, stocks remain a decent bet for yield." That's ok, that's what central banks are there for: to ease investor nerves.

While European shares opened broadly lower, edging away from Monday's seven-week highs as markets in London, Paris and Frankfurt slipped 0.4-0.9 percent in early trade, they have since rebounded somewhat and the the Stoxx Europe 600 Index was trading about 0.1% lower.  Schindler Holding AG led industrial-goods companies lower, sliding 3.6 percent after forecasting a decline in the global elevator and escalator market. Electrolux AB, which gets more than a third of its revenue from North America, lost 2.1 percent after a report showed U.S. shipments of major home appliances fell in July. Antofagasta Plc helped push a measure of commodity producers to the best performance of the 19 industry groups on the Stoxx 600, climbing 3.4 percent. The company said first-half earnings rose and announcing an interim dividend of 3.1 cents a share. Linde AG jumped 5.8 percent, propelling a gauge of chemical stocks higher, after people familiar with the matter said Praxair Inc. has held merger talks with the German industrial-gas company.

S&P 500 Index futures were little changed, with the index having risen to fresh highs on Monday.

In the commodity complex, oil gained, after erasing an earlier loss as the weakness in the dollar overtook speculation that the Organization of Petroleum Exporting Countries will struggle to agree any kind of limit on production next month. West Texas Intermediate crude advanced 0.7 percent to $46.04 a barrel and Brent gained 0.5 percent to $48.58. And speaking of OPEC, after Nigeria overnight expressed doubt any supply cut would take place, when Nigerian petroleum minister Emmanuel Kachikwu said that "on oil production cuts by OPEC, optimism on my part is quite sparse but I believe engagement with the 70% oil producers might have impact," earlier today Iran also poured cold water over expectations of a September production freeze:

  • IRAN HAS YET TO DECIDE ON JOINING OPEC'S INFORMAL TALKS IN SEPTEMBER - OIL MINISTRY SPOKESWOMAN
  • IRAN DOESN'T EXPECT TO REACH PRESANCTIONS PRODUCTION LEVEL BY END OF SEPTEMBER -- SPOKESWOMAN

In bonds, the U.K.’s 10-year gilt yield declined one basis point to 0.52 percent, near a record low, before the Bank of England seeks to buy 1.17 billion pounds ($1.5 billion) of debt due in more than 15 years as part of its expanded quantitative-easing program. The central bank fell short of achieving a similar target at last week’s bond-buying auction, spurring gains in longer-dated gilts. The yield on U.S. Treasuries due in a decade fell three basis points to 1.53 percent. Rates on similar-maturity debt in Germany and Japan decreased by about one basis point to minus 0.08 percent and minus 0.10 percent, respectively.

On today's economic calendar, inflation, housing starts and industrial output data later in the day will provide more clues on the outlook for U.S. interest rates. The minutes from the Federal Reserve's July policy meeting, due on Wednesday, are also in focus. Although Fed officials have said a rate hike is possible by the end of year, investors are not convinced the Fed can raise rates this year given the fragile global economic outlook: U.S. December rate rise odds falls to 45% from 49% on Thursday.

Market Wrap

  • S&P 500 futures down less than 0.1% to 2185
  • Stoxx 600 down 0.2% to 345
  • FTSE 100 down less than 0.1% to 6936
  • DAX down 0.1% to 10725
  • German 10Yr yield down less than 1bp to -0.08%
  • Italian 10Yr yield up 1bp to 1.07%
  • Spanish 10Yr yield up less than 1bp to 0.94%
  • S&P GSCI Index up 0.5% to 361.3
  • MSCI Asia Pacific down 0.1% to 140
  • Nikkei 225 down 1.6% to 16597
  • Hang Seng down less than 0.1% to 22911
  • Shanghai Composite down 0.5% to 3110
  • S&P/ASX 200 down 0.1% to 5532
  • US 10-yr yield down 3bps to 1.53%
  • Dollar Index down 0.75% to 94.92
  • WTI Crude futures up 0.7% to $46.04
  • Brent Futures up 0.6% to $48.62
  • Gold spot up 0.7% to $1,349
  • Silver spot up 1% to $20.02

Top Global News

  • Dovish comments from Fed’s Williams point to signs the Fed is seriously contemplating a change in its current policy mix; Lockhart speaks today, while Bullard and Dudley are due later this week; Any similar comments from them may spur a meaningful repricing of Fed rate hike expectations, particularly further out the curve, before Yellen’s Aug. 26 Jackson Hole speech
  • Praxair, Linde Said to Be in Talks to Merge, WSJ Reports
  • Morgan Stanley Targeted by ValueAct as Core Activist Stake: Activist fund owns 2% of New York-based investment bank. Jeff Ubben’s fund disclosed stake in filing on Monday
  • Huntington’s FirstMerit Purchase Signals Faster Deals, CEO Says: Huntington closed on its biggest deal ever in 204 days. Steinour: Approval could spur more regional lenders to combine
  • Vivint Focusing on Sustainable Growth, Not Growth at All Costs: Blackstone-backed company canceled deal with SunEdison. Installer focused on being ‘best and the most disciplined’
  • Google Debuts New Chat App to Rival Skype, FaceTime: Introducing Duo. Google is trying to simplify a tangle of communication apps.
  • Cargill, Louis Dreyfus Halt Brazil Soy Plants as Margins Vanish: Too few soybeans to meet export commitments, needs of crushers. Profit also hurt as chicken producers buy less soy-based feed

Looking at regional markets, Asia failed to take the impetus from the latest US record close trifecta with the major regional indices in negative territory. Nikkei 225 (-1.3%) underperformed as a firmer JPY dampened investor sentiment, while ASX 200 (-0.1%) traded in a subdued fashion with participants cautious ahead of the expected release of the worst ever financial report from index heavyweight BHP Billiton after market. Chinese markets conformed to the lacklustre tone with choppy trade seen in the Hang Seng (-0.1%), while investors booked profits in the Shanghai Comp (-0.5%) after yesterday's stock connect-inspired outperformance. 10yr JGBs are higher as the lack of appetite for riskier assets spurred safe-haven flows into the paper, while today's JPY 400bIn enhanced liquidity auction was slightly disappointing with a lower than prior b/c. Chinese state council has approved the Shenzhen - Hong Kong stock connect. Note that this was widely in-fitting with weekend reports. RBA minutes from August 2nd meeting stated most recent data on prices and labour costs confirmed that domestic cost pressures had been subdued. The central bank reiterated that a rising AUD complicates an economic transition and sees inflation remaining around 1.5% over this year, before increasing to between 1.5%-2.0% by the end of its forecast period.

Top Asian News

  • Yen Rises Toward 100 as Dollar’s Funk Deepens on Fading Fed Bets: U.S. December rate rise odds falls to 45% from 49% on Thursday
  • Yuan’s Volatility Slides to 10-Month Low as Currency Steadies: Weekly ETF inflows to China, Hong Kong surge $605 million
  • China Plans Targeted Measures to Lift Hard-Hit Northeast Economy: NDRC plans 137 projects
  • RBA: On Balance, Prospects Would Be Improved by Aug. 2 Cut: There was room for stronger growth, which could be assisted by lower interest rates
  • BHP Reports Full-Year Profit Tumbles 81% on Prices Collapse: Biggest miner booked charges on shale unit, Brazil iron ore
  • Noble Group Gets Downgraded by Moody’s on Liquidity Outlook: Moody’s two-level cut contrasts with assessment from Fitch
  • Mizuho Said to Form Alliance With Maybank’s Kim Eng on Equities: Will provide research and execution for Southeast Asian stocks

In Europe, stocks have been subdued this morning, this comes German exporters are feeling the effects of a stronger EUR (+0.7%). The FTSE is currently the outperformer in terms of the European bourses, as mining names outperform with Antofagasta and BHP Billiton both reporting earnings. BHP Billiton posted a bigger than expected net loss but the underlying profit beat expectations and came in at USD 1.22bIn vs. Exp. USD 1.04bIn. The FTSE MIB underperforms after yesterday's break, but another reason for this may be due to PM Renzi asking Brussels asking for more time and more flexibility in regards to its banking reforms. In terms of fixed income markets Bunds are performing well up 24 ticks on session as fixed income is benefiting from risk off sentiment with no major supply from the Eurozone today.

Top European News

  • Offshore Wind Could Replace Hinkley Nuclear in U.K. at Same Cost: Britain would need 830 turbines to replace atomic plant. U.K. could install 5.7 gigawatts offshore for Hinkley costs
  • BHP Flags Price Freefall Over After Reporting Record Net Loss: BHP Billiton Ltd., the world’s biggest mining company, flagged it’s emerging from the worst commodities price collapse in a generation with renewed impetus after reporting a record full-year loss

In FX, the Bloomberg’s dollar index sank 0.8% while the yen strengthened 1.2 percent to 100.10 versus the greenback. The MSCI Emerging Markets Currency Index added 0.3 percent and has risen 1.9 percent this month. South Korea’s won led gains, appreciating 1 percent, its first increase in three trading sessions. Malaysia’s ringgit advanced 0.4 percent and South Africa’s rand strengthened 0.3 percent. The pound rose 0.9 percent to $1.2989, after a Monday close of $1.2880 that was the weakest since June 1985. Tuesday’s gain cut its loss this month to less than 2 percent.

In commodities, gold advanced 0.9 percent to $1,351.28 an ounce amid a decline in the dollar. Silver and platinum both added more than 1 percent. Oil gained, after erasing an earlier loss as the weakness in the dollar overtook speculation that the Organization of Petroleum Exporting Countries will struggle to agree any kind of limit on production next month. West Texas Intermediate crude advanced 0.7 percent to $46.04 a barrel and Brent gained 0.5 percent to $48.58. Nickel dropped 1.3 percent to $10,370 a metric ton after posting the biggest advance in more than two weeks on Monday. Copper advanced 1.2 percent.

There’s a fair bit of data to get through in the US this afternoon with the main event being the July CPI report. Market expectations there are for no change in the mom headline reading and a +0.2% mom pickup for the core. Also due out will be industrial and manufacturing production for July along with the latest capacity utilization reading, as well as last month’s housing starts and building permits data.

* * *

US Event Calendar

  • 8:30am: Housing Starts, July, est. 1.18m (prior 1.189m)
    • Housing Starts m/m, July, est. -0.8% (prior 4.8%)
    • Building Permits, July, est. 1.16m (prior 1.153m)
    • Building Permits m/m, July, est. 0.6% (prior 1.5%)
  • 8:30am: CPI m/m, July, est. 0.0% (prior 0.2%)
    • CPI Ex Food and Energy m/m, July, est. 0.2% (prior 0.2%)
    • CPI y/y, July, est. 0.9% (prior 1.0%)
    • CPI Ex Food and Energy y/y, July, est. 2.3% (prior 2.3%)
    • CPI Index NSA, July, est. 240.805 (prior 241.038)
    • CPI Core Index SA, July, est. 247.872 (prior 247.495)
    • Real Avg Weekly Earnings y/y, July, no est. (prior 1.2%)
  • 9:15am: Industrial Production m/m, July, est. 0.3% (prior 0.6%)
    • Capacity Utilization, July, est. 75.6% (prior 75.4%)
    • Manufacturing (SIC) Production, July, est. 0.3% (prior 0.4%)

Bulletin Headline Summary From RanSquawk and Bloomberg

  • European equities trade lower (albeit off worst levels) with a stronger EUR and downbeat session overnight weighing on price action
  • The USD-index remains soft today after breaking below 95.00 with GBP lent some support by slightly better than expected CPI data
  • Looking ahead, highlights include US CPI, US Industrial Production, API Crude Oil Inventory Report and NZ Employment Change
  • Treasuries higher in overnight trading while global equities selloff, WTI crude and gold rise; U.S. dollar index drops to lowest since June 23.
  • Central banks in developing economies are taking advantage of the biggest rally in their currencies since 2010, using stronger exchange rates to build up foreign reserves for the first time in two years
  • Japanese investors are paying the highest hedging costs since 2008 on foreign bond purchases, thwarting efforts by the central bank to spur overseas investment by boosting dollar supplies
  • The Bank of Japan, already a top-five owner of 81 companies in Japan’s Nikkei 225 Stock Average, is on course to become the No. 1 shareholder in 55 of those firms by the end of next year
  • A gauge of swings in China’s yuan fell to a 10-month low amid receding expectations of a central bank interest-rate cut, increased emerging-market inflows and bets policy makers will limit depreciation pressures
  • German investor confidence rebounded in August after the initial shock of Britain’s decision to leave the European Union
  • U.K. consumer-price growth picked up to 0.6% in July from 0.5% in June and there were signs of further price pressures with the weak pound leading to the biggest jump in import costs in more than four years
  • Big investment banks with their European headquarters in London will start the process of moving jobs from the U.K. within weeks of the government triggering Brexit, according to people briefed on the plans being drawn up by four of the biggest firms
  • Fed President John Williams argues that the level of interest rates that neither stimulates nor slows the economy has fallen. In the new low-natural rate environment, the Fed’s policy of targeting low inflation will no longer make sense

* * *

DB's Jim Reid concludes the overnight wrap

Yesterday was all about Oil really where more jawboning from OPEC members about potential output freezes helped to send WTI and Brent up +2.81% and +2.94% respectively. In fact that was the third consecutive daily gain of at least 2% for WTI and it means Oil is now up over 16% from the early August lows. After Saudi Arabia’s energy minister signalled that the country was open to measures to stabilize the market last week, yesterday Russia’s Energy Minister Alexander Novak said that Russia is also open to such talks with the WSJ also suggesting that the country is already consulting with Saudi Arabia and other countries. OPEC is scheduled to meet for an informal gathering late next month on the sidelines of an energy conference and at the moment the incentive appears to be there for producers to talk up some sort of potential action. Remember though that the market was left disappointed back in spring after similar jawboning.

A slightly softer US Dollar also helped Oil at the margin while gains for energy and financials stocks helped lead US equities to fresh all time highs again. Indeed the S&P 500 (+0.28%), Dow (+0.32%) and Nasdaq (+0.56%) all closed at record highs while markets in Europe finished little changed (Stoxx 600 -0.01%) with volumes a lot lower than usual given the public holiday impact. Credit markets were a touch stronger although the primary market in the US slowed down considerably following a strong past three weeks.

This morning in Asia bourses are generally struggling for any sort of traction, as Oil (-0.66%) pares some of yesterday’s and news flow continues to remain relatively light. Markets in Japan and China in particular are underperforming with the Nikkei and Shanghai Comp currently -1.15% and -0.52% respectively. The Hang Seng is little changed while the ASX is also -0.11%. Only the Kospi (+0.04%) is showing a gain this morning.

Moving on. Yesterday there was a bit of focus over at the Fed and specifically the San Francisco Fed President Williams. Seen as something of a centrist, he argued that central banks need to reassess prevailing policy frameworks and specifically those related to a low natural real rate of interest. Williams noted that ‘there is simply not enough room for central banks to cut interest rates in response to an economic downturn when both natural rates and inflation are very low’. He went on to say that a higher inflation target ‘would imply a higher average level of interest rates and thereby give monetary policy more room to manoeuvre’. Williams also called for changes to fiscal policy saying that such would allow ‘predictable, systematic adjustments of fiscal policy that support the economy during recessions and recoveries’. A reminder that next week we’ve got the Jackson Hole policy symposium.

Staying on the central bank theme, yesterday we got the latest corporate bond holdings data out of the ECB. The bank disclosed that it held €16.23bn of corporate bonds as of August 12th which implies net purchases settled last week of €1.25bn. That means the average daily run rate last week was €250m which is lower than the €353m average daily run rate since the program started. It’s the lowest weekly run rate so far but that shouldn’t be all that unsurprising given the current quiet time of year.

There wasn’t too much to report datawise yesterday with the only economic reports coming out from the other side of the pond. The headline August Empire Manufacturing reading was disappointing after printing at -4.2 (vs. +2.0 expected). That represented a fall of nearly 5pts from July and is the first negative reading since May. That said we did see some improvement in key sub-indices including new orders and the number of employees. The only other data out yesterday was the NAHB housing market index for this month which rose 2pts to 60 as expected.

Looking at today’s calendar, as we noted at the top the significant data out this morning is from the UK with the July inflation docket, while the latest Gilt reverse auction will also attract attention. Also due out will be the be the Euro area trade balance reading for June and the Germany ZEW survey reading for this month where expectations are for a modest pickup in both the current situations and expectations readings. There’s a fair bit of data to get through in the US this afternoon with the main event being the July CPI report. Market expectations there are for no change in the mom headline reading and a +0.2% mom pickup for the core. Also due out will be industrial and manufacturing production for July along with the latest capacity utilization reading, as well as last month’s housing starts and building permits data.