Global Stocks Slide, Futs Flat; Commodities Down On Stronger Dollar As Hike Odds Reprice Higher

The dollar index rose to a two-week high on Monday, while bond yields jumped to their highest since June and global stocks sold off after senior Federal Reserve officials indicated a U.S. interest rate increase was on the cards in the near term. The Fed effect - and the stronger dollar - reverberated through markets, pressuring stocks in Europe and emerging markets, pushing oil below $47 and the commodity complex lower.

In the past few months, the Fed has been swaying back and forth on whether to raise rates this year, keeping investors across the globe on tenterhooks. But on Friday, at the Fed's annual gathering for global central bankers in Jackson Hole, Wyoming, Fed Chair Janet Yellen gave one of the clearest indications that a rate hike was probably round the corner, Reuters reported.

As Bloomberg reports, stocks and currencies in developing economies sank to their lowest levels in at least three weeks after Federal Reserve officials once again spurred bets on a U.S. interest-rate increase in September. The Bloomberg Dollar Spot Index extended its biggest jump since June, while oil led declines in commodities. Japan’s Topix index of shares rose after central bank chief Haruhiko Kuroda reiterated a pledge to boost monetary stimulus if needed.

With hardly any rate hikes expected in 2016 just a few months ago, the prospect of a rate increase next month is now back on the table, with the probability rising to 42% from 22% in the space of a week.    December rate hike odds jumped to 65% after opening at 57% on Friday morning before Jackson Hole and Yellen and Fischer's comments.

Fed Chair Janet Yellen said Friday in Jackson Hole the case for an increase is getting stronger, while Vice Chairman Stanley Fischer indicated a tightening is possible at the next review. Those comments will sharpen the focus on U.S. data this week including consumer spending Monday and the monthly payrolls report Friday to gauge whether the economy is strong enough to sustain higher borrowing costs.

"Fischer confirmed the broad view on the Fed Open Market Committee that the economy has strengthened of late and that interest rates should be raised gradually; possibly again next month if this week's employment report supports a rate rise," said Stewart Richardson, chief investment officer at RMG Wealth Management.

“Declines today have a lot to do with the aftermath of Jackson Hole,” said Samy Chaar of Lombard Odier. “If they manage to raise rates that will be relatively good news but it does entail a little bit more tightening in the system.”

Oil dropped not only on the back of a stronger dollar, but amid newly rising doubts producers will agree on deal to stabilize market when suppliers meet next month for informal talks. As we reported on Friday, Iran’s plan to continue boosting crude output until it regains pre-sanctions OPEC market share is dimming prospects of collective action, according to Patrick Allman-Ward, CEO of Dana Gas. “The likelihood of them actually agreeing to some kind of production freeze is relatively low,” Daniel Hynes, senior commodity strategist at ANZ Bank says in Bloomberg TV interview. “It’s certainly been so far a successful jawboning exercise."

In equities, Asian stocks outside Japan fell after Fed’s Yellen said the case for raising interest rates is getting stronger; shares in Tokyo rallied as the yen weakened and the Bank of Japan’s governor vowed to add stimulus if needed “There will be some mild pressure on markets,” Michael McCarthy, chief market strategist in Sydney at CMC Markets, said by phone. “The Fed remains very much data dependent, and that gives you the next hurdle for global markets which is the U.S. non-farm payrolls on Friday. That now becomes crucial to the near-term direction of markets” 8 out of 10 sectors decline with consumer staples, utilities underperforming and consumer discretionary outperforming. Japan's Nikkei bucked the trend in Asia, closing 2.3 percent higher, the biggest one-day gain in three weeks, as the yen weakened against the resurgent dollar.

In Europe, the Stoxx Europe 600 Index retreated 0.5 percent in early trading, down for the second session in three. A gauge of auto makers posted the biggest decline, while sliding oil prices dragged energy producers lower. The volume of shares changing hands today was 66 percent lower than the 30-day average as U.K. markets closed for a holiday. European equities have oscillated between weekly gains and losses all month, with the Stoxx 600 trading in a tight range and struggling to find a direction after a rebound of as much as 12 percent following the aftermath of Britain’s secession vote.

“Declines today have a lot to do with the aftermath of Jackson Hole and raised expectations of a rate hike this year, so that leads to a bit of adjustment in the market,” said Samy Chaar, a Geneva-based strategist at Lombard Odier, which manages about $170b. “If they manage to raise rates, that will be relatively good news but it does entail a little bit more tightening in the system.”

The dollar rose 0.5 percent to a three-week high of 102.39. That followed gains of 1.3 percent on Friday, its biggest one-day advance in almost seven weeks. The dollar index was up at 95.724 its highest in two weeks. Japanese stocks advanced as a weaker yen boosted the outlook for exporters. The Topix index climbed 2 percent as Toyota Motor Corp. and Mazda Motor Corp. jumped at least 4 percent.

Germany’s benchmark 10-year bund yield increased as much as four basis points to minus 0.035 percent, before being one basis point higher at minus 0.062 percent. The yield on similar-maturity French bonds was one basis point higher at 0.18 percent, having jumped earlier by four basis points. Euro-area bonds are also coming under pressure with Spain’s acting Prime Minister Mariano Rajoy set to face a confidence vote Tuesday, and governments set to reissue debt after a summer lull that saw Germany the sole issuer last week. Countries in the region may sell about €30 billion this week, according to Commerzbank AG.

Market Snapshot

  • S&P 500 futures down less than 0.1% to 2168
  • Stoxx 600 down 0.3% to 343
  • DAX down 0.7% to 10515
  • German 10Yr yield up 2bps to -0.06%
  • Italian 10Yr yield up less than 1bp to 1.14%
  • Spanish 10Yr yield up less than 1bp to 0.95%
  • S&P GSCI Index down 0.8% to 360
  • MSCI Asia Pacific down 0.3% to 138
  • Nikkei 225 up 2.3% to 16737
  • Hang Seng down 0.4% to 22821
  • Shanghai Composite down less than 0.1% to 3070
  • S&P/ASX 200 down 0.8% to 5469
  • US 10-yr yield down 2bps to 1.61%
  • Dollar Index up 0.04% to 95.6
  • WTI Crude futures down 1.3% to $47.03
  • Brent Futures down 1.3% to $49.27
  • Gold spot down 0.1% to $1,320
  • Silver spot down 0.5% to $18.57

Top Global Headlines

  • Central Bankers Spurn Call for Radical Approach at Jackson Hole: Fed’s Yellen says more activist measures not being considered; BOJ, ECB ready to ease further if fiscal action falls short; Draghi Silence Puts Numbers in Spotlight Ahead of ECB Meeting
  • Fiat Chrysler CEO Calls Samsung a Potential Strategic Partner: Marchionne says Magneti Marelli parts unit has several suitors
  • GCL-Poly to Buy SunEdison’s Solar Materials Business for $150m; D.E. Shaw Said to Mull Bid for SunEdison’s TerraForm Stake: Reuters
  • Amazon Said to Be Near to Introducing Music Streaming, FT Says: Amazon may introduce subscription music streaming service as soon as next month
  • Icahn Buys More Herbalife, Denying Claim He’s Selling Stake: Icahn says he acquired 2.3 million additional Herbalife shares
  • Prada Shares Surge as Chairman Forecasts Improvement in 2017: forecasts co. will return to growth in sales and earnings next year, helped by cost-cutting and online expansion in Asia
  • GM, Ford, Fiat Workers Authorize Unifor to Start Strike Action
  • ‘Don’t Breathe,’ Sony’s $10 Million Horror Film, Opens at No. 1

Looking at regional markets, Asia stocks began the week mostly lower following a similar close in the US on Friday amid hawkish Fed commentary at the Jackson Hole symposium. ASX 200 (-0.8%) declined by around 1%, while Chinese markets were weighed by earnings from AgBank and Sinopec. However, Shanghai Comp. later recovered off its lows as the largest increase to Industrial Profits in 4 months helped stem losses. Nikkei 225 (+2.3%) advanced over 2% on JPY weakness and after BoJ Governor Kuroda stated that there is still ample room to ease including cutting rates deeper into negative territory. 10yr JGBs were higher despite the upbeat tone in Japanese stocks amid the dovish comments from BoJ's Kuroda, while the central bank was also in the market under its massive buying program.BoJ Governor Kuroda said the central bank has ample room for further monetary easing and reiterated the BoJ could reduce interest rates deeper into negative territory.  The Shenzhen Stock Exchange has called on securities firms to finalise all preparation work for the Shenzhen-Hong Kong Stock Connect program by early November. Chinese industrial profits rose by 11% to CNY 523b1n in July, which was the fastest pace of growth in 4 months.

Asia Top News

  • China Stock Traders Feel Heat With 774 Probes in Two Months: exchanges intensify scrutiny of unusual market movements
  • BOJ May Prefer to Fund Rail, Sewers Over Helicopter Money: analysts see BOJ buying bonds in local govts., public corps
  • Yuan Trades Near Five-Week Low as Fed Signals Renew Pressure: PBOC’s fixing suggests it will defend currency, Natixis says
  • Typhoon Lionrock Set to Hit Japan, Prompting Early Abe Return: cyclone “large” and “very strong”
  • Rupee Bulls See Patel Surviving $20 Billion Outflow Baptism: Standard Chartered predicts rupee to rise to 66.25 by year- end
  • Hong Kong Stocks Decline as Fed Bets Sink Property Developers: currency peg makes Hong Kong vulnerable to Fed rates
  • Carlsberg, Heineken Fight for Vietnam’s Thriving Beer Market: Vietnam’s young beer-drinking culture beckons foreign brands
  • Most of China’s Electric-Car Startups Face Wipeout by New Rules: govt may limit makers to 10
  • Billionaire Packer Cuts Crown Resorts Stake in $338 Million Sale: sale part of ‘financing and capital management strategy’

European equities trade modestly in the red amid broad based losses, with much of the price action dictated by the stronger dollar after Jackson Hole in which hawkish commentary from Fed Vice Chair Fischer boosted rate hike expectations. Newsflow has been particularly quiet with UK participants away due to the bank holiday, while focus on the economic schedule is for the release of the US PCE figures at 1330BST. Bunds saw an initial spike lower by around 40 ticks after the Eurex open, before quickly retracing, with much of the price action stemming from the moves seen in T-notes on Friday which were hampered by the aforementioned hawkish commentary from Fed Vice Chair Fischer in which he stated that a rate hike or rate hikes may be possible this year. Additionally, the soft tone in Europe has led to Bunds paring some of its losses with prices breaking back above 167.00 while some of the moves could be somewhat exacerbated by the thin volumes given the UK bank holiday. Greece PM Tsipras is calling for Greece's International creditors to honour pledges and implement specific measures by the end of 2016 to make the Greek debt load sustainable and support economic recovery.  Spain's interim Prime Minister Rajoy has won support from the Centrist Party which will provide his party with 170 seats compared to 176 seats needed before this week's parliamentary confidence vote. UK PM May will begin drawing up Britain's blueprint for Brexit this week, with her cabinet split over the terms of European Union withdrawal. Senior Tories say UK Chancellor Hammond is resisting plans by other ministers to pull out of the EU single market.

European Top News

  • Statoil Trims $2.9b Off Sverdrup Cost as Output Boosted: sees output of 440,000 barrels a day in first phase; says total project investment could be as low as $17b
  • Italy Manufacturing, Consumer Trust Fall on Stagnant Economy: manufacturing gauge falls to the lowest since early 2015; Italy grappling with fallout from earthquake last week
  • UniCredit Rises, Driven by Pekao; Valuation, Sale in Spotlight: FT reported Aug. 28 Poland’s PZU confident of reaching Bank Pekao pact in Oct.
  • SCA Turned Down Bid for Forestry Part of Business, DN Reports: co. received bid for forestry part of business but declined it and decided to move forward with split instead

In FX, the Bloomberg Dollar Spot Index gained 0.2 percent, after surging 0.8 percent on Friday. The yen fell 0.4 percent, after sliding 1.3 percent in the last session, and the euro fell to a two-week low. The pound weakened 0.3 percent. The MSCI Emerging Markets Currency Index fell 0.7 percent, led by a 1 percent slide in South Korea’s won. Most of the central banks that are tracked by Bloomberg in both Asia and Europe have cut interest rates this year. South Africa’s rand weakened 0.4 percent, after a 5.9 percent weekly loss. The currency posted its steepest slide of the year last week on concern that a stand-off between South African Finance Minister Pravin Gordhan and the country’s police could lead to Gordhan’s ouster.

In commodities, the Bloomberg Commodity Index is down a fourth day, trimming a monthly advance as oil and precious metals fell. West Texas Intermediate crude slid 1.5 percent to $46.95 a barrel amid doubts producers will agree on a deal to stabilize the market when suppliers meet next month for informal talks. A similar proposal was made in February, but a meeting in April ended with no final accord. “The likelihood of them actually agreeing to some kind of production freeze is relatively low,” Daniel Hynes, a senior commodity strategist at Australia & New Zealand Banking Group Ltd. in Sydney, said in a Bloomberg television interview. Gold extended its longest losing run since May to a 7th day, falling as much as 0.5 percent after losing 1.5 percent last week. Silver touched the lowest price in almost two months.

On today's calendar in the US there’s important releases however with the July personal income and spending reports, along with the PCE core and deflator readings. Later on we’ll also get the Dallas Fed’s manufacturing survey.

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Bulletin Headline Summary from RanSquawk and Bloomberg

  • European equities trade lower as participants digest the fallout of the hawkish Fed rhetoric from the Jackson Hole Symposium
  • Subsequently, the USD remains firm against its major counterparts with USD/JPY back above 102.00
  • Looking ahead, highlights include US Personal Income & Core PCE Price Index, UK markets are closed for a Bank Holiday
  • Treasuries rise during overnight trading while global sovereigns, equities, commodities fall; USTs opened weaker in Tokyo, was met with “decent buying from the lows” by banks, asset managers, Seaport Global managing director Tom di Galoma said in note.
  • Federal Reserve Chair Janet Yellen’s speech Friday was hawkish enough for Goldman Sachs to boost the odds of a September interest-rate increase, while Pimco said there was nothing of note in her remarks
  • After five weeks of silence, the ECB President Mario Draghi is leaving it largely to a raft of economic data to fine- tune policy expectations ahead of the Governing Council’s next meeting on Sept. 8
  • The BOJ could announce a “massive stimulus program” as the nation seeks to reach a 2 percent inflation target, according to UBS Wealth Management; Forget helicopter money. The Bank of Japan might next target financing a bit closer to the ground -- trains, hospitals, power plants and sewers
  • Direct Match Holdings Inc., which aimed to be an alternative to bank dominance in the $13 trillion U.S. Treasury market, died before it arranged even one trade
  • Norway’s $890 billion sovereign wealth fund is acknowledging that rising withdrawals by the government could hamper its quest to manage more risk and generate greater returns as it takes on more and more negative yielding securities

US Event Calendar

  • 8:30am: Personal Income, July, est. 0.4% (prior 0.2%)
  • 8:30am Personal Spending, July, est. 0.3% (prior 0.4%)
  • 10:30am: Dallas Fed Manufacturing Activity, Aug., est. -3 (prior -1.3)

DB's Jim Reid concludes the overnight wrap

Given how dull this month had been even by historical August standards, it wasn’t going to take much from Jackson Hole to make markets exciting again. Our concern leading into Yellen’s speech was that she had not traditionally used the event as a vehicle to focus on policy guidance. Well the actual content that Yellen did provide on Friday afternoon was fairly bland, instead choosing to largely focus on past policy tools and mechanics. That being said, Yellen did provide the important assist to her Vice-Chair Fischer which had markets quickly scrambling to firm up tightening expectations.

Headlines were initially dominated by Yellen’s mention that the ‘rate hike case had strengthened in recent months’ given the continued solid performance of the labour market and also the Fed’s outlook for economic activity and inflation. As usual this was also balanced with the careful consideration of any decision depending ‘on the degree to which incoming data continues to confirm the Committee’s outlook’. Aside from that there were only really two other interesting components of her speech. The Fed Chair implicitly talked down the significance of the academic paper in which some observers had suggested changing the Fed’s inflation target. She also made a special mention of acknowledging the productivity problem which had been addressed by some of her colleagues recently.

If markets were a bit unsure as to how to react to Yellen’s comments, Fed Vice-Chair Fischer’s interview with CNBC quickly resolved that. When asked if we should be on the edge of our seats for a rate hike as soon as September and more than one hike this year, he answered ‘what the Chair said today was consistent with answering ‘yes’ to both of your questions’, before again going on to stress that the Fed remains data dependent. The comments finally got Treasuries moving with the 2y yield, which had traded as low as 0.762% intraday, rising nearly 8bps to close at 0.843% and the highest since June 2nd. The 10y yield also ended up nearly 6bps higher by the close at 1.630% while the USD index rallied +0.84% on the day but had an intraday range of 1.43%. Risk assets weakened with the S&P 500 closing -0.16% but had the biggest high-to-low daily range (1.28%) since July 6th. Most notably, the probability of a Fed rate hike in September rose to 42% from 32% the day prior, while December is now at 65% from 57%.

It wasn’t just the Fed that was in focus over the weekend with many eyes also on the BoJ’s Kuroda. Speaking on Saturday, the BoJ Governor said that the Bank would ‘not hesitate to boost monetary stimulus if needed’ and that ‘there is no doubt that there is ample space for additional easing in each of the three dimensions’. He went on to say that ‘the bank will carefully consider how to make the best use of the policy scheme in order to achieve the price stability target’. A reminder that the BoJ next meet on the 20th and 21st September, which happens to also be the same days that the FOMC next meet.

Glancing at markets this morning the most notable moves have unsurprisingly come in Japan and particularly in equity markets where the Nikkei and Topix are currently +2.42% and +2.17% respectively. The Yen (-0.41%) is weaker while longer dated JGB yields have risen a few basis points. In other regional markets it’s a much more mixed start to the week. China bourses are a touch firmer (Shanghai Comp +0.10%) however the Hang Seng (-0.29%), Kospi (-0.21%) and ASX (-1.09%) are all in the red. Emerging market currencies are under pressure, albeit modestly so, while WTI (-1.15%) and Gold (-0.30%) have continued to pullback.

Moving on. With the common denominator from Fed speakers on Friday and the weekend being one of the Fed still very much data dependent, this week’s packed diary should keep things interesting. As you’ll see in the week ahead at the end the highlight is this Friday when we get the August employment report and the important payrolls print where market expectations are currently sitting at 180k (vs. 255k in July). We’ll have a full preview of that closer to Friday. It’s also worth highlighting though that we’ll get the personal income and spending report, consumer confidence, ISM services and manufacturing readings and also trade data this week. So plenty to get through and there’s also some more Fedspeak for us to digest which should keep us busy.

While we’re on the subject of data, on Friday we got the second reading of Q2 GDP in the US which didn’t offer any surprises after being revised down one-tenth to +1.1% qoq, in line with the consensus. A big focus was on the corporate profits data and as expected it was weak. Corporate profits declined -1.2% qoq in Q2 and are now -4.9% yoy which is the fifth consecutive decline and the worst such streak since mid-2009. As our US economists previously noted the danger is that this could eventually weigh on employment and wage growth so it’s worth keeping an eye on.

Also released in the US on Friday was the advance goods trade balance reading which revealed a narrowing in the deficit to $59.3bn from $64.5bn owing to a +2.4% mom increase in exports. Elsewhere wholesale inventories (0.0% mom vs. +0.1% mom expected) were unchanged in July and the final headline reading for the University of Michigan consumer sentiment reading in August was revised down 0.6pts to 89.8 (vs. 90.8 expected). The expectations index was however revised up to 107.0 (+0.9pts) although that is still a full 2pts below where it was in July.

Prior to all this in Europe consumer confidence reports in both Germany (+0.2pts to 10.2) and France (+1pt to 97) rose unexpectedly. Meanwhile the UK and France confirmed growth of +0.6% qoq and 0.0% qoq respectively in Q2 while the ECB reported a surprising slowdown in the rate of M3 growth to +4.8% yoy last month from +5.0%. For completeness European equities nudged up on Friday (Stoxx 600 +0.50%) although this failed to capture the fallout from Fischer’s comments just after markets closed.

Away from the data we’re due to hear from the Fed’s Rosengren, Evans and Kashkari on Wednesday, Mester on Thursday and then Lacker on Friday. The ECB’s Villeroy will also speak on Wednesday. It’s worth also keeping an eye on Spain’s confidence vote this week on Wednesday for PM Rajoy with a possible second vote scheduled for Friday.