Eclipse Day Begins With S&P Futures Flat While Industrial Metals Soar

As the US awaits its first full solar eclipse since 1918, S&P500 futures, together with Asian and European stocks started off the week off fractionally in the red after the cash index fell to its lowest level in five weeks on Friday, with the "Bannon rally" fading on growing concerns about the US political situation, while tensions ratcheted up again as the US and South Korea began massive military drills and North Korea responded, threatening a “merciless strike” on the US. Markets are looking ahead to this week's Jackson Hole symposium where Mario Draghi may or may not pre-announce the start of ECB balance sheet tapering.

With overnight markets doing little of note, a quick preview of today's main event: the full solar eclipse which is the first such event to cross the contiguous United States since 1918. Of the main financial centres there will be a partial eclipse in New York (c70%), Boston (c63%), Chicago (c86%) and LA (c61%). To celebrate, Royal Caribbean's week long "total-eclipse" cruise offers passengers get the best opportunity to see the event at sea, while Bonnie Tyler has been hired to perform her 1983 classic "Total Eclipse of the Heart" while the skies darken.

Meanwhile, as the US waits to fade to darkness, world stocks struggled at a five and a half week low on Monday, though metals surged in Chinese trading with zinc at its highest in a decade, copper hitting a nearly three-year high and iron ore's gains in the last two sessions stretching to 5 percent.

The dollar was little changed after rising from a four-month low against the yen Friday, as speculation the currency will get a boost from the Steve Bannon’s exit from the White House was offset by concern about the joint military drill in South Korea. The USD/JPY dipped in European trade, holding above a four- month low reached on Friday. Trading was muted and bids for the dollar were limited amid concerns about a new North Korean escalation/provocation/retaliation and as traders await the start of Jackson Hole, which begins Thursday.

“Arguably Bannon’s departure was more about egos than policy change, but markets seem to have opted for the hopeful narrative that it is a step away from protectionist trade policies,” said Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney. “If so, this would reduce trade tensions and limit safe haven flows into the yen.”

South Korea’s won led modest gains in Asian emerging-market currencies as the MSCI EM Asia Index of stocks resumed its advance. Government bonds were mixed after a rally in U.S. Treasury yields reversed. The Bloomberg Dollar Spot Index and the yen rose. Caution before the Jackson Hole symposium late in the week means that “gains in Asian emerging currencies may be opportunistic and shallow rather than driven by conviction,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank in Singapore.

The Topix index slid 0.1% with volume was about 16 percent below the 30-day intraday average, while the Nikkei 225 lost 0.4% as banks and technology companies weighed on the gauges after yen’s three-day ascent against the dollar. Australia’s S&P/ASX 200 Index dropped 0.4 percent, with BlueScope Steel Ltd. tumbling as much as 23 percent after the company reported disappointing earnings. Hong Kong’s Hang Seng Index added 0.4 percent and the Shanghai Composite Index was up 0.6 percent. The MSCI Asia Pacific Index slid 0.1 percent.

European stocks fell for a third session, though M&A activity helped shipping giant Maersk jump and the rally in metals sent Rio Tinto, BHP Billiton and Anglo American higher. The Stoxx Europe 600 Index fell 0.1 percent in early European trading. The MSCI All-Country World Index declined 0.1 percent to the lowest in almost five weeks on a closing basis. Germany’s DAX Index tumbled 0.4 percent. The U.K.’s FTSE 100 Index dipped 0.2 percent. The MSCI Emerging Market Index jumped 0.2 percent.  Futures on the S&P 500 Index decreased 0.1 percent to the lowest in more than five weeks.

While global stocks started the week generally on the backfoot, the same can not be said for industrial metals with zinc surging to the highest level since October 2007 at $3,180.50 a tonne, "Dr. Copper" rallied to $6,593 a tonne, its highest since November 2014, and nickel, used in stainless steel, gained over 2 percent to a 2017 peak.

Iron ore futures soared 6.6% before Dalian Commidity Exchange imposed a daily purchases and sales limit for Jan & Feb delivery to 6000 lots.

"I'm looking at the prospect for the global economy and looking at the price of metals and there seems to be a significant disconnect between the two," said CMC markets strategist Michael Hewson. "But it's certainly helping the mining sector, which has been beleaguered for quite some time."

In addition to (geo)political tensions, and worries about the looming debt ceiling negotiation, Fed Chair Janet Yellen and ECB President Mario Draghi will be among the officials addressing this year’s annual conference hosted by the Kansas City Fed. The Jackson Hole summit comes as central banks in advanced economies grapple with ending years of unprecedented monetary easing, even as stubbornly tepid inflation clouds the outlook.

“The key event this week is the Jackson Hole central bank policy forum which begins on Thursday,” Citigroup strategists including Peter Goves wrote in a note to clients. “The market spotlight will likely focus on Yellen, given the generally low U.S. inflation environment and the likelihood of Fed balance sheet reduction occurring relatively soon.” As the following Bloomberg chart shows, traders are starting to hedge for potential Jackson Hole-induced volatility with one-week EURUSD implied-realized vol premium rising rapidly.

Comments last week from Fed officials suggested the stock market's steady rise, still low long-term bond yields and a sagging dollar are strengthening the Fed's intent to raise interest rates again this year despite caution about weak inflation.

"People focus on inflation but in the Fed's minutes policymakers spend a lot of time discussing whether bond yields are too low or asset prices are too high. If Yellen questions market stability, markets will expect a tighter policy," said Hiroko Iwaki, senior bond strategist at Mizuho Securities.

Oil markets steadied after big gains on Friday, which were triggered by a drop in crude inventories. WTI traded at $48.46 per barrel, down 0.1 percent, while Brent futures were down 0.2 percent at $52.63 per barrel.

In rates, the 10Y U.S. Treasuries yield stood at 2.19%, having slipped on Friday to 2.162% - its lowest since late June. German Bunds were steady at 0.4 percent. Greece's government bond yields dipped early after Fitch became the second ratings agency to upgrade it to "Single B" status, marking another milestone in the debt-laden state's slow journey away from default territory.

Market Snapshot

  • S&P 500 futures up 0.1% to 2,427
  • STOXX Europe 600 unchanged at 373.30
  • MXAP down 0.1% to 159.04
  • MXAPJ up 0.03% to 523.33
  • Nikkei down 0.4% to 19,393.13
  • Topix down 0.1% to 1,595.19
  • Hang Seng Index up 0.4% to 27,154.68
  • Shanghai Composite up 0.6% to 3,286.91
  • Sensex down 0.6% to 31,351.93
  • Australia S&P/ASX 200 down 0.4% to 5,725.85
  • Kospi down 0.1% to 2,355.00
  • Brent futures down 0.2% to $52.62/bbl
  • Gold spot up 0.3% to $1,288.47
  • U.S. Dollar Index up 0.1% to 93.51
  • German 10Y yield fell 1.2 bps to 0.402%
  • Euro down 0.1% to $1.1746
  • Italian 10Y yield rose 0.4 bps to 1.741%
  • Spanish 10Y yield fell 3.0 bps to 1.531%

Top Overnight News

  • Donald Trump returns to the Oval Office in danger of becoming increasingly isolated from the Republican establishment he needs to enact his agenda and the grassroots activists inspired by just-departed chief strategist Stephen Bannon
  • U.S. utility owner Sempra Energy has agreed to buy control of Texas power distributor Oncor Electric Delivery Co. for $9.45 billion, topping a bid by Warren Buffett’s Berkshire Hathaway Inc. just last month
  • As the world’s top central bankers gather in Wyoming this week, their relief about a stronger global economy will be tempered by a growing unease that inflation remains inexplicably low
  • ADP’s board voted unanimously not to nominate any of Pershing Square Capital Management’s three candidates for election to the board at ADP’s 2017 annual meeting of stockholders
  • Goldman Sachs, seeking a rebound in its commodities business after a bout of losing trades dented earnings, has a plan built around hiring fresh stars and luring new clients
  • Money managers pushed their net-bullish bets on gold to the highest since October, and investments through exchange-traded funds also jumped, as investors seek insurance amid concern political uncertainty will derail U.S. economic growth
  • Financial regulators should increase coordination and step up punishment for violators to crack down on regulatory arbitrage, PBOC Vice Governor Yin Yong said at a forum on Saturday
  • U.S. Trade Representative Robert Lighthizer officially starts a probe into China’s intellectual-property practices
  • China’s not running a trade surplus with every nation; South Korea’s $72.2 billion excess with Asia’s largest economy tops a list of more than 40 nations that export more to the country than they import from it, followed by Switzerland and Australia, data compiled by Bloomberg show
  • Total Chases Growth With $5 Billion Purchase of Maersk Oil
  • Sempra Bests Berkshire With $9.45 Billion Offer for Oncor
  • Unintended Consequences of MiFID: Job Losses, Trading Turmoil?
  • Yellen, Draghi Head to Jackson Hole With Prices Missing Goal
  • Ten Sailors Missing After U.S. Warship Crash Near Singapore
  • Trump Struggles to Move Past Bannon, Starting With Afghanistan
  • China Expresses ‘Strong Dissatisfaction’ With U.S. Trade Probe
  • Britain and EU Clash Over Brexit Timetable for Trade Deal

Asian equity markets traded mostly lower with the Nikkei 225 down by 0.4% amid geopolitical tensions on the Korean peninsula. Tensions ratcheted up again as the US and South Korea were set to begin military drills. North Korea responded, threatening a "merciless strike" on the US. Nevertheless, the Kospi was relatively resilient, trading lower by just 0.14%. The ASX 200 (-0.37%) had conformed to the downbeat tone in Asia however had been driven by some major earnings throughout the majority of the session with Fortescue Metals rising over 6% after doubling their dividend. Chinese markets were higher, lifted by the telecoms sector after China Unicom confirmed a share placement to tech titans Alibaba, Tencent and Baidu. JGBs traded marginally higher after the break, after initially trading sideways for much of the morning. Some were pinning the late uptick to JPY 3.13fin of T-bill redemptions on Monday, one of only two lots of redemptions at all in August. BoJ Governor Kuroda said the Balls commitment to achieving the price goal as early as possible remains unchanged.

Top Asian News

  • Qatar Is Said to Tell Banks to Seek Overseas Funding Amid Spat
  • Asian Central Banks Lean on Wide Mandates as Fed Eyes Tightening
  • China Overseas Land in Talks on Potential M&A Opportunities: CEO
  • Hermina Hospital Is Said to Pick Arrangers for $200 Million IPO
  • Missiles in Golf Course Hurt Lotte in China as It Plans Bonds
  • Marchionne’s Fiat Review Spurs Great Wall Interest in Jeep Brand
  • Iron Ore Will Hold in $70s, RBC Says in a Challenge to Bears
  • Fortescue Finds It Hard to Escape Junk Ratings Despite Debt Cuts

European bourses trading with minor losses this morning with the Euro Stoxx 50 slipping 0.3%. All sectors trading in the red with financials the notable laggard this morning, BNP shares trading lower by 1.6% amid reports that Belgium could place more shares in the bank. Elsewhere, Fiat Chrysler shares are outperforming after Great Wall Motor announced that they are engaged with talks over a possible offer. Investors paying a close eye on Greek bonds this morning with yields initially edging lower after Fitch upgraded Greece to B- from CCC; outlook positive. DBRS confirmed Ireland at A (high), stable trend and confirmed Belgium at AA (high) , stable trend. German finance ministry says monthly data suggests further economic expansion; emissions scandal is a medium term risk to the economy.

Top European News

  • Rosneft, Trafigura Seal $12.9 Billion Deal for India’s Essar Oil
  • Shell Is Said to Mull Buying Israel, Cyprus Gas for Egypt Plant
  • Goldman Warns Euro Gains May Be Russian Bonds’ Achilles Heel
  • Big Data Convert Channels Big Brother to Take Russia’s Pulse
  • Bunds Underpinned as Risk Assets Suffer; Demand in UST Futures
  • Global Ports Holding Plunges After 1H Loss on Turkish Ports
  • Pound Vulnerable as U.K. Prepares to Provide Brexit Plan Details

In currencies, it has been a calm start to the week given the quiet newsflow thus far, the greenback up marginally by 0.1% to remain within close proximity to 93.50. USD also unfazed by North Korean anger at South Korean and US forces beginning military exercises. EUR slightly offered this morning ahead of the main risk event in which Draghi is set to speak at the Jackson Hole Symposium later this week, as such positioning for this could see EUR longs reduced. As a reminder, source reports last week indicated that Draghi was set to stick to his dovish stance, which could weigh on EUR/USD. Influence of today's option expiries could grow with 720m1n and 918mln set to roll off at 1.1700 and 1.1795-118.00. JPY firmer across the board with equities taking a slight dip this morning, USD/JPY now tripping below 109.00 to hover around intra-day lows. More US political concerns with regards Trump's administration could continue to send USD/JPY lower with a possible move towards the YTD low at 108.11.

In commodities, oil prices are slightly softer this morning, however do remain at elevated levels following a fall in the Baker Hughes rig count on Friday. Focus will shift towards the joint OPEC-Non-OPEC technical committee which is set to convene today. Libya's Sharara oil field (280K bpd) has been closed since Saturday because of a pipeline blockade, according to sources. Libya has declared a force majeure on loadings of Sharara crude from the Zawia terminal. Russian Energy Minister Novak said it is important that OPEC and non-OPEC members honor the oil production commitments they have made

US Event Calendar

  • 8:30am: Chicago Fed Nat Activity Index, est. 0.1, prior 0.1

DB's Jim Reid concludes the overnight wrap

Good luck if you're in the US today as a rare chance to see a total eclipse beckons. Apparently this is the first such event to cross the contiguous United States since 1918. Of the main financial centres there will be a partial eclipse in New York (c70%), Boston (c63%), Chicago (c86%) and LA (c61%). If it wasn't for the fact that I'm on call to rush to the hospital at any point in the next week I'd be sorely tempted by the Royal Caribbean's week long "total-eclipse" cruise where passengers get the best opportunity to see the event at sea. The coup de grâce though is that Bonnie Tyler has been hired to perform her 1983 classic "Total Eclipse of the Heart" while the skies darken. What could be more perfect?

In case my wife gives birth a few days early I googled what it means to be born under an eclipse and as usual the internet is a feast of information. Apparently Mr Trump was born under a South Node Lunar eclipse in Sagittarius. There was then a whole article about how this has impacted his personality and leadership skills. Anyway apparently babies born under solar eclipses are natural born leaders so if I get the call today I'll be earmarking them to be the first joint Prime Ministers of the UK in say 40 years time! Be warned! My wife is now under strict observations every two days with a view that the consultant might want to pull the trigger at any moment. We have a hard long stop of next Tuesday as the consultant thinks there are risks of going further than 36 weeks given all the variables and her interpretations of our regular check-ups. Fingers crossed it’s a safe and successful week. My wife and I are both bags of nerves!!

There might be a few less nerves about the next few days in markets than many felt a few weeks ago. Back then, Thursday's commencement of the annual Jackson Hole Symposium seemed to be a natural place for Mr Draghi to signal that exit from QE was soon to be accelerated. However a combination of still soft global inflation data and the Euro's recent ascent has made it unlikely that the event will be a watershed moment. Expect him to be upbeat on the economy but the hawkish/dovishness indicator might be swayed one way or the other on how much attention the Euro gets in his remarks. Draghi is expected to speak in the afternoon on the 25th August, with remarks focusing on the themes of the conference. Before then, don't relax until the summit opens as Mr Draghi is warming up for the trip by speaking at the Lindau  economics symposium in Germany on 23 August and as such he could front run himself! So two symposiums back to back! Impressive stuff.

Our Fixed Income Strategists now actually think that the Fed could be more important at Jackson Hole. The running theme of this year’s symposium is “Fostering a Dynamic Global Economy” and the full line up of speakers and presentations will be released at 4PM EST on Thursday. It seems that Mrs Yellen will be speaking Friday morning at 10AM EST on financial stability. Our strategists noted that in the US there is a  tension between softer inflation and easy financial conditions and given the topic of Yellen's speech is 'financial stability' she may lean towards prioritising one side or the other. Overall the market will probably be most sensitive as to whether a December hike is more or less likely after her comments. The imminent halting of reinvestment seems to be considered a fine deal.

This morning in Asia, markets have broadly softened following leads from the US on Friday. Trading volumes are thin, with the Nikkei (-0.41%) and Kospi (-0.10%) slightly down, but Hang Seng (+0.52%) and the Chinese bourses were up c0.3% as we type. We have long planned joint South Korean-US military drills today but it's remarkable how quickly the North Korean situation has calmed down but also quite interesting that markets still closed notably lower last week.

Indeed US equities were initially higher on Friday on reports that President Trump’s controversial Chief strategist, Steve Bannon had resigned, but ended the day slightly down, with the S&P (-0.18%), the Dow (-0.35%) and the Nasdaq (-0.09%). Within the S&P, the utilities and energy (+0.57%) sector posted modest gains, but was broadly offset by losses in real estate, telcos and discretionary consumers names. European markets were also lower, with the Stoxx 600 down 0.71% with all sectors in the red, led by the real estate (-1.25%) sector. Elsewhere, the Dax (-0.31%) and FTSE (-0.86%) declined modestly, but the Italian FTSE MIB bucked the trend, to be up +0.12%.

Over in government bonds, yields were mixed but little changed. The UST 10y increased 1bp across the curve (2Y: +1bp; 10Y: +1bps), but core European bond yields fell 1bp at the longer end of the curve, with  bunds (2Y: +0.3bp; 10Y: -1bps) and French OATs (2Y: -0.4bp; 10Y: -1bp), but Gilts (2Y: +1bp; 10Y: unch) were unchanged. Elsewhere, Italian BTPs (2Y: +1bp; 10Y: +1bp) were slightly higher in yields.

Turning to currencies, the USD dollar index weakened 0.2%. The Euro gained 0.3% against both the USD and Sterling, while Sterling/USD was broadly flat. In commodities, WTI oil was up 3%, with the OPEC’s full technical committee scheduled to meet today to discuss compliance with production targets. Iron ore continued to increase, up 3.4% following signs of stronger steel demand from China. Elsewhere, precious metals were slightly down on Friday (Gold -0.3%; Silver -0.4%). This morning, other metals were modestly up (Copper +0.6%, Aluminium +1.1%) and Zinc was up 2.7% following reports that LME stock had fallen to the lowest level since 2008.

Away from the markets, China’s State Council formalised its campaign against irrational acquisitions offshore last Friday, with new rules that will restrict domestic firms investing in offshore real estate, hotels, film, entertainment and sports clubs, while investments in gambling and pornography will be banned. Companies are encouraged to support domestic projects in the government’s “Belt and road” initiative. Elsewhere, Treasury secretary Steven Mnuchin has said he will stay in the Trump administration despite being urged to quit from a letter co-written by 300 of his fellow Yale graduates.

We'll wrap up with other data releases from Friday. In the US, the University of Michigan’s consumer sentiment index was higher than expectations at 97.6 (vs. 94), the highest reading since January. The return in confidence should be supportive for consumer spending growth going forward. The Atlanta Fed’s GDPNow estimate of Q3 GDP growth currently stands at 3.8% saar, whilst the NY Fed’s estimate closed the week at a more restrained 2.1% saar. Sitting between those estimates but at the higher end, the St Louis Fed’s model has growth pegged at 3.5% saar. Elsewhere, Germany’s July PPI was higher than expected, at 0.2% mom (vs. 0% expected) and 2.3% yoy (vs. 2.2% expected) and Canada’s July inflation was in line at 0.0% mom and 1.2% yoy.