European stocks dropped, Asian and EM market rose, and S&P were lower by 0.3% as investors assessed the latest overnight carnage in the USD which plunged to the lowest level since the start of 2015, sending the USDJPY tumbling to 107, the euro extending gains to just shy of $1.21 and a slowdown in China’s export growth which however did not prevent the Yuan from posting its best weekly gain on record.
It was all about the seemingly huge currency moves overnight as the dollar plunged for the 7th day in a row, the biggest 7 day drop in 4 months, amid doubts about further Federal Reserve tightening, North Korea tensions and as Hurricane Irma threatens South Florida. The Yen rose to the strongest level against the dollar since Nov. amid nervousness about possible provocation from North Korea ahead of its foundation day on Saturday; yen surged past 108 per dollar as options barriers gave way, triggering a series of stop-losses. The Yuan rallied toward 6.45/USD in both onshore and offshore markets as traders speculate PBOC will tolerate a stronger currency after it rose past the psychological 6.50 mark Thursday. The Australian dollar surged to the highest in more than two years on the back of dollar weakness while the cherry on top was the 10Y TSY yield touching a YTD low of 2.014% before rebounding to ~2.035%.
Meanwhile, natural disasters were aplenty, including the most powerful earthquake this century to shake Mexico, while Hurricane Irma is projected to hit Florida Sunday, and North Korea is widely expected to launch an ICBM on its September 9 holiday.
As reported last night, the big overnight story was the dramatic plunge in the dollar in Asian trading....
... which also pushed the EURUSD to the highest level since January 2015, a move that was not helped by this morning's Reuters "trial balloon" according to which the ECB was considering 4 QE reducing scenarios.
“At its current level, the Euro is not a threat for the Eurozone,” Philippe Ithurbide, global head of research at Amundi Asset Management, said in a report. “If the euro stabilizes, or continues a gradual appreciation path as in our base scenario, the ECB could announce -- maybe in October -- a reduction, starting in January 2018, of the quantitative easing program. Should the euro continue to appreciate rapidly, the ECB could become more dovish and postpone its tapering.”
This morning, the USD has attempted to stabilize after said heavy selling in Asian session, which has seen the DXY hit a fresh YTD low. Meanwhile, the USD/CNH has bounced from levels last seen in Dec. 2015 after reports of Chinese concerns on yuan strength. The Yuan was set for its best weekly gain since records began in 2007. The onshore yuan headed for the third weekly advance in a row, with a gauge of the dollar tumbling toward the biggest decline since May. The CNY climbed 0.48% to 6.4543 per dollar as of 5:11 p.m. in Shanghai on Friday; extending the weekly advance to 1.6%, the most since Bloomberg began compiling CFETS data in 2007. On Friday morning, the PBOC strengthened the daily reference rate by 0.36% to 6.5032 per dollar, extending the 10-day run of increases to 2.4%. The Bloomberg replica of CFETS index, which tracks the yuan against 24 currencies, climbs 0.10% to 95.16
The Yuan’s recent appreciation has been bigger than expected - and it’s also more than what can be explained by the dollar’s moves - which is likely driven by strong corporate dollar selling and positive market sentiment, UBS economist Wang Tao writes in report sent Friday. "Allowing the yuan to gain versus the basket is a step toward convincing the market of increased two-way flexibility; not expecting it to embark on a multi-year appreciation path in effective term" Wang adeded.
According to Reuters, China policy makers are increasingly worried a sharp CNY rally could hurt exports and the economy, however China is unlikely to intervene forcefully to cap the CNY due to worries of criticism from the US.
Overnight, NY Fed president Bill Dudley became the latest U.S. central banker to lay out his views ahead of a policy-setting meeting later this month as expectations for an interest-rate increase have been scaled back. According to Bloomberg, Dudley reiterated the need to continue raising rates while conceding that the Fed may have to rethink its inflation model.
USD/JPY holds close to overnight levels after tripping downside stops through 108.00. As noted earlier, Bund futures sell off after latest ECB sources give more details on potential tapering, curve steepens. Treasurys partially retrace overnight spike higher, precipitated by the USD weakness.
In equities, European equity markets open lower and slowly grind back to unchanged led by bank sector, Santander +2.5% after being upgraded at Morgan Stanley. Mining sector underperforms after base metals sell off aggressively in response to China trade data. Stocks in Europe struggled for traction as the euro extended its march above $1.20, while S&P 500 index futures dropped. The most powerful earthquake this century shook Mexico, adding to investor anxiety.
Asia equity markets traded mixed following similar indecisiveness in US and as the region digested a slew of economic releases including Japanese GDP and Chinese Trade data. ASX 200 and Nikkei 225 were lower as financials mirrored the underperformance in their US peers, with Japan also dampened by a weaker than expected Final Q2 GDP which showed the largest downward revision since the current accounting method began in 2010. Shanghai Comp. and Hang Seng were positive despite another OMO skip by the PBoC which resulted to a larger net weekly liquidity drain W/W, as strength in property and energy names kept sentiment upbeat while traders mulled over the release of mixed Chinese Data. China released its latest trade balance data which showed that Exports missed, but Imports surpassed expectations to suggest strong domestic demand. Exports growth for China moderated to 5.5% yoy in August from 7.2% yoy in July, below expectations, while imports growth was up to 13.3% yoy from 11.0% yoy in July, above consensus. In sequential terms, exports contracted by 0.4% mom sa, albeit less than that in July ( -2.0% mom sa). Imports increased by 2.9% mom sa, rebounding from -1.9% mom sa in July. The trade surplus moderated to US$42.0bn from US$46.7bn in July
- Chinese Trade Balance (CNY)(Aug) M/M 286.5B vs. Exp. 335.7B (Prev. 321.2B)
- Chinese Exports (CNY)(Aug) Y/Y 6.90% vs. Exp. 8.70% (Prev. 11.20%)
- Chinese Imports (CNY)(Aug) Y/Y 14.40% vs. Exp. 11.70% (Prev. 14.70%)
Meanwhile, the threat from North Korea lingers. U.S. President Donald Trump said it’s not “inevitable” that the U.S. will wind up in a war with North Korea over its continued development of nuclear weapons, though military action remains an option. Pyongyang may test a missile this weekend to coincide with its “founding day” on Sept. 9.
Ten-year Treasury yields fell toward 2 percent and gold headed for a third week of advance ahead of a potential North Korean missile launch. Copper led most industrial metals lower and crude oil dropped. The yield on 10-year Treasuries declined less than one basis point to 2.04 percent, the lowest in 10 months. Britain’s 10-year yield advanced one basis point to 0.982 percent.
West Texas Intermediate crude fell 0.4 percent to $48.91 a barrel, the largest fall in more than a week. Gold gained 0.2 percent to $1,351.25 an ounce, the strongest in almost 13 months. Copper declined 1.4 percent to $6,802.00 per metric ton, the lowest in more than a week on the largest drop in more than four months.
Economic data include wholesale inventories.
- S&P 500 futures down 0.4% to 2,455.75
- STOXX Europe 600 down 0.2% to 374.04
- German 10Y yield fell 1.3 bps to 0.294%
- MSCI Asia up 0.4% to 161.82
- MSCI Asia ex Japan up 0.4% to 534.48
- Nikkei down 0.6% to 19,274.82
- Topix down 0.3% to 1,593.54
- Hang Seng Index up 0.5% to 27,668.47
- Shanghai Composite down 0.01% to 3,365.24
- Sensex up 0.03% to 31,671.21
- Australia S&P/ASX 200 down 0.3% to 5,672.62
- Kospi down 0.1% to 2,343.72
- Euro up 0.2% to $1.2046
- Italian 10Y yield fell 10.2 bps to 1.634%
- Spanish 10Y yield rose 1.6 bps to 1.511%
- Brent Futures up 0.5% to $54.76/bbl
- Gold spot up 0.4% to $1,354.10
- U.S. Dollar Index down 0.4% to 91.27
Top Overnight News
- Reuters: ECB discussed scenarios yesterday and agreed the next step is to cut stimulus but should be done with broadest possible consensus; options included reduction to EU20b or EU40b and extension by 6 or 9 months, according to people familiar; ECB’s Liikanen: Some QE decisions will be taken in December
- Fed’s Dudley: Appropriate to continue to remove monetary policy accommodation gradually, low inflation may be structural; Fed’s George says it’s time to continue with Fed rate hikes
- President Donald Trump said it’s not “inevitable” that the U.S. will wind up in a war with North Korea over its continued development of nuclear weapons, but that military action remains an option
- Trump suffered another setback on his travel ban, with an appeals panel leaving in place a lower-court ruling that forces the administration to accept people with grandparents, cousins and other relatives in the U.S.
- Traders braced for economic damage to Florida from Hurricane Irma, set to make landfall on Sunday. The most powerful earthquake this century shook Mexico, adding to investor anxiety and sending the peso weaker
- Federal Reserve Bank of New York President William Dudley reiterated the need to continue raising interest rates while conceding that the U.S. central bank’s inflation model may be in for a rethink soon
- White House is considering at least six candidates to be the next head of the Fed; a chance Yellen will be renominated, though Cohn’s prospects have dimmed according to people familiar
- Chinese officials are beginning to worry about the rallying yuan due to the strain on exporters, according to people familiar: Reuters
- China Aug. Trade Balance: +$41.9b vs +$48.5b est; Exports 5.5% vs 6.0% est; Imports 13.3% vs 10.0% est.
- Delta Cancels Flights for South Florida Airports on Irma
- Strongest Quake in Century Hits Mexico, at Least Three Dead
- White House Is Said to Be Considering at Least Six for Fed Chair
- Equifax’s Historic Hack May Have Exposed Almost Half of U.S.
- U.S. Is Said to Target North Korea Violators, With ZTE’s Help
- BlackRock Is Said to Be in Talks for Calpers’s Buyout Business
- ECB Is Said to Study QE Options That Don’t Need Rule Tweaks
- Apple-Backed Billionaire Makes Case to Buy Toshiba Chip Unit
- China’s Export Engine Slows as Imports Maintain Steady Gains
Asia equity markets traded mixed following similar indecisiveness in US and as the region digested a slew of economic releases including Japanese GDP and Chinese Trade data. ASX 200 and Nikkei 225 were lower as financials mirrored the underperformance in their US peers, with Japan also dampened by a weaker than expected Final Q2 GDP which showed the largest downward revision since the current accounting method began in 2010. Shanghai Comp. and Hang Seng were positive despite another OMO skip by the PBoC which resulted to a larger net weekly liquidity drain W/W, as strength in property and energy names kept sentiment upbeat while participants also mulled over the release of mixed Chinese Data where Trade Balance and Exports missed, but Imports surpassed expectations to suggest strong domestic demand. 10yr JGBs gained amid the risk averse sentiment in Japan and as yields tracked the declines seen in their US counterparts, while the BoJ were also present in the market for a total of JPY 880bln of JGBs across the curve. China policy makers worry a sharp CNY rally could hurt exports and the economy; China unlikely to intervene forcefully to cap the CNY due to worries of criticism from the US, according to sources.
Top Asian News
- Tencent’s Giant Rally Is a Problem for Some China Investors
- SpiceJet Shows Long-Haul Intent With Boeing-Airbus Contest
- Japan’s GDP Growth Revised Down on Softer Capital Expenditure
- Citi Sees Pressure on Yuan, Philippines Peso Amid Reserves Trend
- China No. 4 Developer Seeks to Repay Overdue Debt at Lower Rate
- Topix Has Worst Week Since April on N. Korea, Natural Disasters
- Yuan Surge Feeds Speculation Policy Makers to Loosen Control
Soft risk off tone has highlighted this lacklustre Friday morning, as much of the price action was seen yesterday. Equity markets opened marginally lower and have traded around these levels from the open with 8/10 Euro Stoxx sectors trading in the red. The stronger EUR has supported the mild risk-off tone following yesterday’s ECB meeting and the EUR continuing to ramp. Stock specific sees basic resources struggling, being affected by the pressure of copper prices, elsewhere the finance sector is one to trade in the marginal green, buoyed by Morgan Stanley’s upgrade of Santander. Peripheral bonds are seeing slight downward pressure, likely due to profit taking following yesterday’s outperformance amid the ECB press conference. Price action across European curves has been quiet, as the EU AAAs all trade around levels seen in the open.
Top European News
- U.K. Manufacturing Jumps, Construction Falls as Quarter Starts
- Akzo Nobel Warns on 2017 Profit as Paintmaker Replaces CFO
- Nordea Move Has Riksbank Chief Warning of Dangerous Fallout
- Swedish Government Backs Away From Plan to Cut Riksbank Reserves
- Overlooked in Cancer, Glaxo and Sanofi Look to Get Into the Race
- Greene King Shares Slump on Trading Update, Dragging Pubs Lower
- Mercedes Fields Buzz Aldrin to Take on BMW While Fiat Stays Home
- Trinity Mirror Starts Talks to Buy Desmond’s U.K. Tabloids
- Germany’s Facebook Case Tackles Crucial Digital Issues: Mundt
FX markets have seen subdued trade following yesterday’s volatility being followed by an attack on the greenback overnight. Much anticipation was on the UK Manufacturing and Industrial Production data, the formers slight beat vs. expected sparked little sterling buying, with the data causing no real price action. USD/JPY broke through the 108 handle during the Asia/European crossover, knocking through option barriers on the way through. The week’s aggressive buying between 108.00/108.50 has aided with the bearish pressure, as stops were triggered through the 108.00 level, now firmly through April’s low. July 16, 2016 high has paved some support for the pair, however, a break through 107.50 is likely to see a 105 print.
In commodities, the US storms remain a concern to energy traders, the catastrophic events are likely to lead to refiners and recovery projects competing for the same labour, in turn driving up costs or causing labour shortages. Brent futures have flipped back into its pre-hurricane backwardation after fears of a significant drop in crude demand failed to leak into markets. Copper has been the noticeable laggard in metal markets, as the precious metals all perform well amid the risk-off tone.
Looking at the day ahead, there is the final reading for wholesale inventories along with consumer credit data. Away from the data, the Philadelphia Fed President Harker will speak on consumer behaviour in credit.
US Event Calendar
- 8:45am: Fed’s Harker Speaks on Consumer Finance in Philadelphia
- 10am: Wholesale Inventories MoM, est. 0.4%, prior 0.4%; Wholesale Trade Sales MoM, est. 0.5%, prior 0.7%
- 3pm: Consumer Credit, est. $15.0b, prior $12.4b
DB's Jim Reid concludes the overnight wrap
So unsurprisingly the talk of the town over the past 24 hours has been the ECB and President Draghi. As expected there was no change to policy but that was never going to be the talking point. Draghi did however more or less confirm that a decision on tapering will likely be taken at the October meeting. A “very, very preliminary discussion” was said to have taken place within the governing council yesterday but the “bulk of decisions” will be made in October for beyond 2017 according to the President.
The biggest focus going into the meeting though was on what sort of rhetoric we would get from Draghi around the recent strength in the currency. While questioned and addressed at least half a dozen times, the general feeling was that Draghi felt relatively comfortable suggesting that he and the council view Euro strength as a sign of improving economic fundamentals. That gave the green light for the single currency to rally another +0.89% yesterday and so close above 1.200 for the first time since January 2015. This morning it’s up further, at 1.2070 as we go to print. The President did yesterday highlight up front that “the recent volatility in the exchange rate represents a source of uncertainty which requires monitoring” along with making various other references. However Draghi also played up growth and failed to really downplay inflation. Draghi called growth “robust” and “broad based” and signalled that the ECB had upgraded this year’s growth forecast to 2.2% from 1.9%. 2018 and 2019 forecasts were left unchanged. On inflation the impact of the recent currency move was to only shade one-tenth off the 2018 and 2019 headline forecasts, and leave 2017 as is at 1.5%. That said core inflation expectations were revised down in 2019 by twotenths. Overall though it felt a bit like every time Draghi tried to downplay the currency he ended up caveating it with a positive.
Away from that, another notable snippet from the press conference included Draghi saying that the ECB “haven’t really discussed the scarcity issue (for bond buying) because so far we’ve consistently shown that we’ve been able to cope with this issue quite successfully”. DB’s Mark Wall summed up in his report by saying that his baseline expectation is a “slow and extend” decision on QE at the October meeting, extending until mid-2018 at the slower rate of EUR40bn per month. He expects a dovish tightening and notes that the ECB could achieve this by justifying slower QE on the basis of partial normalisation of core while saying that full normalisation is susceptible to FX appreciation, and also maintaining the QE guidance by saying that the Bank is prepared to do more if necessary.
The failure to temper the move in the currency resulted in an interesting market dynamic as it essentially cleared the path for European bonds to rally. 10y Bund yields closed -4.1bps lower at 0.302% and the lowest since late June. France and Netherlands were -5.0bps and -4.5bps lower respectively while the periphery outperformed with yields in Italy, Spain and Portugal -11.1bps, -7.3bps and -10.5bps respectively. The Stoxx 600 also rebounded from an early fall to close +0.27%.
Meanwhile across the pond, 10y Treasuries plunged to a new YTD low during the day of 2.032% and are continuing to flirt with that 1% handle. They eventually closed just off that at 2.040% which is where they are this morning. That move for Treasuries appeared to be more European led but clearly the threat of Hurricane Irma (and two other Hurricanes) inching closer to Florida and reports per Bloomberg about another possible missile test by North Korea is keeping the bond market propped up. The cloud hanging over the Fed now with the all the antics in Washington and an uncertain Fed Board composition is clearly not helping too. The S&P 500 closed virtually flat (-0.02%), but within the sectors, health care rose but banks (-1.76%) and insurers (-1.90%) were hit given the potential drags from lower bond yields and Hurricane Irma respectively. Elsewhere, the US dollar index fell -0.68%, Gold rose +1.12% to a new one-year high but WTI Oil was little changed.
On the topic of uncertainty, the feeling was that it might be a two-horse race between Janet Yellen and Gary Cohn to be the next Fed Chair, but Bloomberg reported last night that Trump may be considering six more possible candidates for the top job. The list is fairly broad and includes: Kevin Warsh (former Fed governor), Glenn Hubbard (professor at Columbia Uni.), John Taylor (professor at Stanford Uni.), Lawrence Lindsey (former economic advisor to President Bush), Richard Davis (former US Bancorp CEO) and John Allison (former CEO of BB&T). With the various other departures on the Board, Trump is going to have a rare opportunity to handpick and reshape the composition of the Federal Reserve. However as we’ve been saying in recent days, this very much keeps the clouds of uncertainty from dissipating over the Fed for a while.
On a related note, following up from the Fed’s Vice-Chair Stanley Fischer’s early resignation the other day, our US team took a closer look at the potential implications. They argue that the FOMC has lost one of its more hawkish members and with the December FOMC decision already on a course to be contentious, it is possible that there could be at least three dissents to a rate hike decision.
This morning in Asia, markets are heading into the end of the week a bit mixed. The Nikkei (-0.38%), Kospi (-0.13%) and ASX 200 (-0.36%) are all softer but the Hang Seng (+0.50%) and Shanghai Comp (+0.24%) have edged higher. It’s worth noting that trade data in China this morning showed export growth as slowing to +5.5% yoy in Dollar terms from +7.2%. Expectations were for a slower decline to +6.0%. Imports on the other hand surged to +13.3% yoy from +11.0% after the consensus was also for a slowdown in the growth rate. It’s worth noting that this is the second month in a row that export numbers have disappointed.
Back to the US debt ceiling. Now that the September deadline has been extended to December, President Trump suggested yesterday that there are “a lot of good reasons” to get rid of the debt ceiling altogether. Senate minority leader Schumer and Senate Finance Chairman Hatch along with others supports the idea, but some do not, including House Speaker Paul Ryan who said that “there is a legitimate role for the power of the purse and Article One powers”.
Staying with the US, we’ve had two more Fed speakers in the last 24 hours. The usually hawkish Cleveland’s Fed President Mester said she is “comfortable” raising interest rates again this year and added that not hiking rates between now and March 2018 is not her idea of a gradual rise. Elsewhere, The NY Fed President Dudley said that “I expect the US economy will perform quite well… as this occurs, I anticipate that wage growth will firm and price inflation will gradually rise” and that “we will continue to gradually remove monetary policy accommodation”.
Moving on. The latest on Brexit talks yesterday saw EU Chief Brexit negotiator David Barnier say “I’ve been very disappointed by the UK position…there is a moral dilemma here, you can’t have 27 (states) paying for what was decided by 28” and that “the UK needs to tell us what it wants and we will see what is possible”. Elsewhere, the President of the European Parliament, Antonio Tajani, said “it would seem very difficult that sufficient progress can be achieved by October”. Here in the UK, the Guardian noted that PM May has rejected an invite to address the EU Parliament to explain Britain’s position, instead preferring to discuss with leaders in closed sessions.
Before we take a look at today’s calendar, a quick recap of yesterday’s economic data. In the US, the initial impact of Hurricane Harvey has seen initial jobless claims rise 62k to 298k (vs. 245k expected), with applications in Texas up 52k. Continuing claims were broadly in line at 1,940k (vs. 1,945k expected). Elsewhere, the final reading for nonfarm productivity was above market at +1.5% qoq (vs. +1.3% expected), resulting in a through-year gain of +1.3% yoy.
Back in Europe, the final reading on the Eurozone’s 2Q GDP was unrevised at +0.6% qoq and +2.3% yoy (vs. 2.2% expected). In Germany, July industrial production was flat (vs. +0.5% mom expected), but annual growth is still up +4.0% yoy (vs. +4.6% expected). In the UK, the Halifax house price index was well above market at +1.1% mom (vs. +0.2% expected) and +2.6% yoy (vs. +2.1% expected). Over in France, the trade deficit widened to EUR6.0bn in July, with +4.9% yoy growth in exports outpaced by +9.2% yoy growth in imports.
Looking at the day ahead, Germany’s trade balance, current account balance and export / imports stats are due this morning. For the UK and France, industrial production (+0.2% mom expected for UK; +0.5% mom for France), manufacturing production and trade balance stats are also due. Over in the US, there is the final reading for wholesale inventories along with consumer credit data. Away from the data, the Philadelphia Fed President Harker will speak on consumer behaviour in credit.