The dollar rally paused on Friday and looked poised to finish its best weekly gain of the year with a whimper, when in a repeat of the Thursday session the, Bloomberg dollar index first rose more than 0.1% during Asia hours before slumping around the European open as month and quarter-end flows came into play again.
U.S. stock-index futures were little changed as investors awaited data on personal spending, which however is likely to be distorted by Hurricanes Harvey and Irma, while both European and Asian shares were in the green. European equities drifted higher, headed for the best month this year, while stocks in Asia also followed the S&P 500 higher earlier. Treasuries were steady after a selloff that saw yields jump 18 basis points this week, the most since Donald Trump’s U.S. election victory in November. Emerging-market assets rallied, with stocks rising and most currencies strengthening against the greenback.
After an initial bout of euphoria over Trump’s tax plan - which still needs approval from Congress although it currently lacks detail, leaving investors guessing which parts of the package will be prioritized by the administration - the renewed "Trump trade" paused as profits were taken on some of the recent reflation trades. Though with the chances of higher U.S. interest rates by the end of the year now at about 65%, they have driven equities higher and taken money out of gold, which was on track for its worst month this year, suggesting that the Fed has once again failed to send a tightening message to markets.
“Trump’s fiscal package continues to drive markets,” said Societe Generale analyst Guy Stear. “U.S. bond yields have climbed both as a direct response to tax cut fears and as the market’s wider risk appetite returned.” He said the sharp rise in 10-year Treasury yields, which hit a two-month high of 2.36% on Thursday, was driving the dollar higher.
The euro swung between gains and losses around a pivotal level as supportive month- and quarter-end flows were countered by choppy trading. European data underscored the region’s economic recovery with German unemployment fallling to a record low in September, bolstering the ECB case to tighten and reduce asset purchases in coming months. The EUR traded within 0.2 percent of the psychologically significant $1.1800 level in London trading. Though the euro is headed for its first monthly drop since February, it is still up for a third quarter, a performance not seen in more than three years. As such, the EUR/USD reversed its drop and rose 0.1% to 1.1801. European exporters were helped in the early session by the dip in the Euro, and nudged the pan-European STOXX 600 index up to a two-month high, while Europe's miners were green across the board in reflex to Chinese action.
This morning in Asia, markets are trading broadly higher. Note the Chinese markets will be closed for a week from next Monday given their Golden week holidays. Asian shares regained some poise after several days of declines, with the MSCI index of Asia-Pacific shares ex Japan bounding 0.4%, but still down 1.7% for the week so far. For the quarter, it looked set to gain 4.7%. Chinese H shares capped their biggest monthly loss this year, despite edging higher Friday ahead of national holidays. The Hang Seng China Enterprises Index closes up 0.3% for monthly loss of 3.4%, the worst since December. The Hang Seng Index rose 0.5%; posts first monthly decline this year, down 1.5%; for 3Q, the gauge climbs 7% and it remains Asia’s best performing major index this year. The MSCI China Index rallied 0.5% oon Friday, posting its ninth monthly gain and +0.3% in September. The ASX 200 (+0.2%) and Nikkei 225 (-0.03%) were both initially subdued as energy weighed on Australia after crude prices fell over 1%, while Japanese sentiment was dampened from the prior day’s currency strength and as participants digested a deluge of mixed data releases. However, markets recovered alongside a jubilant China where Hang Seng (+0.5%) and Shanghai Comp. (+0.3%) were underpinned on retailer optimism ahead of the National Day holiday and as financials benefitted after the banking regulator confirmed it is studying plans to further open up the industry
As a result, Euro zone stocks hit their highest in three months, on track for a quarterly gain after falling back in the second quarter. That helped push world stocks up 0.14% , with MSCI’s all-country world index, which tracks shares in 46 countries, gaining for 11 consecutive months - its longest winning run since 2004.
Meanwhile, GBP saw some added volatility amid the aforementioned month-end flow, alongside comments from BoE’s Carney with the Governor noting that the committee has seen a downtick in productivity due to Brexit uncertainty. GBP/USD slumped as low as -0.5% to 1.3353 first after BOE’s Carney said he is thinking about "taking foot off the accelerator", it then jumped back above 1.3400 as he reiterated that rates may rise in coming months, in a limited and gradual pace, only to drop once again following weak eco data showing the current account deficit ballooning to GBP 23bln, while GDP for the second quarter was revised down to 1.5 percent from a previous estimate of 1.7 percent as service sector output fell -0.2%. Swedish krona slid as Stefan Ingves appointed to a third term as Riksbank governor.
Over the weekend, investors will be keeping a close eye on the Spanish region of Catalonia, where separatist groups urged supporters to defy efforts to block an independence referendum on Sunday.
"At the moment, there is no significant market impact from the tensions, but if the Catalan police and the Spanish police are standing there in front of the polling stations and discussing whether to block the station or not, this will be an issue,” said DZ Bank strategist Sebastian Fellechner.
In euro zone bond markets, lower-than-expected German inflation data released on Thursday led many to speculate that the corresponding figure for the bloc as a whole, due on Friday, would also disappoint. Germany’s 10-year yield declined two basis points to 0.46 percent. Britain’s 10-year yield declined two basis points to 1.33 percent, the largest drop in almost three weeks. The yield on 10-year Treasuries climbed less than one basis point to 2.31 percent.
In commodities, it's been a quiet morning in commodities with WTI and Brent crude showing a slight pullback from some of the losses seen late yesterday. WTI looking to make a retest back to USD 52, after rejecting the break above the 1 week high. Precious metals have been led by risk flow, as month end unwinds are evident, with a bid seen through the European morning following the bearish September. Gold consolidates back in summer levels, back within pre- August 25th highs. Gold, under pressure due to the stronger dollar, was set for its biggest monthly fall of the year. The metal was last all but flat at $1,287 an ounce.
- Dow, E-Mini S&P 500 and E- Mini Nasdaq 100 futures little changed
- S&P 500 +0.1% to a fresh record-high at 2,510.06 on Thursday
- VIX Index increases 0.7%, ending 3-day decline... for now
- Gold spot up 0.1% to $1,288.70
- U.S. Dollar Index up 0.02% to 93.11
- WTI crude down 0.1% to $51.53, Brent unchanged at $57.41
- STOXX Europe 600 up 0.02% to 386.42
- MSCI Asia up 0.4% to 161.21
- MSCI Asia ex Japan up 0.6% to 529.56
- Nikkei down 0.03% to 20,356.28
- Topix down 0.08% to 1,674.75
- Hang Seng Index up 0.5% to 27,554.30
- Shanghai Composite up 0.3% to 3,348.94
- Sensex up 0.7% to 31,508.30
- Australia S&P/ASX 200 up 0.2% to 5,681.61
- Kospi up 0.9% to 2,394.47
- German 10Y yield fell 2.5 bps to 0.454%
- Euro up 0.1% to $1.1799
- Brent Futures up 0.4% to $57.61/bbl
- Italian 10Y yield fell 2.9 bps to 1.829%
- Spanish 10Y yield fell 1.6 bps to 1.61%
Bulletin Headline Summary from RanSquawk
- GBP sees some pressure as UK GDP misses
- European Equities marginally higher on the final trading session of the quarter
- Looking ahead, highlights include US PCE, Personal Spending, Chicago PMI and a slew of Central Bank Speakers
Top Overnight News
- U.S. regulators are planning to release American International Group Inc. from the special government oversight ordered for the insurer after its central role in the 2008 financial crisis
- Deutsche Bank had its long-term credit grade cut one level by Fitch Ratings late Thursday, which said the lender will take longer to revive growth under a turnaround plan unveiled in March
- Ken Griffin’s Citadel LLC is returning capital to some of the clients in one of its multi-strategy hedge funds as it seeks to tighten up its investor base
- Iron ore is down 20 percent in September, putting it on course for the first back-to-back quarterly loss since 2015, and there’s rising concern that the final three months of the year may bring further declines
- London house prices posted their first annual decline since the financial crisis
- U.K. 2Q GDP rises 0.3% q/q in line with previous estimate
- Euro-zone September inflation comes in at 1.5%, below consensus of 1.6%. Core CPI also below consensus at 1.1%
- Uber CEO Will Meet With London Regulators Over License Ban
- U.S. equity funds see outflows of $7.6b in week to Sept. 27, largest in 14 weeks, BofAML strategists write in note, citing EPFR Global data
- “If the economy continues on this track it’s been on -- and all indications are that it is -- then in the relatively near term, you could expect interest rates to increase,” BOE Governor Mark Carney says in an interview on BBC Radio 4
- Chinese Premier Li Keqiang is set to keep his seat on the Politburo Standing Committee at an upcoming meeting of the party congress next month, South China Morning Post reports
- German unemployment slid to record low in September in a sign that Europe’s largest economy will continue to expand on the back of domestic spending while August unadjusted retail sales expanded 2.8% y/y vs est. +3.2%
Asia equity markets were positive on what was a range-bound day heading into quarter-end and after a similar close on Wall St, where the S&P 500 eked another fresh record. ASX 200 (+0.2%) and Nikkei 225 (-0.03%) were both initially subdued as energy weighed on Australia after crude prices fell over 1%, while Japanese sentiment was dampened from the prior day’s currency strength and as participants digested a deluge of mixed data releases. However, markets then recovered alongside a jubilant China where Hang Seng (+0.5%) and Shanghai Comp. (+0.3%) were underpinned on retailer optimism ahead of the National Day holiday and as financials benefitted after the banking regulator confirmed it is studying plans to further open up the industry. 10yr JGBs were modestly higher on mild short covering and with the BoJ present in the market for JPY 710bln of JGBs ranging from the belly to the super-long end. BoJ Summary of Opinions for September 20th-21st meeting stated Japan's economy is expanding moderately and the best way to achieve the price goal is to patiently maintain current easy policy. There was also an opinion that the BoJ needs to ease policy further to support demand due to expected impact from scheduled sales tax hike.
- Japanese National CPI (Aug) Y/Y 0.7% vs. Exp. 0.6% (Prev. 0.4%); Core CPI Y/Y 0.7% vs. Exp. 0.7% (Prev. 0.5%).
- Japanese Industrial Production (Aug P) M/M 2.1% vs. Exp. 1.8% (Prev. -0.8%); Y/Y 5.4% vs. Exp. 5.2% (Prev. 4.7%)
- Japanese Retail Sales (Aug) M/M -1.7% vs. Exp. -0.5% (Prev. 1.1%); Y/Y 1.7% vs. Exp. 2.5% (Prev. 1.8%)
PBoC refrained from open markets operations today. PBoC set CNY mid-point at 6.6369 (Prev. 6.6285) Chinese Premier Li is said to remain in position for another term, according to Hong Kong press reports.
Top Asia News
- China Uber-Rich Prompt Haitong to Build Hong Kong Private Bank
- BOJ Keeps October Bond Purchase Ranges Unchanged From September
- S&P Estimates China’s Debt Will Expand 77% by 2021
- Cryptocurrency Exchanges Get Nod to Operate in First for Japan
- After Panda Bond, Philippines to Explore Dim Sum in Funding Push
European equities are looking for a strong finish this week with EU bourses modestly higher following the outperformance in material names. In terms of stock specific movers, Volkswagen shares fell amid reports that the company will suffer negative special items of around EUR 2.5bln. Alongside equities, EGBs have been bid this morning which is most likely down to technical factors such as month and quarter end adjustments, as well as some short covering ahead of the weekend. Germany curve showing a flattening bias this morning with outperformance in the long-end.
Top European News
- Euro-Area Inflation Fails to Improve as ECB Prepares for QE Talk
- Deutsche Bank Rating Cut by Fitch as Cryan Turnaround Stalls
- London House Prices Decline for First Time in Eight Years
- U.K. Consumers Display Resilience as Saving Ratio Climbs
- May Pledges Britain Will Defend EU From Russian Aggression
- Germany Sept. SA Unemployment Change -23K M/m; Est. -5K M/m
In currencies, the EUR is slightly firmer this morning, above 1.18 (1.2bln worth of expires at 1.18-1.1815) with cross related buying in EUR/GBP supporting the currency. This comes amid usual month-end demand, consequently taking EUR/GBP back to 0.8800. However, the undertone for EUR remains weak, following Merkel’s wobble in the German Elections, while yesterday’s inflation readings from Germany had also been relatively subdued. The USDJPY nursed some of the prior day’s declines, which was slightly aided by the release of the BoJ’s Summary of Opinions from the September meeting which suggested to patiently maintain current easy policy and that further policy easing may be needed to support demand on the impact from the scheduled sales tax hike. However, price action was contained as participants also digested a slew of mixed Japanese data in which Core CPI printed its firmest YTD of 0.7% but was in-line with estimates and still a distance from the 2% target, while Industrial Production surged and Retail Sales disappointed. Cable saw some volatility amid the aforementioned month-end flow, alongside comments from BoE’s Carney with the Governor noting that the committee has seen a downtick in productivity due to Brexit uncertainty. Carney also reiterated that the majority of members may see a need to raise rates if the economy stays on track. A slew of data this morning further pressured GBP with the current account deficit ballooning to GBP 23bln, while service sector output fell -0.2%
In commodities, a quiet morning in commodities with WTI and Brent crude showing a slight pullback from some of the losses seen late yesterday. WTI looking to make a retest back to USD 52, after rejecting the break above the 1 week high. Precious metals have been led by risk flow, as month end unwinds are evident, with a bid seen through the European morning following the bearish September. Gold consolidates back in summer levels, back within pre- August 25th highs.
Looking at the day ahead, there is PCE core for August, personal income and spending, the Chicago PMI as well as the University of Michigan consumer sentiment index. Onto other events, there is the BOJ’s summary of opinions for its September meeting. In the UK, IMF’s Lagarde and BOE’s Broadbent will speak at the BOE conference (Mr Draghi has cancelled his talk due to a relative’s sickness). Over in the US, the Fed’s Harker will speak at a Fintech event.
US Event Calendar
- 8:30am: Personal Income, est. 0.2%, prior 0.4%; Personal Spending, est. 0.1%, prior 0.3%
- 8:30am: Real Personal Spending, est. -0.1%, prior 0.2%
- 8:30am: PCE Deflator MoM, est. 0.3%, prior 0.1%; PCE Deflator YoY, est. 1.5%, prior 1.4%
- 8:30am: PCE Core MoM, est. 0.2%, prior 0.1%; PCE Core YoY, est. 1.4%, prior 1.4%
- 9:45am: Chicago Purchasing Manager, est. 58.7, prior 58.9
- 10am: U. of Mich. Sentiment, est. 95.3, prior 95.3; Current Conditions, prior 113.9; Expectations, prior 83.4; 1 Yr Inflation, prior 2.7%; 5-10 Yr Inflation, prior 2.6%
- 11am: Fed’s Harker Speaks at Fintech Event on Consumers and Banking
DB's Jim Reid concludes the overnight wrap
Welcome to the last day of September and the quarter. There’s always a slight randomness to month and quarter end trading as investors adjust portfolios! The penultimate day of the month initially saw the sudden global bond rout continue after the more optimistic take on tax reform continued before a slight miss on German inflation seems to reverse the decline. 10 year Bund and Treasuries yields saw an intra-day peak of 0.516% and 2.357% respectively, before closing +1.1bp and -0.2bp at 0.475% and 2.309% (+0.7bp this morning in Asia). The yield lows this month were 0.302% and 2.04%.
Yesterday, both the German and Spanish CPI readings missed slightly. In Germany, the September CPI was a touch below market expectations at 0% mom (vs. 0.1%), leaving annual growth at 1.8% yoy (vs. 1.9%). Similarly, Spain’s CPI also missed at 0.6% mom (vs. 0.8% expected) and 1.9% yoy (vs. 2.0%). Looking ahead, we have CPI for the Eurozone, France, Italy and Poland today, along with the US August PCE Core, all of which could help dictate how bonds will end for the month. This morning, the August core Japanese national CPI (ex-fresh food) was in line at 0.7% yoy while IP beat expectations at 2.1% mom (vs. 1.8%). The DB house view on 10 years bonds is for YE yields of 2.75% (USTs) and 0.65% (Bunds) but as DB's Francis Yared suggested yesterday the scale of the move over the last 36 hours has been a surprise as he believes the tax plan is just an opening bid and likely to be pared down. So a long way to go although at least we've moved away from pricing no probability of a tax plan passing.
One event that has slipped a bit under the radar is the independence referendum in Catalonia on Sunday. It's been deemed illegal and therefore it’s all a bit confusing as to what will happen on Sunday, whether it will indeed go ahead and what happens next. Remember 3 years ago a non-binding ballot saw 80% support independence albeit on a 30% turnout.
Continuing on the theme of breaking away, the EU’s Brexit negotiator Barnier noted yesterday that “we are not yet there in terms of achieving sufficient progress” and signalled that it could take weeks or months before the talks can move onto a trade deal, as one of the sticking points remains that UK has not outlined what it thinks the country owes to the EU. Conversely, he did show some optimism, noting the UK PM’s Florence speech “has created a new dynamic in our negotiations, and we have felt this”. The next round of talks will begin from October 9th, two weeks before the EU Summit.
This morning in Asia, markets are trading broadly higher.The Kospi (+0.56%), Hang Seng (+0.21%) and Chinese bourses are up c0.5% as we type, while the Nikkei is down -0.29%. Note the Chinese markets will be closed for a week from next Monday given their Golden week holidays.
Back onto Mr Trump’s tax plans which still lacks many details especially on where it’s funding will come from. Treasury Secretary Mnuchin said the plans will actually “cut” the US deficit by US$1trn, as the plans “will not only pay for itself, but it will pay down debt” by generating additional revenue. Conversely, the Committee for a Responsible Federal Budget said the plans could add US $2trn to the deficit over the next 10 years. Notably, a Bloomberg survey suggests 21 out of 26 economists expect the tax plans to increase the budget deficit. Elsewhere, White House’s economic advisor Gary Cohn said the tax plans was aimed at helping the middle class, but he could not guarantee that everyone in that tax bracket would get a cut.
Staying in the US, the Fed’s Esther George reiterated the US economy is in a “reasonably good shape” and that recent storms will hit 3Q growth, but is likely to be offset as rebuilding efforts gets underway. On rates, she said a gradual monetary tightening “will benefit the long run sustainable growth and financial stability in the US”.
Quickly recapping yesterday’s market performance now. US equities strengthened further, with the S&P up 0.12% to a fresh all-time high, while the Dow rose 0.18% and Nasdaq was flat following larger gains the day before. Within the S&P, most sectors advanced slightly, with only the industrials (-0.09%) and consumer discretionary sector marginally down. Elsewhere, the small caps index (Russell 2000) rose a further 0.27%, likely building on the optimism from Trump’s tax plans. Over in Europe, the Stoxx 600 gained (+0.19%) for the six consecutive day, while the DAX (+0.37%) and FTSE (+0.13%) also increased slightly. Turning to currencies, the US dollar index dipped 0.30%, but Sterling gained 0.41%, partly helped by BoE Chief Economist Andy Haldane’s comment that policy tightening should be considered good news for UK. In commodities, WTI oil fell 1.11% as investors consider whether rising output from US shale assets will offset OPEC’s efforts for production cuts. Elsewhere, precious metals were slightly higher yesterday (Gold +0.35%; Silver +0.67%), while other base metals are also trading (Copper +1.90%; Zinc +1.07%) higher this morning.
Away from the markets and onto Japan. A former ally of PM Abe has just formed a new party on Wednesday with reasonable traction as per the polls. Tokyo’s first female governor Yuriko Koike has formally launched her Party of Hope, seeking a “tolerant, conservative reform party”. According to a survey by Mainichi newspaper, it found 18% of respondents would vote for Hope vs. 29% for Abe’s party. We will watch and see whether PM Abe’s opportunistic choice for a snap election on the 22 October will eventually pay off.
Finally, our European equity strategist Sebastian Raedler has published “European equity strategy – Market overview” and in it expects European equities to end the year close to current levels, with his models pointing to temporary upside to around 400 for the Stoxx 600 (around 4% above current levels). Yet, with Euro area PMIs at 56.3, consistent with 3%+ Euro area GDP growth, significantly above our economists’ growth forecast of 2.0% for 2018, he sees scope for PMI momentum (the six-month change in PMIs and a key driver of equity market momentum) to turn meaningfully negative in Q1 next year, leading to renewed downside for the market.
Before we take a look at today’s calendar, we wrap up the other data releases from yesterday. In the US, the final reading of 2Q GDP was slightly higher at 3.1% qoq (vs. 3.0% expected), mainly due to a positive revision in inventories. The 2Q core PCE (0.9% qoq) and personal consumption (3.3%) were both unchanged. More up to date economic readings showed the August wholesale inventories was ahead of expectations at 1% (vs. 0.4% expected) and the advance goods trade balance deficit was not as wide as anticipated (-$62.9bn vs. -$65.1bn). Elsewhere, the Kansas City Fed manufacturing activity index was above expectations at 17 (vs. 15 expected) – the second highest reading over the past six years. Finally, the continuing claims (1,934k vs. 1,993k expected) and initial jobless claims (272k vs. 270k expected) were broadly in line.
For the Eurozone, numerous September confidence indicators beat expectations. The economic sentiment index rose 1pt to a fresh 10-year high (113 vs. 112 expected), while both the business climate (1.34 vs. 1.12 expected) and industrial confidence (6.6 vs. 5.2 expected) also beat. The consumer confidence was in line at -1.2. Elsewhere, Germany’s GfK consumer confidence was slightly lower than expected at 10.8 (vs. 11) while Spain’s retail sales rose 1.6% yoy in August (vs. 1.2% yoy previous).
Looking at the day ahead, we have the Eurozone CPI (1.2% yoy expected for core) along with CPI & PPI for France and Italy. In Germany, there is unemployment change for September. In the UK, there is the final reading of 2Q GDP along with mortgage approvals and money supply M4 stats. Over in the US, there is PCE core for August, personal income and spending, the Chicago PMI as well as the University of Michigan consumer sentiment index. Onto other events, there is the BOJ’s summary of opinions for its September meeting. In the UK, IMF’s Lagarde and BOE’s Broadbent will speak at the BOE conference (Mr Draghi has cancelled his talk due to a relative’s sickness). Over in the US, the Fed’s Harker will speak at a Fintech event.