With just hours left until the Fed announces its latest rate hike (and potentially tilts even more hawkish on 2019), US futures gained 0.2% alongside higher Asian shares while European bourses were mixed amid generally thin volumes as the dollar rebounded from overnight lows and Treasuries gained.
Asian shares inched up on Wednesday, rising 0.1% outside of Japan, as Chinese stocks extended their recovery to hit eight-week highs on receding fears about the trade war as well as hopes China’s weighting in the global benchmark will be increased. Other markets were more subdued as U.S. TSY yields rose near a seven-year peak of 3.113% ahead of a widely expected rate hike by the Federal Reserve and as international oil prices rose to four-year highs.
Japan’s Topix ended just below its highest point in almost eight months, while stocks rallied in Hong Kong as traders returned from a holiday. Shanghai shares rose 0.9% to 2806.81, after global index provider MSCI said it will consider quadrupling the weighting of Chinese big-caps in its global benchmarks from 5% to 20% and also proposed adding mid-caps and shares listed on Shenzhen’s start-up board ChiNext.
The news further improved the mood of the market, where fears about the trade war have been offset by hopes Beijing’s stimulus could help the economy weather the impact of U.S. tariffs.
In Europe, the Stoxx Europe 600 Index traded sideways, holding small gains while the DAX underperformed as the auto selloff continued after BMW slashed its outlook and following news of a new CEO at Daimler. Italian BTPs rallied as risk-off hedges related to Italian budget are removed, as Tria's latest comments appear to calm worst concerns. The Bund curve flattened, led by 5s30s.
Contracts on the S&P 500, Nasdaq and Dow all climbed ahead of the Fed. As previewed earlier, while markets have fully priced in another rate hike today, the outlook for future policy as signaled by the dot plot and any comments from Jerome Powell will be key to whether bond markets extend their recent selloff. Ten-year Treasury yields of 3.08% are just below their year-to-date peak, while two-year yields are at a decade high.
“The U.S. domestic economy is trotting along nicely; the rest of the world is not in the same place and there’s no doubt that global investor caution is continuing to increase as the trade war between the U.S. and China appears to be heating up,” wrote Nick Twidale, chief operating officer at Rakuten Securities Australia. "Analysts will be watching closely to see if the Fed acknowledges this and its potential impact on the U.S."
Meanwhile, in a sleepy FX market, the Bloomberg Dollar Spot Index steadied ahead of a Federal Reserve decision at which investors anticipate the third interest-rate increase this year. Treasuries gained while emerging-market currencies stayed in relatively tight ranges. The yen recovered after touching its lowest in almost 10 weeks against the dollar as dealers positioned themselves ahead of the Fed meeting, while the yield curve steepened ahead of the Bank of Japan’s debt purchase operation on Thursday. The euro was also steady, while the pound snapped a two-day rally after Theresa May doubled down on her Brexit stance and as U.K. investors await Corbyn’s speech after Labour said it will vote against Prime Minister Theresa May’s Brexit proposals.
Riksbank's Jansson said if the central bank moves too quickly ahead of the ECB, SEK would strengthen too quickly, while he
added the Riksbank may have to raise unemployment forecasts slightly in October.
In rates, Italy led gains among euro-area bonds ahead of the country’s coalition government announcing fiscal targets Thursday. The Bund curve flattened led by 5s30s. The yield on 10-year Treasuries fell 1bp to 3.08%.
In geopolitical news, US National Security Advisor Bolton said the enforcement of sanctions will be aggressive and unwavering and will not be undermined by Europe or anybody else. South Korean President Moon said North Korea's Kim wants a second summit with US as soon as possible. EU Commissioner Hahn rejected financial aid to Turkey.
Elsewhere, Brent oil pulled back from a four-year high of $82.55 but remains on course for its fifth consecutive quarterly increase, the longest such stretch for the global benchmark since early 2007, when a six-quarter run led to a record-high of $147.50 a barrel. U.S. crude futures ticked down 0.2 percent to $72.16 per barrel after hitting an 11-week high of $72.78 the previous day.
In metals, Gold is once again finding magnetism to the USD 1,200/oz level, with the yellow metal down by a dollar ahead of the FOMC rate decision. Steel futures in China have dropped for the 2nd straight session as Chinese demand falls ahead of their week-long holiday.
In addition to the Fed's decision, expected data include mortgage applications and new home sales. CarMax and HB Fuller are among companies reporting earnings.
- S&P 500 futures up 0.2% to 2,927.50
- STOXX Europe 600 down 0.03% to 383.76
- MXAP up 0.1% to 165.77
- MXAPJ up 0.2% to 525.74
- Nikkei up 0.4% to 24,033.79
- Topix down 0.04% to 1,821.67
- Hang Seng Index up 1.2% to 27,816.87
- Shanghai Composite up 0.9% to 2,806.81
- Sensex down 0.6% to 36,420.54
- Australia S&P/ASX 200 up 0.1% to 6,192.28
- Kospi up 0.7% to 2,339.17
- German 10Y yield fell 0.8 bps to 0.535%
- Euro up 0.03% to $1.1771
- Italian 10Y yield fell 7.0 bps to 2.517%
- Spanish 10Y yield fell 1.1 bps to 1.515%
- Brent futures down 0.4% to $81.58/bbl
- Gold spot down 0.2% to $1,198.80
- U.S. Dollar Index little changed at 94.15
Top Overnight News
- President Donald Trump reasserted his “America First” perspective in his address to the United Nations on Tuesday, chastising regimes in Iran and Venezuela and offering a blunt rejection of the multilateral underpinnings of the very body he addressed
- Theresa May said she’d prefer leaving the European Union without any deal at all to the Canada-style free trade arrangement proposed by so-called Brexiteers in her Conservative Party
- Blackstone Group LP, the soon-to-be owner of Thomson Reuters Corp’s financial-and-risk arm, is weighing a sale of FXall, a currency trading platform, according to people familiar with the matter
- Oil slipped after President Donald Trump resumed his attack on OPEC while Goldman Sachs Group Inc. poured cold water on forecasts for $100 crude
- Italy’s anti-establishment Five Star Movement said it will block the country’s 2019 budget unless it includes full funding for the party’s flagship plan to boost incomes for the poor. Investors shrugged off the threat, judging Five Star leader Luigi Di Maio doesn’t have the political weight to back it up
- A global tariff tit-for-tat could boost China’s $12 trillion economy and hurt the U.S. expansion, according to European Central Bank research published Wednesday
- French Finance Minister Bruno Le Maire said it would be “suicidal” to grant the U.K. a Brexit deal that seems better than remaining in the European Union, reinforcing the position that saw the bloc’s leaders reject May’s latest withdrawal proposal
- Japan’s Government Pension Investment Fund gave itself more flexibility on how much it invests in the nation’s bonds, raising the prospect that it’ll trim its $387 billion stash of domestic debt
Asian equities traded mostly higher despite a mixed lead from Wall St. where the Dow and S&P closed with losses amid cautiousness ahead of the FOMC. ASX 200 (+0.1%) gains were led by the strength in commodity names amid the bounce in base metals, while Nikkei 225 (+0.4%) initially lagged but remained in close proximity to test the 24,000 level to the upside. Elsewhere, Hang Seng (+1.2%) and Shanghai Comp (+0.9%) outperformed as trade tensions took a backseat amid reports that MSCI will consider increasing the weight of China A-shares in its indices to 20% from 5% and with bluechip energy names frontrunning the gains in Hong Kong. Finally, 10yr JGBs saw a slight rebound and printed fresh weekly highs as yields marginally declined across the curve but with gains capped amid weaker than previous 40yr auction results.
Top Asian News
- Ex-UBS Banker Starts $100 Million Fund for Share-Backed Loans
- MSCI Considers Boosting China A Share Weighting, Adding ChiNext
- SPH, Keppel Said to Mull Buyout of $1.1 Billion Carrier M1
European equities have started the day directionless, with trade choppy and newsflow light ahead of the FOMC’s rate decision later on in the day. The DAX is once again the major index underperformer with BMW still near the foot of the index after yesterday’s guidance cut. The CAC is leading the gains in the equity space, with Bouygues lifting the index after an upgrade at JPM to overweight. M&A related news was the pre-market focus, with suggestions that Unicredit may tie-up with one of Lloyds or ABN Amro; and further reports saying Deutsche Bank was looking at a theoretical merger with UBS, as according to sources; something which their CEO later downplayed.
Top European News
- Deutsche Bank Sees Quarterly Profit Broadly Meeting Expectations
- Bankers Get $4,700 Car Parking Spaces as Ireland Roars Back
- GAM Names Juan Landazabal to Newly Created Head of Trading Role
- Record Czech Rate Hike ‘Done Deal’ With Koruna Back in Focus
In FX, amidst very rangy or cagy trade in Usd/majors ahead of the FOMC, the GBP and NZD are just standing out from the
crowd as outliers, with the former outperforming in wake of more encouraging NZ macro news overnight, as a marked improvement in the business outlook overshadowed a worse than expected trade deficit, on balance. Nzd/Usd rebounded towards 0.6700, but is now back down around 0.6650 vs Cable unable to reach 1.3200 and retreating towards 0.8950 again vs the EUR. AUD/JPY - The next best G10 currencies in terms of gains vs a still soggy Usd (DXY only just holding above 94.000), with the Aud maintaining 0.7250+ status and Jpy defending 113.00 again, even though month/quarter/Japanese half year end positioning is said to be net negative. Expiry interest may also be influential here with some decent layered run-offs from 112.95-113.00 down to 112.30-35 (1-2 bn). CAD/CHF - Marginal laggards as the Loonie continues to pivot 1.2950 amidst the ongoing NAFTA stalemate, but cushioned somewhat by elevated oil prices, while the Franc is anchored around 0.9650 and 1.1350 vs the Eur after a sharp deterioration in ZEW’s Swiss investor sentiment index that underscores SNB caution about risks to the economy. EM - The Try has taken over the mantle as main regional mover, albeit with the Zar not far behind and both firmer vs the Usd. The Lira appears to be encouraged by more assurances about CBRT independence from Turkey’s Finance Minister, while the Rand awaits an address from President Ramaphosa later today. Usd/Try at the lower end of a circa 6.2000-1000 band and Usd/Zar also nearer the base of 14.3800-2750 parameters
In commodities, oil is flat and has erased the slight losses seen following a surprise build in API crude inventories. This comes amid reports from India overnight saying they were set to cut oil imports from Iran to zero, that was later denied. Commentary on the fossil fuel came from Goldman who said the initial decline in Iran could bring prices to USD 82.50/bbl and that price risks are skewed to the upside given the elevated geopolitical tensions among oil producers and robust oil demand. The Iranian Oil Minister was also on the wires saying that if US President Trump wants oil to stop rising he should stop interfering in theMiddle East.In the metals scope, Gold is once again finding magnetism to the USD 1,200/oz level, with the yellow metal down by a dollar ahead of the FOMC rate decision. Steel futures in China have dropped for the 2nd straight session as Chinese demand falls ahead of their week-long holiday.
US Event Calendar
- 7am: MBA Mortgage Applications, prior 1.6%;
- 10am: New Home Sales, est. 630,000, prior 627,000
- 2pm: FOMC Rate Decision (Upper Bound), est. 2.0-2.25%, prior 1.75%-2.0%
- 2pm: Interest Rate on Excess Reserves, prior 1.95%
DB's Jim Reid concludes the overnight wrap
As we hit US rate hike day, bond markets continue to be the focus for now with the last 24 hours seeing another steady selloff across the majority of core markets. It is still a very controlled sell off though with bond vol measures staying much lower than the sell-offs in Jan/early Feb and in May.
Treasuries did rally back into the close last night at 3.093% (+0.4bps on the day) but earlier traded within a whisker of the YTD (and 7-year) closing high in May of 3.112% (they did hit 3.123% intraday on May 18th however). Before the late rally, Bunds also closed 3.4bps higher at 0.541% while the rest of Europe (ex. Italy – see below) saw yields up a similar amount. Equities on the other hand were a lot more muted. The Stoxx 600 closed +0.46% but the FTSE-MIB out-performed to
close +1.54% though as the up and down Italian newsflow of late was more on an “up” yesterday.
In the US the S&P 500, DOW and NASDAQ ended -0.13%, -0.26% and +0.18% respectively. Oil is quietly driving price action in both bonds and equities, pushing up inflation breakevens and boosting energy stocks. The energy sector paced gains on both sides of the Atlantic yesterday. Brent finished last night up another +0.83% and is at the highest level ($81.87/bbl) since November 2014. Mr Trump’s comments at the UN did create some volatility though as he said OPEC nations are “ripping off the world” with current oil prices. Brent spiked down a little around the comment but held gains into the close amid reports that India plans to cut its imports of Iranian oil to zero by November to comply with US sanction, from their end-August level of 375 million barrels per day. So the oil story is one to watch especially as breakevens start to respond.
How markets fare today will likely depend on what sort of message we get from the Fed and Mr Powell this evening. With a 25bp hike in the fed funds rate as good as done, the focus will instead be on the Committee’s signal about the prospects for rate hikes in the coming quarters. DB’s Peter Hooper believes that although the market may interpret a few elements of the meeting dovishly, namely the possible change to the description of the policy stance as “accommodative” and a decline in the long-run median dot in the Summary of Economic Projections, he and the team would caution against this interpretation.
Instead, Peter expects the overall message from the meeting to be that the current gradual (i.e. roughly quarterly) pace of rate hikes remains appropriate and that, with growth expected to continue to run well above potential, the labour market beyond full employment, inflation at target, and financial conditions still accommodative, the Committee has become more confident that rate hikes should continue at least to neutral. Moreover, as Chair Powell has recently indicated, as long as income and job gains remain strong, a restrictive monetary policy stance could be needed. Peter goes on to say that this signal should reinforce elevated market pricing for the next rate hike in December and support expectations for further hikes at least through the first half of 2019. As a reminder, DB expects another 4 rate hikes in 2019 in addition to another this December.
Back to yesterday and President Trump’s speech at the UN General Assembly. He stuck a lot closer to the prepared script than we’re used to seeing of late but there were still a couple of headlines which caught the market’s attention. Trump reiterated that the trade imbalance with China is “just not acceptable” and also that China’s trade distortions “cannot be tolerated”. He confirmed that sanctions on North Korea will stay until denuclearization occurs and also pleaded with all nations to isolate Iran’s regime. Trump cited a “breakthrough” new trade deal with Mexico but also said issues remain outstanding with Canada – an issue also highlighted by US Trade Representative Lighthizer yesterday.
Meanwhile the Mexican Peso (-0.13%) was actually a shade weaker despite Trump and Lighthizer’s comments, slightly underperforming the rest of EM currencies which advanced +0.20%. The Argentinian Peso (-2.40%) was the big underperformer though, following the news that Central Bank President Luis Caputo had resigned just three months after taking office. His decision was supposedly due to personal decisions, though 10-year yields rallied 6.6bps and the country’s benchmark equity index advanced +2.68%, possibly on optimism that a new IMF deal will be finalized soon.
Overnight, the tone in Asia has been mostly positive. Leading the way are bourses in China (Shanghai Comp +1.27%, CSI 300 +1.58%) which have been boosted by the news that MSCI is considering lifting the weight of China’s mainland shares in its global indexes from next year by lifting the cap on free-float-adjusted market value to 20% from 5% for yuan-denominated stocks.
Chinese tech stocks are also being considered. The Hang Seng (+1.64%) has also been boosted by that news while the Nikkei (+0.20%) and ASX (+0.11%) have made smaller advances. Futures in the US are also up modestly while Treasuries have largely held onto yesterday’s move. There’s not been much notable newsflow overnight other than that although it was interesting to see that the new BIS figures show non-financial debt as a percentage of GDP in China increasing again in Q1 2018 with the ratio up to 164.1%, having declined in the four quarters prior to that, hitting 160.3% at the end of 2017.
In other news, bucking the trend in bond markets again yesterday were BTPs with 10y yields falling -7.0bps and 2y yields down -5.2bps. This followed a la Stampa article yesterday shortly after we went to print which suggested that the government was heading to a compromise on the budget deficit of 1.9% of GDP. Other major newspapers, Corriere and Il Messaggero, both reported similar values in the 1.8-1.9% range as well. That’s about 0.3% higher than what was previously reported as the upper limit for Tria, but illustrates that we might be getting closer to a deal. The article also made a reference to some measures to boost capital investment with the intention of accounting them as one-off and therefore out of the computation of the deficit for EU rules according to our Italian economist Clemente DeLucia. It is unclear if this potential one-off would be included into the 1.9% or if the aggregate deficit figure would be above that level but the market will no doubt be keeping an eye on this. As you’ll see in the day ahead Tria is due to speak this morning so we’ll be watching out for any more headlines.
Here in the UK, the latest Brexit development was confirmation from PM May that she would prefer a no-deal Brexit outcome to a Canada-style outcome, which is pushback against the Brexiteers who have been urging May to revert to a simple FTA. Separately, at the Labour party conference, Shadow Brexit Secretary Starmer said that the opposition would be willing to vote against PM May’s Brexit deal, with an eye toward a new general election or a second referendum if necessary. Labour does not really have an incentive to articulate a clear position for now, so their leaders will likely continue to keep the party’s position ambiguous. The pound shook off the Brexit noise to close +0.49% stronger yesterday.
Staying in Europe, following on from Draghi’s comments on Monday, Peter Praet said that “I don’t think there was anything new” in Draghi’s comments and that the market was right to downplay the ‘vigorous’ headline a little later. Praet instead said that “basically what we say is price pressure remain subdued and it will take a long time before we get close to two percent”.
In Germany, the CDU’s party whip, Volker Kauder, was surprisingly replaced in favor of Ralph Brinkhaus. Kauder was a Merkel loyalist tasked with ensuring parliamentary support for the Chancellor’s policies, and his loss reflects the growing tension within Merkel’s governing coalition. It slightly raises the odds that Merkel struggles to finish her term as party leader and Chancellor, and the DAX index dropped -0.24% after the story broke, but subsequently rallied to close +0.19% higher.
On the economic data front, UK inflation expectations ticked higher in August, up 0.2pp to 2.9% for short-term expectations and up 0.1pp to 3.4% for the long-term. In France, manufacturing confidence fell slightly to 107 from 110, mirroring last week’s slightly soft PMIs. In the US, data was strong, with the Richmond Fed Manufacturing Index up to a new cyclical high of 29 from 24. The Conference Board consumer confidence index also rose, to 138.4 and its highest level since 2000.
The day ahead will almost certainly revolve around the FOMC meeting this evening and Chair Powell’s press conference. Prior to that there’s only a few data releases due with September consumer confidence in France, September CBI retailing reported sales in the UK and August new home sales in the US. Away from that keep an eye on Italian Finance Minister Tria’s comments at 9.30am BST when he speaks at an event organized by the retailers’ association. German President Steinmeier is also due to visit the ECB this afternoon, EU27 government envoys are due to meet in Brussels to discuss Brexit, the UN summit continues for another day while here in the UK Labour leader Corbyn is due to speak at the Labour Party conference.