It is a sea of green out there to start the week, and we have Germany's generous taxpayers and Chinese rate reform to thank for today's ramp.
With central banks now almost out of ammo, every algo is attuned to even the faintest hint of fiscal stimulus, and nowhere more so than "stingy" Europe, which is why the trial balloon two weeks ago and again last week out of Spiegel, that Germany would unleash billions in stimulus spending in case of a recession will be repeated again and again, and overnight it was Bloomber's turn to report that Germany was readying a stimulus plan as a contingency plan for a "deep recession", helping send futures and global stocks sharply higher.
It was all about Germany over the weekend too, with the Bloomberg news following an overnight report that Germany’s finmin and SDP leadership contender, Olaf Scholz, said in Berlin that "the last crisis cost €50bn ... we can muster that [again]." However, as Mizuho wrote overnight, "we are sceptical of a sustained market impact, as it is conditional on a crisis" with the Japanese bank adding that "the point which is being missed is that said German fiscal stimulus is conditional on a recession, and existing law already allows for this. The ECB would probably restart QE before the German fiscal taps were at risk of being nudged open. We suspect the market is simply trading the headlines in a kneejerk manner and the summer liquidity is allowing for the moves to go unfaded"
Mizuho is right, and while the German news is largely meaningless - especially when one considers that of the €50BN stimulus, about half or more would have to be spent to shore up Deutsche Bank (as it would only be unlocked in a "deep recession"), for now it has provided enough fuel to send global markets and US equity futures sharply higher, and to steepened the curve, sending 30Y yield back over 2.00%, especially after news from late Friday that the US treasury reached out to dealers again seeking feedback for 50Y or 100Y issuance, even though as we noted on Friday, longer issuance has been repeatedly shunned in the past, most recently 2017, citing a lack of stable demand. In 2017 this caused a 7bp round trip (up then down) in three days for 5s30s.
News of the recession-contingent German stimulus sent the EUR to session highs of 1.1114, if not for long...
... while the German 30Y yield has soared higher in the past 2 days, rising from -0.30% to as high as -0.10%.
In the US, S&P futures advanced alongside the Stoxx Europe 600, which extended its gains to a session high following the Bloomberg Germany stimulus report and amid speculation that economies would prop up stalling growth with fresh stimulus measures, easing pressure on bonds and dampening demand for perceived safe-havens such as gold.
Hopes of government action to stave off fears of recession - triggered by an inversion in the U.S. bond yield curve - grew as China’s central bank unveiled interest rate reforms expected to lower corporate borrowing costs. The prospect of Germany’s coalition government ditching its balanced budget rule to take on new debt and launch stimulus steps also helped the mood, after boosting Wall Street shares on Friday.
Over the weekend, the PBoC announced a new interest rate reform plan which will make the Loan Prime Rate the new Benchmark Reference Rate to be used by banks for lending which is aimed at supporting funding as well as lower borrowing costs for small businesses, while it is to be set monthly (20th of every month) and will be linked to the Medium-term Lending Facility rate. (Newswires) Note: current 1yr LPR stands at 4.31% vs. Benchmark Rate 4.35%. China is to publish the new LPR from August 20th.
The MSCI world equity index gained 0.3%, powered by a 0.8% gain for the Euro STOXX 600. Bourses in London, Frankfurt and Paris rose between 0.7%-0.9%. The optimism was set to spread to Wall Street, too, where futures gauges were pointing to gains of around 1%.
Earlier in the day, the People's Bank of China's interest rate reforms - which it is said would help steer borrowing costs lower for companies and support a slowing economy - helped stocks in Shanghai rise 2.1%. MSCI’s index of Asia-Pacific shares outside Japan gained 1.1% with shares in Hong Kong and China climing the most in Asia, where jumps across the region were helped by news of Beijing’s plan to reform its interest-rate system and cut borrowing costs. Treasury 10-year yields continued to rise from multiyear lows reached last week, while the Bloomberg dollar index ticked even higher and the pound reversed an early increase. Gold fell, hovering back around the $1,500 level.
Yet even as signs that major economies would act to support growth emboldened investors, some market players cautioned that the boost to markets from expectations of stimulus was fragile.
“You have just got a little bit of portfolio readjustment, a resetting of expectations. The big question is whether it can last,” said Michael Hewson, chief market strategist at CMC Markets. “Talking about fiscal stimulus in Germany is one thing, doing it is something else.”
As investors tiptoed back to riskier assets, gold fell 1% to $1,499.30 per ounce, with U.S. futures for the precious metal also down.
In FX, the dollar index was higher in Asia at 98.201, close to a two-week high reached on Friday, while the Bloomberg dollar index was at session highs above 1210.
The euphoria will probably not last long: with volatility jumping in August, traders’ focus will turn to Fed Chair Powell’s address planned at the Kansas Fed’s annual Jackson Hole gathering on Friday, which will be key to gauging whether U.S. policy makers will add to July’s interest-rate cut. Analysts think Powell’s remarks will be aimed at reassuring nervous markets that the Fed will keep its easing stance and set the stage for more rate cuts.
“What Powell has to say is in focus as the discrepancy remains between what he said on interest rates and what the markets have come to expect the Fed will do,” said Junichi Ishikawa, senior FX strategist at IG Securities in Tokyo.
“This week is an opportunity for, in particular, Chair Powell to straighten up the message and show that they are at one and that there is a clear view about where the economy is going,” Anne Anderson, head of fixed income in Sydney for UBS Asset Management Australia, told Bloomberg TV. “This fear needs to be arrested.”
Over the weekend, While White House economic director Larry Kudlow said recent phone calls between U.S. and Chinese trade negotiators had been “positive,” even though later in the day President Trump suggested he wasn’t ready to sign a deal and linked the discussions to Hong Kong, saying for the first time on camera that it would be harder to reach a deal if there’s a violent conclusion to the protests.
In geopolitical news, US issued a warrant to seize the Iranian oil tanker Grace 1 which was just released by Gibraltar. Subsequently, Iran has warned the US against seizing its oil tanker in open seas, said the Iranian Foreign Ministry
In commodity markets, crude oil prices rose after an attack on a Saudi oil facility by Yemeni separatists on Saturday, with traders also looking for signs that Sino-U.S. trade tensions could ease. Brent crude was up 65 cents, or about 1.1%, at $59.29 a barrel at 0805 GMT.
No major economic data are expected. Estee Lauder and Baidu are among companies reporting earnings.
- S&P 500 futures up 0.7% to 2,923.50
- STOXX Europe 600 up 0.7% to 372.13
- German 10Y yield rose 4.3 bps to -0.642%
- Euro up 0.1% to $1.1104
- Italian 10Y yield rose 6.1 bps to 1.046%
- Spanish 10Y yield rose 4.8 bps to 0.129%
- Brent futures up 1% to $59.21/bbl
- Gold spot down 0.8% to $1,501.21
- U.S. Dollar Index little changed at 98.20
- MXAP up 0.8% to 151.93
- MXAPJ up 1.1% to 493.02
- Nikkei up 0.7% to 20,563.16
- Topix up 0.6% to 1,494.33
- Hang Seng Index up 2.2% to 26,291.84
- Shanghai Composite up 2.1% to 2,883.10
- Sensex up 0.7% to 37,595.10
- Australia S&P/ASX 200 up 1% to 6,467.44
- Kospi up 0.7% to 1,939.90
Top Overnight News
- Finance Minister Olaf Scholz suggested Germany could muster 50 billion euros ($55 billion) of extra spending in an economic crisis, putting a number on a possible fiscal stimulus for the first time
- President Trump said the U.S. is “doing very well with China, and talking!” but suggested he wasn’t ready to sign a trade deal, hours after his top economic adviser laid out a potential timeline for the resumption of substantive discussions with Beijing
- U.K. opposition leader Jeremy Corbyn will promise to do "everything necessary" to prevent a no-deal Brexit. Prime Minister Boris Johnson will travel to Germany and France this week to make clear that Britain is leaving the European Union on Oct. 31 with or without a deal
- China’s central bank said it’ll start releasing a new reference rate for bank loans, a further step in a long-awaited reform to interest rates that’s set to bring lower borrowing costs to the economy
- Italy’s anti- establishment Five Star Movement said Sunday that its coalition partner the League -- and its leadership -- is “no longer a credible interlocutor,” setting the stage for a full-blown split that could realign the nation’s politics
- Hong Kong protesters turned out in force through heavy rain to march for an 11th straight weekend, as more moderate leaders sought to reset the movement after violent scenes at the airport last week threatened to sap support among the public
- The Iranian supertanker detained last month on suspicion of hauling oil to Syria in violation of European sanctions set sail from Gibraltar waters after being released by the British territory
- Deputy Premier Matteo Salvini’s push for power in Italy looks to be running into trouble, with the strongest indication yet that his rivals may be able to forge an alliance to thwart him
- Trump’s trade policy could be one of the many topics Fed Chairman Powell could talk about in the annual Jackson Hole symposium Friday. Powell is likely to use the gathering to suggest the Fed is ready to cut interest rates
- Iran warned the U.S. against targeting a supertanker carrying the Middle East country’s oil as the vessel departed Gibraltar after being seized last month by U.K. forces and held in the British territory
- The 1.1 trillion euro ($1.2 trillion) global pool of negative-yielding corporate debt is failing to entice European companies to borrow at ultra-cheap levels. It shows the uphill battle the ECB faces to revive the region’s economy
Asian equity markets were higher across the board as the region took impetus from last Friday’s firm gains on Wall Street and as composure returns to the market following the recent turmoil. ASX 200 (+1.0%) and Nikkei 225 (+0.7%) were positive in which the tech and energy sectors led the advances and with firm gains seen in the likes of Beach Energy and Lend Lease post-earnings despite a decline in the latter’s profits, as it stressed the strong position of its core business and confirmed several parties are conducting due diligence on its engineering unit. Tokyo sentiment also found relief from the latest Japanese trade figures which showed Exports and Imports continued to contract, albeit at a slower pace than what the market feared. Hang Seng (+2.0%) and Shanghai Comp. (+2.1%) conformed to the positive tone after the PBoC continued its liquidity efforts and announced interest rate reforms in which it will make the new Loan Prime Rate the benchmark rate for bank loans which is aimed at lowering borrowing costs. Furthermore, Hong Kong outperformed despite the continuation of mass protests over the weekend which were of a peaceful nature, while participants await the US decision on Huawei as reports suggested the Trump administration will grant an additional 90-day extension to the licence which allows the Chinese tech firm to conduct some business with US customers. Finally, 10yr JGBs were slightly lower amid the heightened risk appetite but with downside also stemmed by the BoJ’s presence in the market for a total JPY 760bln in 1yr-5yr JGBs.
Top Asian news
- China Lines Up Lower Borrowing Costs with Revamped Rate System
- Rebound in China, Hong Kong Stocks Accelerates on Policy Support
- Huawei’s Three Closest Chinese Rivals Form Rare Partnership
- Thailand Says Producers Leaving China Offer Hope for its Economy
European equities are higher across the board [Eurostoxx 50 +0.9%] following on from a stellar Asia-Pac handover in which Hang Seng and Shanghai Comp. closed higher by 2%. Sectors are all in the green with underperformance seen in some defensive sectors amid the overall risk appetite. Meanwhile, material and energy names outperform amid price action in the base metal and oil complexes; while the European Banking Index has experienced a turnaround from last weeks poor performance as reports around the size of potential fiscal stimulus for Germany (USD 55bln according to Finance Minister Scholz) have provided the first figures to the possible package. As such, the likes of Deutsche Bank (+2.5%) and Commerzbank (+2.4%) are notably firmer this morning. Looking at individual movers, Bpost (-1.5%) shares fell towards the bottom of the Stoxx 600 as its CEO is to reportedly step down in 2020. At the other end of the index, CNH Industrial (+3.2%) rose amid a broker upgrade at Morgan Stanley. Finally, BASF (+1.5%) is among the top DAX performers as its CEO reaffirmed the Co’s intent to steadily increase dividend.
Top European News
- Welder Shortage Threatens Boris Johnson’s U.K. Nuclear Revival
- Salvini’s Rivals Are Threatening to Derail Italian Power Grab
- SNB Sight Deposits Surge, Suggesting Interventions to Curb Franc
- Thomas Cook Shares Jump as Bailout Partner Swings to Profit
In FX, the Dollar remains firm vs most G10 counterparts and EM currencies, but the index has lost some momentum after reaching 98.341 on Friday and has eased back towards 98.000 within a 98.242-134 range. In truth, trade has been rather muted overall at the start of a week that is relatively light on data/events until Wednesday when FOMC minutes are due and are followed by preliminary PMIs, ECB minutes and the Jackson Hole Symposium.
- JPY/GBP/NZD/SEK - The major ‘underperformers’ as the Yen extends is retreat from recent lows to 106.65 and close to Fib resistance ahead of DMAs either side of 107.00 amidst a further rebound in US Treasury yields and Japanese trade data showing shallower than forecast declines in both imports and exports. Meanwhile, UK political/no deal Brexit jitters have scuppered Sterling’s revival on the back of last week’s better than expected run of data, with Cable slipping back towards 1.2100 and Eur/Gbp back up over 0.9150 vs sub-0.9100 at one stage. Note, comments from BoE Governor playing down NIRP and any change in the 2% inflation target have not really impacted, though Gilts and 3 month futures are weaker and the curve is steeper. Elsewhere, the Kiwi is lagging down under after recent downbeat NZ macro releases, like the sub-50 manufacturing PMI, with Nzd/Usd hovering just above 0.6400 and AUD/Nzd firm within a 1.0550-70 range as Aud/Usd holds up better between 0.6800-70 parameters. Back to the cross, MS advocates a long position around current levels for 1.1100 and with a 1.0280 stop based on diverging RBNZ/RBA policy outlooks in wake of the latest Aussie jobs report that revealed a bigger rise in headline payrolls and mostly due to full-time hiring. Similarly, the Sek is struggling to keep pace with its Scandi peer on relative Riksbank vs Norges Bank rate guidance and with the Nok also propped up by firm oil prices. Indeed, Eur/Sek is hovering around 10.7400 whereas Eur/Nok has pulled back from circa 10.0000.
- EUR/CAD - The single currency is also benefiting from a retracement in Eurozone debt yields amidst more German Government reports about fiscal spending to offset recession, and as the Bundesbank warns that the economy may have shrunk further through the summer. Hence, Eur/Usd is resilient either side of 1.1100 even though final Eurozone CPI was revised a bit lower and ECB’s Muller expresses concern about inflation being too soft, with a decision about more stimulus likely to come next month. As noted above, crude has firmed up again and the Loonie is also drawing some support as Usd/Cad sits closer to the base of a tight 1.3277-57 band.
- EM - Broad losses vs the Greenback, but the Argentine Peso may be in for additional investor angst given a double dose of credit rating punishment from S&P and Fitch late on Friday. Note, Usd/Ars closed at 54.8340.
In commodities,the energy complex is currently benefitting from the overall risk appetite in the market which sees WTI futures above the 55/bbl mark whilst Brent futures remain north of 59/bbl. Prices may also be deriving some support from reports of a drone attack at Saudi’s 1mln BPD Shaybah oilfield, albeit the fire was extinguished at a gas processing plant and there has been no reported impact on production. Looking at the complex from a technical perspective, WTI sees a golden cross forming with its 200 and 50 DMAs both around 56.15. Elsewhere, gold prices are subdued amid the overall risk appetite with the yellow metal back at the 1500/oz level, session low of USD 1497/oz thus far. Meanwhile, the risk tone has provided supported to copper prices as the red metal reclaims 2.60/lb to the upside.
US Event Calendar
- Nothing major scheduled
DB's Craig Nicol concludes the overnight wrap
So, August is clearly proving to be anything but the quiet, sleepy, non-eventful month that most were hoping for. If you were lucky enough to be on holiday last week then all you missed were four daily moves of at least 1% for US equities, the 10y treasury briefly dipping below 1.50% and the 2s10s curve at one stage inverting intraday which started a chorus of recession debates. That was compounded by soft China data and a negative Q2 GDP print for Germany, and one which our economists believe will be followed by another negative reading in Q3 and thus sending the economy into recession (see their update here ).
That’s one way to set the scene for the Fed then and specifically to see if Powell can right the ship with the Fed’s annual Jackson Hole symposium due for the end of the week. The event officially kicks off on Thursday however we won’t hear from Fed Chair Powell until the Friday at 10am EST/3pm BST. The theme for this year’s conference is the sufficiently vague “Challenges for Monetary Policy” however expect the market to be leaning on every word Powell says especially given that there’s been relatively muted Fedspeak in the wake of the July FOMC meeting. Obviously since then we’ve had a ratcheting up in the trade war, slowing global growth and the massive focus on the inversion of the yield curve last week. We’re still pricing in around two and a half more rate cuts this year so the bar for Powell to be dovish is clearly fairly high. All that to look forward to.
We’ll also get the FOMC meeting minutes from the July meeting on Wednesday evening however that could look a little stale now in light of developments since then. That said our economists noted they may provide an important benchmark for Fed officials’ outlooks prior to the escalation of trade tension. For example, if the minutes indicate officials’ existing economic views were largely predicated on a flare-up in trade tensions, as St. Louis Fed President Bullard (dove/voter) mentioned last week, this would be relatively hawkish as it would imply officials think they do not need to do much more easing than they have already foreshadowed. However, if trade tensions returning to a boil a day after the July meeting was actually a surprise, which would be implied by Powell saying they had "returned to a simmer" in his prepared remarks to open the press conference, this would be consistent with our economists’ call that more monetary policy easing than was built into the June dot plot is to be expected.
As for other things to watch, the data calendar is sparse with the exception of the global flash PMIs for August on Thursday. A reminder that the data for Europe in July confirmed a reversal of the improvement seen in June with the composite reading for the Euro Area dropping back to 51.5. The consensus expects a further modest deterioration to 51.2 with the manufacturing reading expected to fall further into contractionary territory at 46.2.
All that to look forward to then. In the meantime the main news flow from the weekend has focused on what appear to be mostly positive comments on trade and the US economy from the US administration. President Trump tweeted yesterday that “we are doing very well with China, and talking”. Prior to that White House National Economic Council Director Kudlow told Fox News that talks with China had been “positive” and that if deputies meetings pan out then the plan is still to have China come to the White House and continue negotiations, without expanding on any time frame. Kudlow also downplayed recession fears while adding to upbeat commentary was Trump’s trade adviser, Navarro, who told ABC that he expected “a strong economy through 2020 and beyond”.
Those comments combined with the strong close on Wall Street on Friday have seen markets in Asia kick off the week on the front foot. The Nikkei (+0.67%), Hang Seng (+1.87%), Shanghai Comp (1.47%) and Kospi (+0.67%) are all up. Elsewhere, futures on the S&P 500 are up +0.50% this morning while the yield on the 10y treasury is up +2.8bps. WTI crude oil prices are up +0.89% after a drone attack on a Saudi Arabian oil field kept geopolitical risks into focus. Meanwhile, the CNY is little changed overnight. It’s worth noting that the PBoC has announced that it will start releasing a new reference rate for bank loans as a further step in a long-awaited reform to interest rates.
Elsewhere, the euro is flat this morning following comments yesterday from Germany’s Finance Minister Olaf Scholz about Germany potentially increasing spending to an equivalent of that during the financial crisis which “cost us 50 billion euros”. Scholz said “we have to be able to muster that and we can muster that,” but, “the biggest problem is uncertainty, including that caused by the Chinese-U.S. trade war.”
Quickly recapping Friday’s action now, where equity markets pared their losses and bonds surrendered a bit of their rally from earlier in the week. The S&P 500 still ended the week -1.02% lower (+1.44% Friday), while the DOW and NASDAQ had similar moves of -1.53% and -0.79% (+1.20% and +1.67% Friday). Semiconductors outperformed, gaining +1.02% (+2.78% Friday), while bank stocks dropped -3.07% as interest rates collapsed (+2.61% Friday). Treasury yields rallied for the third consecutive week, with 10-year yields down -19.1bps (+2.7bps Friday), taking the 2y10y yield curve to 7.9bps after briefly dipping below zero earlier in the week. That small selloff on Friday was driven by new reports that Germany could consider running a fiscal deficit to address a downturn, in contrast to the current policy for a “black zero” of fiscal surpluses. Our economists are sceptical that the story means anything beyond normal automatic stabilizers, but bunds still instinctively sold off +2.7bps, paring their weekly decline to -10.9bps. Peripheral bonds outperformed, with BTPs rallying -41.1bps (+5.9bps Friday).
In other markets, the STOXX 600 somewhat mirrored moves in the S&P 500, retreating -0.52% (+1.24% Friday), though bank stocks performed better in Europe, down only -0.78% (+3.09% Friday). The euro weakened -0.98% (-0.15% Friday) as the dollar broadly rallied +0.72% (0.00% Friday). EMs currencies weakened -0.79% (+0.29% Friday), with the clear weak spot coming from Argentina, which saw the peso weaken -17.49% (+4.28% Friday) after the poor election result for incumbent President Macri. Commodities were fairly tame, with Brent crude advancing +0.29% (+0.81%), while gold rose +1.10% (-0.65% Friday) to touch its highest levels in six years. Credit markets were weaker, as HY spreads widened +21bps and +13bps in the US and Europe (-2.5bps and +3.0bps Friday), respectively.