In what is shaping up to be another listless trading day, where attention is glued to Hurricane Issac making not one but two landfalls, and the implication for US refining capacity or the lack thereof, here is what has happened so far, via BBG and Deutsche. The overnight session is mixed with Chinese equities under-performing again. The Nikkei and the KOSPI are both around two-tenths of a percent higher. The Shanghai Composite (-0.4%) is lower as the economic slowdown is adding negative pressure on cyclical sector earnings, closing at fresh 3 year lows. Iron ore prices continued to fall amid the weaker growth backdrop in China. Spot iron ore prices were down nearly 5% overnight to their lowest since November 2009. Rio Tinto's 5yr CDS has widened by about 25bp in a week. Rio's share price is down by about 6.6% over the same period. European markets fall, led by the commodity-heavy FTSE 100, with Swedish, Swiss markets rising. The euro rebounds against the dollar. Crude oil falls, metal prices decline. Spanish, Italian bond yields rise slightly, German, U.K., Irish bond yields fall. U.S. futures little changed and 2Q GDP figures are released later today. The state of Italy has sold EUR9 billion in 6 month bills at a 1.69 BTC, yielding 1.585%, the lowest since March, on prayers that Draghi, who was last heard defending the ECB as a non-political institution (whose sole product is the political construct known as the Euro - go figure), will finally step up and act instead of just continuing to talk and make empty promises.
- S&P 500 futures down 0.06% to 1407
- Stoxx 600 down 0.3% to 266.51
- US 10Yr yield down 0bps to 1.63%
- German 10Yr yield down 2bps to 1.32%
- MSCI Asia Pacific up 0.19% to 119.46
- Gold spot up 0.02% to $1667.2/oz
SocGen summarizes what the main events of the day are:
Volatility has started to perk up for most EUR crosses, especially in the shorter dated vs mid and longer maturities, which makes complete sense given the EU event timeline for September. Markets have been slow to catch on, but the return from holidays in Europe and the US after the Labour Day next week is likely to drip feed a rise in volatility to levels more commensurate with historical norms and looming event risk. The biggest vol changes yesterday were registered in EUR/JPY and EUR/GBP (see chart). Outside the EUR, there was also a noticeable bounce in USD/CHF. But as stated above, the current levels are still extremely cheap and 2 to 2.5 vol below the 2y averages. The pressure on the ECB to deliver comes only next week (report the bank will not push for indemnity on any losses on bond holdings allays subordination concerns), ahead of Bernanke's keynote speech this Friday, we are probably dependent on moves in spot for the cost of optionality to extend the moves of the last 24 hours. To this end, we will keep an eye on the headlines coming out of the Merkel-Monti meeting and revised US GDP data.
A rather busy calendar today sees the release of the Swiss KOF leading indicator, German CPI and revised US Q2 GDP. Focus in the eurozone will be on the meeting between German Chancellor Merkel and Italian PM Monti. Suggestions of what the ECB will or will not announce next week continue to centre on ‘yield caps' or a ‘yield range' or volatility for peripheral bonds. It was no surprise that the EU yesterday fully endorsed the ECB bond-buying proposal. All we need is a formal request from Spain.