Markets: Relief
Whether today is a sustainable change or not depends on the type of relief. Treating the symptom or the disease matters. Doctors for the market – commonly known as central bankers – did little to change things today. Witness the Norges Bank decision to keep rates unchanged but to likely hike in September.
What did change the mood overnight was two stories – 1) China/US talks on trade (US Malpass meets China Wang in late August) and 2) Qatar promising $15bn for direct investment into Turkey. There is also hope that Brexit talks restarting led to something better than a no-deal ending of UK/EU trade. However, the event of the day is the conference call of new Turkey FinMin Albayrak, seen as many as a key test for TRY holding below 6. Despite all the talk of relief, the sinking of Turkey and China has led this week to the MSCI EM index to reverse from its January highs to bear territory (down 20%).
Asia just didn’t buy into the relief trade while Europe has except for Italy. This brings out the key theme for the day – what type of relief has been delivered for the symptoms. The USD strength has led to gold to touch 19-month lows and most currencies beside the JPY to weaken substantially, that has led to another round of Hong Kong intervention to hold the HKD peg and it has brought mining shares to 5-year lows.
The USD relief starts with hope that US/China trade talks are real, continues with the Turkey alternative plans for its economy to have some credibility, and extends to how central bankers – particularly the FOMC – see the world financial stability.The summer vacation trading is easy to ignore and to push off as due to illiquidity and extreme over-reactions to the usual set of headlines about dire geopolitics.This begs investors to find the right safe-haven barometer to guide us through whether the doctors have fixed the markets or the just hidden the symptoms. The old FX saying is that CHF doesn’t lie – meaning a nation where negative rates and huge surpluses – remains a constant safe-haven even with SNB confusions. The risk off trade will gather steam if EURCHF 1.12 breaks much like 110 in JPY.
Question for the Day: Is the real problem Italy and Greece? The recovery from the great recession has been uneven for many nations. The focus on emerging markets has left many wondering if the real problem is elsewhere – with Italy politics daily driving doubts. The history lesson about too much debt and the cost of deleveraging without devaluation remains intact with Greece.
You can’t force a huge economic restructuring without all tools working – and the ongoing problems for Europe link back to the Greek bailouts where the inflexibility of the EUR clashed with the insistence of keeping the debt burden on the books (albeit restructured and pushed further out into the pretend and extend Neverland). Axios has an article worth reading today to consider all of this. The key question for risk is if the dominos for the weeks have already fallen and are fully priced - namely Turkey, then China, then Italy.
What Happened?
- Japan July trade deficit Y231.2bn after surplus Y720.8bn – more than –Y70bn expected - first deficit in 2-months. Imports rise 14.8% y/y after 2.5% y/y – near expectations – while exports rise 3.9% y/y after 6.7% y/y – less than 6.6% y/y expected.Exports fell with auto shipments to the US down, but Asian demand for Japanese machines and electronics parts remained strong, indicating the US-China trade row hasn't had any direct impact on Japan's economy. Imports were led by purchases of crude oil, medical products and refined petroleum products.
- Australia August MI Consumer trimmed mean Inflation outlook 4% from 3.9% - mean weighted 2.5% from 2.3% y/y – highest in 10-months.
- Australia July jobs -3,900 after +58,200 – less than 15,000 expected and first drop in 5 months - but unemployment rate improves to 5.3% from 5.4% - better than 5.4% expected and best since November 2012- as participation rate drops to 65.5% from 65.7% - less than 65.6% expected. The employment-to-population ratio declined to 62.1% but this was still above May's 61.9%. The decline in jobs was due to fall in part-time jobs -23,200, which offset the solid 19,300 rise in full-time jobs. Total jobs in June revised higher from 50,900.
- German July WPI 0% m/m, 3.5% y/y after 3.4% y/y – as expected. Fuels/oil products up 0.3% m/m, grains/feed up 2.2% m/m, ore/steel -0.1% m/m, data processing -0.1% m/m, food/beverages -0.3% m/m, household items 0% m/m.
- Norges Bank leaves rates unchanged at 0.5% - as expected – rates most likely to be hiked in September 2018.The Executive Board's assessment of the outlook and balance of risks suggested that the key policy rate would most likely be raised in September 2018. The Executive Board's assessment is that the upturn in the Norwegian economy appears to be continuing broadly in line with the picture presented in June. Underlying inflation is below the inflation target, but the driving forces indicate that it will rise further out. "The outlook and the balance of risks do not appear to have changed substantially since the June Report", says Governor Oystein Olsen.
- UK July retail sales +0.7% m/m, 3.5% y/y after -0.5% m/m, 2.9% y/y – better than +0.2% m/m expected. The ex-fuel sales up 0.9% m/m,3.7% y/y after 3% y/y – better than 2.8% y/y expected. The 3M/3M rate for total sales now 2.1% after 2% in 2Q.Deflator drops to 2.1% y/y from 2.3% y/y with ex-fuel up 1% y/y.
- Eurozone June trade surplus E16.7bn after E16.9bn – less than E18.2bn expected. Exports up 1.6% m/m, 5.7% y/y while imports up 1.8% m/m, 8.6% y/y. The non-seasonally adjusted trade balance E22.5bn from E25.7bn in June 2017
Market Recap:
Equities: The S&P500 futures are up 0.4% after losing 0.76% yesterday. The Stoxx Europe 600 is up 0.4% while the MSCI Asia Pacific again suffered off 0.3% with Hong Kong leading the losses as HKMA defends the peg.
- Japan Nikkei off 0.05% to 22,192.04
- Korea Kospi off 0.80% to 2,240.80
- Hong Kong Hang Seng off 0.82% to 27,100.06
- China Shanghai Composite off 0.63% to 2,705.97
- Australia ASX off 0.06% to 6.412.60
- India NSE50 off 0.44% to 11,385.05
- UK FTSE so far up 0.65% to 7,547
- German DAX so far up 0.40% to 12,213
- French CAC40 so far up 0.55% to 5,334
- Italian FTSE so far off 1.25% to 20,646
Fixed Income: Risk-on drives yields higher. Core EU bonds are lower – UK 10Y gilts after retail sales up 2bps to 1.242%, German Bunds up 1.5bps to 0.315%, French OATs up 0.5bps to 0.67% while Periphery rallies with Italy off 5pbs to 3.10%, Spain off 1.5bps to 1.425%, Portugal off 1bps to 1.82% and Greece up 2bps to 4.23%.
- US Bonds are lower with focus on risk mood – 2Y up 1.6bps to 2.625%, 3Y up 1.9bps to 2.698%, 5Y up 2.2bps to 2.757%, 10Y up 2bps to 2.882% and 30Y up 1.6bps to 3.048%.
- Japan JGB full circle trading with equities – 10Y up 0.3bps to 0.09%. The MOF sold Y1.711trn of 5Y bonds at -0.076% with 3.949 cover – previously -0.107% with 4.869 cover.
- Australian bonds reverse early gains tracking stocks – 3Y up 0.1bps to 2.01%, 10Y off 0.3bps to 2.72%.
- China PBOC injects CNY40bn via 7-day reverse repos, first open market operation after 19 days – net adding CNY40bn on the day. Money market rates rose with O/N up 17bps to 2.505% and 7-day up 1bps to 2.577%. 10Y bond yields rose 4bps to 3.62%.
Foreign Exchange: The US dollar index is off 0.2% to 96.62 after touching 96.98 highs yesterday. Focus is on 96.45 and 97 for breakouts. In EM USD mostly lower with some notable exceptions – Asia: INR off 0.55% to 70.28, KRW up 0.2% to 1130, TWD up 0.1% to 30.83; EMEA: TRY up 2.5% to 5.7950 – touched 5.6968, RUB up 0.3% to 67.07 and ZAR up 0.15% to 14.54.
- EUR: 1.1365 up 0.15%. Range 1.1336-1.1398 with 1.1450 key resistance against 1.1250 targets – EM and US rates key.
- JPY: 110.90 up 0.15%. Range 110.46-110.93 with EUR/JPY 126.05 up 0.3%. Risk key still but 111.20 and 110 now the goal posts with 110.70 pivot.
- GBP: 1.2695 flat. Range 1.2686-1.2733 with EUR/GBP .8950 up 0.2% - better retail sales vs. Brexit with 1.26 holding against 1.28 resistance.
- AUD: .7265 up 0.35%. Range .7219-.7279 with European relief helping along with better jobs and metals bouncing. NZD up 0.2% to .6575 with .6545 still key.
- CAD: 1.3130 off 0.1%. Range 1.3114-1.3155 with focus on NAFTA and oil along with data tomorrow – BOC hikes vs. global EM pain 1.3050-1.3200 still.
- CHF: .9940 up 0.05%. Range .9916-.9943 with EUR/CHF up 0.2% to 1.1295 as 1.1250 base building.
- CNY: 6.8946 fixed 0.15% weaker from 6.8856 yesterday. Trades weaker to 6.9150 into London from 6.9220 lows, now 6.8990 up 0.5%.
Commodities: Oil up, Gold up, Copper up 1.7% to $2.6580.
- Oil: $65.05 up 0.05%. Range $64.43-$65.25 with WTI watching $66 for resistance. Brent up 0.2% to $70.90 with $70 base.
- Gold: $1179.10 up 0.35%. Range $1161-$1179.50 – bouncing from 19 month lows – with $1180 and $1195 next key depending on USD.Silver up 1% to $14.59, Platinum up 1.5% to $780.15 and Palladium up 2.5% to $865.40
Conclusions: Is it US strength or foreign weakness? The biggest issue for today may be in the trajectory of US growth with the Philly Fed release likely to be used by many forecasters for estimating the full 3Q growth risks and rewards. The 4% plus growth hopes are doubted by many economists but that could change.
The relationship of US capex and the potential of the economy to grow show up in productivity numbers. That release yesterday didn’t grab enough headlines and it may be worth revisiting to prove the point that much of the US gains are about US growth beating expectations.
Economic Calendar:
- 0830 am US July housing starts -12.3%p +5%e /1.173m p 1.25m e
- 0830 am US weekly jobless claims 213,000 p 217,000 e
- 0830 am US Aug Phil Fed Manufacturing 25.7p 22e
- 0830 am Canada Jun manufacturing shipments +1.4%p +1%e
- 0830 am Canada July ADP employment -10.5k p +45k e
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