The Morning Track – Action?
This is supposed to be the week of false calm, where price action remains subdued despite the underlying fears of worsening trade tariffs leading to a global slowdown in growth and leading to weaker animal spirits in risk markets. The price action overnight tells another story. Commodities and Foreign Exchange are grabbing the headlines for investors today, with GBP trading at 10-month lows, thanks to weak retail sales that take away BOE August rate hike certainty; with EM FX in focus again as INR trades near historic lows trading 69.006 today, with CNY weaker again, trading 12-month lows, as the PBOC leans dovish. China saw $10.7 billion cross-border capital outflows in June as the yuan has depreciated. The drops of oil prices and metals (particularly those around autos) have continued to technical break points overnight. The movements of Commodities FX maybe the reality but the drivers are the key for understanding what it means for other markets and the bigger picture.
- First there is trade – the US threats to China continue and EU is on deck. Trump ahead of talks next week threatened “tremendous retribution.” This leads to weaker Platinum prices, lower metals in general. It also hit the CNY which trades over its previous 6.73 highs to 6.7845 so far.
- Second there is policy confusion - Japan saw the BOJ cut its buying of longer term bonds and the JPY rallied (perhaps more because of risk-appetites and safe-haven purchases), but the bond markets didn’t react, in fact, yields in the long-end fell. PM Abe’s likelihood of winning leadership of the ruling LDP for the third term is increasing, reinforcing view that BOJ Governor Kuroda’s monetary stimulus will be prolonged. Expectations drive markets and FOMC Powell testimony made clear the Fed will be hiking again in September and likely December. This drives the USD higher across the board. US 10Y rates are back to 2.89% and look to 2.95% as the next big level.
- Third there is politics – as the UK May wins on Brexit seem pyrrhic. The EU prepares for “no deal Brexit.” The US mid-term elections are back in focus given the Trump/Russia headlines leading to more Republican Party divisions.
- Fourth there is fear – There is still the greed of missing out on the upside for stocks at the peak of earnings season, but there is fear that the policy of Powell and Trump lead to mistakes and recession. The added tail is that good things like North Korea denuclearization has stalled. Trump said there is “no rush” to deal with Kim-Jong Un.
This puts the modest drops in equities in Europe and in US futures at risk for a larger move should the price action continue to matter in FX and commodities. The barometer of risk-on and off has usually been the JPY but today, the break of 1.16 EUR opens a larger picture for trouble in Europe as it wraps around politics, trade, rates and other fears.
Question for the Day: Are markets too calm for liquidity risks? The subtext of summer is passive investing where ETFs hold positions until active managers can decide in the Autumn whether trade, rates, politics matter. The risks for markets until then are that the carry trades, selling volatility and passive flows reverse quickly and sink animal spirits sufficiently to call people back from the beach. The work from S&P Global on passive investing is worth studying. There is a bit more seasonal calm than usual in many markets this July – witness the 8bps range in US 10Y bond yields, witness the slow melt up in the S&P500. But behind this is larger positioning risk – one that this chart highlights and maybe pause from planning Friday/Monday day’s off.
What Happened?
- Japan July Reuters Manufacturing Tankan slips to 25 from 26 with outlook for October 29, while Services survey also slips to 34 from 35 with ebbing real estate and construction conviction. For many, trade war concerns were cited. Food processing, precision machinery, textiles/paper, metal products/machinery and autos/transport equipment were among the industries that dragged down the overall sentiment gauge.
- Japan June trade surplus Y721.4bn after Y580.5bn deficit – better than Y500bn surplus expected and the first surplus in 3-months. The exports rose 6.7% after May’s 8.1% rise – less than the 7% y/y expected. The increase was led by higher shipments of power generating machines, semiconductors and auto parts. Automobile exports to the U.S. and European Union declined, and overall exports to the US fell for the first time in 17 months while those to Asia and China rose for the 4th consecutive month. Imports rose 2.5% y/y after 14% rise in May – also less than the 5.5% rise expected – led by purchases of nonferrous metals, crude oil, and clothing.
- Australian 2Q NAB business confidence slows to 7 from 8, while conditions drop to 15 from 17 and 3M outlook holds steady at 24. The 12M outlook for conditions slipped to 31 from 33. The confidence remains above the long-term average and spread across industries with exports up 2 from 0, retail prices steady at 0.1% along with labor costs at 0.6% q/q. Forward orders fell to 6 from 9 and employment fell to 8 from 13 along with profitability 15 from 17.
- Australian June jobs jump 50,900 after 13,400 gain revised – more than 20,000 expected – best in 7-months. Full-time jobs rose 41,200 after losing 19,900 while part-time rose 9,700 after 33,400 gain in May. The unemployment rate held at 5.4% as expected – at 5-year lows - but the participation rate rose to 65.7% from 65.5% and employment to population rose to 62.1% from 62% - both were better than expected. Unemployment fell 1,100 to 714,100. Hours worked rose 10.7 million hours to 1,750 million.
- The Central Bank of Indonesia left rates unchanged at 5.25% as expected after 3 hikes in a row. The Central bank will maintain its front-loaded, pre-emptive and ahead of the curve policy due to uncertainty in global financial market, Governor Perry Warjiyo warned.
- Swiss June trade surplus widens to CHF1.31bn from revised CHF1.24bn with exports driving. Exports up 0.4% to CH18.79bn with chemicals and pharmaceuticals leading. Imports rose 0.1% to CHF17.49bn with machinery and electronics leading. The trade surplus for 2Q rose to CHF4.6bn from CHF3.6bn in 1Q. Exporst were up 1.4% with Germany, US, and China sales at historic highs while imports fell 0.4%.
- UK June retail sales -0.5% m/m, 2.9% y/y after revised +1.4% m/m, 4.1% y/y – weaker than the 0.5% m/m, 3.8% y/y expected. The sale ex fuel fell -0.6% m/m, 3.0% y/y after 1.4% m/m, 4.5% y/y – also weaker than +0.3% m/m expected. Nevertheless, 2Q sales were up 2.1% q/q – the best gains since 1Q2004 – and will add 0.11pp to 2Q GDP. For May, despite World-Cup related food-and-drink sales, a 1.4% drop in non-store retailing, the biggest decline since last December, accounted for much of the decline. Internet sales volumes slipped by 0.4% in June, after a 4.9% surge between April and May, contributing to much of the weakness in the sector. On-line activity accounts for approximately half of non-store retailing, with total internet share of spending steady at 18%. The implied price deflator rose by 2.3% in the year to June, the twentieth straight increase, but down from a 2.4% increase in May. Fuel prices accounted for much of the acceleration in retail inflation, jumping by an annual rate of 11.2% in line with the recent rise in crude oil prices. Excluding fuel, the implied deflator rose by 1.4, the smallest increase since February of 2017.
Market Recap:
Equities: The US S&P500 futures are off 0.25% after a 0.22% gain yesterday. The Stoxx Europe 600 is off 0.15% after opening flat with trade fears clashing with earnings. The MSCI Asia Pacific fell 0.2%.
- Japan Nikkei off 0.13% to 22,764.68
- Korea Kospi off 0.34% to 2,282.29
- Hong Kong Hang Seng off 0.38% to 28,010.86
- China Shanghai Composite off 0.51% to 2,772.98
- Australia ASX up 0.41% to 6,355
- India NSE50 off 0.21% to 10,957.10
- UK FTSE so far up 0.2% to 7,692
- German DAX so far off 0.3% to 12,726
- French CAC40 so far off 0.35% to 5,427
- Italian FTSE so far off 0.2% to 21,926
Fixed Income: Global fixed income lower tracking US lead. Curves are bear steepening but belly leads pain trade. Supply was clearly a factor along with data and mixed risk appetites. Core is underperforming with UK Gilt 10Y yields up 0.5bps to 1.23% despite retail sales (odds for BOE hike August holding 75%), German Bund yields up 1.5bps to 0.35%, French OATs up 1.5bps to 0.637% while periphery better – Italy off 1.5bps to 2.485%, Spain flat at 1.27%, Portugal up 0.5bps to 1.74% and Greece flat at 3.82%.
- Spain sold E4.55bn of bonds at lower rates and lower demand – E1.29bn of 5Y 0.35% Jul 2023 Bono at 0.31% with 1.56 cover – previously 0.34% with 1.62 cover – E0.83bn of 8Y 5.9% Jul 2026 Oblig at 0.95% with 1.4 cover – previously 1.07% with 1.94 cover – E1.34bn of 10Y 1.4% July 2028 Oblig at 1.31% with 1.47 cover and E1.09bn of 15Y 2.35% Jul 2033 Oblig at 1.80% with 1.37 cover – previously 1.83% with 1.99 cover.
- France sold E7.487bn of OATs with mixed yields and lower demand – E3.291bn of 3Y 0% Feb 2021 OAT at -0.44% with 2.4 cover – previously -0.46% with 3.25 cover – and E4.196bn of 5Y 0% Mar 2024 OAT at 0.01% with 1.95 cover – previously 0.03% with 1.97 cover.
- France sold E1.615bn of OAT linkers at lower rates and good demand. E0.49bn of 8Y 0.1% Mar 2025 OATei at -1.1% with 2.14 cover – previously -0.89% with 1.85 cover – E0.795bn of 12Y 0.7% Jul 2030 OATei at -0.70% with 1.82 cover – previously -0.52% with 1.56 cover and E0.33bn of 30Y 0.1% Jul 2047 OATei at -0.24% with 2.18 cover – previously -0.11% with 2.48 cover.
- The UK DMO sold GBP2bn of 1.75% July 2057 Gilts at 1.6% with 1.74 cover and 0.2bps tail.
- US Bonds are offered with belly of curve hit hardest – 2Y up 1.5bps to 2.625%, 5Y up 2.2bps to 2.79%, 10Y up 2.2bps to 2.891%, 30Y up 1.4bps to 3.00%.
- Japan JGBs steady despite BOJ cutting 10-25-year buying – 10Y flat at 0.04%, 20Y off 1bps to 0.48%. The BOJ cuts the buying in 10-25Y by Y10bn to Y180bn today and for 25Y+ by Y10bn to Y60bn. Yields on the long-end still fell.
- Australian bonds sold after strong jobs but supported by China doubts – 3Y up 4bps to 2.125%, 10Y up 2bps to 2.66%.
- China PBOC net adds CNY70bn on the day after injecting CNY70bn in 7-day and CNY30bn in 14-day reverse repos. Money market rates fell with 7-day off 3bps to 2.637% and O/N off 9bps to 2.393%. 10Y bonds yields drop 4bps to 3.44%.
Foreign Exchange: The US dollar index is up 0.3% to 95.40 with 95.53 breakout still in play. In Asian EM FX, USD bid – KRW off 0.1% to 1133.20, TWD off 0.15% to 30.632 – back to April 2017 lows, INR off 0.8% to 68.99. In EMEA, USD also bid – ZAR off 1.4% to 13.452, RUB off 0.% to 63.523, TRY off 0.75% to 4.8310
- EUR: 1.1600 off 0.4%. Range 1.1595-1.1657 with focus on 1.1550 and 1.15 barrier.
- JPY: 113.00 up 0.15%. Range 112.65-113.08 with EUR/JPY 131.05 off 0.25%. Risk off drives safe-haven test to 112.50 again but USD is bid.
- GBP: 1.2990 off 0.65%. Range 1.2983-1.3083 with EUR/GBP .8930 up 0.3%. Break of 1.3010 opens 1.2880 next.
- AUD: .7345 off 0.7%. Range .7344-.7441 despite better jobs, weaker metals and China/Trade fears along with cross pressures with NZD off 1% to .6725
- CAD: 1.3235 up 0.5%. Range 1.3160-1.3241 with focus on oil, NAFTA unwind, politics and 1.33 still.
- CHF:1.0020 up 0.3%. Range .9981-1.0025 with EUR/CHF 1.1625 off 0.1%. Less safe-haven demand than price action suggests? 1.00 pivot for 1.02 in play.
- CNY: 6.7066 fixed 0.17% weaker from 6.6914, trades weaker to 6.7225 from 6.7145 yesterday close. CNH trades off 0.8% to 6.7960.
Commodities: Oil lower, Gold lower, Copper off 2.5% to $2.7075
- Oil: $68.03 off 1.05%. Range $67.89-$69.03 with Brent off 1% to $72.16 – confusion over US inventory build, Libya port openings and USD role driving.
- Gold: $1215.80 off 0.95%. Range $1215-$1226. The drop gains momentum with $1226 pivot and $1204.60 the July 2017 lows in play. Silver $15.241 off 2%, Platinum off 2.3% to $799.05 and Palladium off 1.85% to $892.
Economic Calendar:
- 0830 am US weekly jobless claims 214k p 220k e
- 0830 am Canada June ADP employment 2.9k p 25k e
- 0900 am FOMC Quarles speech
- 0900 am South Africa Reserve Bank rate decision – no change from 6.5% expected.
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