Fed Fatigue Does Not Dissuade Dollar Bulls

Tuesday September 13: Five things the markets are talking about

The uptick in volatility, especially in equities and fixed income in September, is based on two factors – a feared shift in Fed interest rate policy (more/sooner hikes) and a concern over the sustainability/pace of asset purchases at the BoJ and ECB.

Yet for all the volatility, certain current asset prices would suggest little really has changed. Investors and dealers do understand that a change is afoot, but when and how remains anyone’s guess, hence the intraday repricing of fed fund futures that may or may not end up being the new norm depending on whether central bankers have the stomach for market disruptions.

After Fed rhetoric late last week, the market was given the amber light on next weeks FOMC meeting for higher rates. That all came to naught yesterday after the reliable ‘dove,’ Fed governor Brainard, said that the U.S should take care to avoid ending up in the same economic predicament as Japan and the eurozone. Their experiences “highlight the risk of becoming trapped in a low-growth, low-inflation, low-inflation-expectations environment and suggest that policy should be oriented toward minimizing the risk of the U.S economy slipping into such a situation,” she said.

For investors, it’s now back to the drawing board as we enter the one-week Fed blackout period ahead of next week’s FOMC meeting.

1. Global equities steady

Stock markets in Asia and Europe have steadied overnight after yesterday’s strong finish stateside, as investor concerns eased over a potential Fed rate hike next week (Sept. 20-21).

In Asia, Japan’s Nikkei Stock Average rose +0.3%, while Australia’s S&P ASX 200 edged lower and the Shanghai Composite Index was little changed. The market was even unfazed by better Chinese data that included industrial output, which rose a better-than-expected +6.3% last month, further dimming expectations of a rate cut by the People’s Bank of China (PBoC) any time soon.

In early trade in Europe, the Stoxx Europe 600 has rallied +0.4% after falling for three-consecutive sessions. The FTSE 100 is under pressure from commodity and mining stocks.

Currently, U.S. futures pointed to a -0.7% opening loss for the S&P 500, which notched its largest gain yesterday in eight week’s.

Indices: Stoxx50 -0.1% at 3,010, FTSE -0.3% at 6,683, DAX +0.1% at 10,446, CAC-40 -0.1% at 4,436, IBEX-35 -0.4% at 8,835, FTSE MIB -0.3% at 16,793, SMI +0.4% at 8,236, S&P 500 Futures -0.7%

2. Crude oil sees red

Oil prices are on the back foot after the IEA (International Energy Agency) indicated in their latest monthly report that a surplus in global markets will last longer than initially estimated, persisting well into 2017. The agency had previously expected the market to show no surplus in H2.

The report also indicated that global demand growth is slowing at a faster pace than the group initially predicted. The IEA left its forecast for demand growth for 2017 unchanged from its prediction in June at +1.2m bpd, but cut its forecast for 2016 consumption growth to +1.3m bpd, from +1.4m.

Also providing pressure, market concerns over increased drilling stateside and investor profit taking after yesterday’s +1% rally.

Brent crude futures (Nov.) are trading down -$1.05 at $47.27 per barrel, while WTI is down -$1.14 at $45.15.

Gold is edging higher (+0.1% at $1,328.50 an ounce) after Fed Brainard’s dovish comments have reduced prospects of Fed hike next week.

Spot silver has climbed +0.4% to $19.14 an ounce, after hitting a one-week low in yesterday’s session. Platinum slipped -0.4% to $1,049.35 after touching its two month low on Monday at $1,033.45.

3. Fixed income trades like a “hot” commodity

He said, she said continues to drive volatility along corporate and sovereign yield curves.

Dovish comments from Fed member Brainard yesterday are again pushing corporate bond issuance back into action, especially EUR dominated debt which had been sidelined awaiting Fed direction.

After Brainard’s remarks yesterday, the probability of a rate hike next week has fallen to +15% from around +30% pre-speech.

German 10-year bund yields have fallen -1.4bps to +0.03%, having turned positive last week for first time since U.K’s Brexit vote (June 23) to leave the EU. Elsewhere, the yield on U.S 10’s has eased a tad to +1.652% ahead of the open.

4. “Big” dollar finding some relief, commodity sensitive pairs suffer

Ahead of the U.S open, the USD is managing to claw back some of yesterday’s losses against G10 currency pairs.

The EUR is lower outright (€1.1227), while the dollar is little changed against the yen (¥101.89). The pound (£1.3262) is under some pressure after U.K. data this morning showed inflation picking up last month, but not as much as the market had expected. CPI rose by +0.3% m/m, and by +0.6% y/y.

With crude oil prices under pressure, is dragging down currencies of commodity sensitive countries, most notably AUD (A$0.7532), MXN ($18.9730) and CAD (C$1.3093).

5. Does a surge in offshore Yuan rates suggest China intervention?

The squeeze in funding cost continues in Hong Kong, the “official’ offshore market for trading the Yuan.

The CNH Interbank Offered Rate benchmark (CNH Hibor) has rallied aggressively overnight to +5.5155%, its highest level since Feb. 19. Suspected intervention by Chinese banks has led to the surge in the cost to borrow yuan from bank to bank.

There are two possibilities for the increase, first, the PBoC is intervening to dissuade investors betting against the Yuan or second, it’s a possible move by authorities to cushion a possible liquidity squeeze in the up coming holiday (Sept. 15-18).

Currently, the offshore yuan is trading -0.15% weaker from the onshore spot at ¥6.6894.

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