Volatility Compressed, Yield Curves Flatten, Dollar Hangs In

Friday September 23: Five things the markets are talking about

It’s no surprise to see volatility compressed for a second day and sovereign yield curve flatten as markets and investors process this week’s central banks (FOMC and BoJ) ripple and settle on a coin toss for a December Fed hike.

With the Fed on the fence, much of the markets focus will begin to quickly shift to the U.S presidential race and how each candidate will impact markets.

Up to this point, the various asset classes have not really being weighing in on the election outcome. Expect that needle to be moved soon, now that Presidential debates are upon us (Sept 26, Oct 9 and 19).

1. Equity markets see mixed results

Asian stocks were mixed overnight, with some indices boosted by central banks’ deciding to stick with easy-money policies. However, Japanese stocks continue to trade under pressure, weighed down by a stronger yen.

Australia’s S&P/ASX 200 closed up +1.1%, making its gain for the week +2.5%. South Korea’s Kospi rose +0.2%, while Singapore’s Straits Times Index was flat. Tokyo’s Nikkei Stock Average fell -0.3%, after the yen strengthened yesterday (With Japanese holidays, various asset classes were playing catch up) and is up +1.4% for the week.

In Europe, most bourses are trading lower as equity markets pare back some aggressive buying on loose monetary policy decisions. Both banking and financial stocks sectors are leading the losses.

Futures on the S&P 500 Index contracts are little changed, trading atop of their two-week high print in yesterday’s session.

Indices: Stoxx50 -0.5% at 3,034, FTSE -0.3% at 6,893, DAX -0.3% at 10,644, CAC-40 -0.7% at 4,479, IBEX-35 -1.4% at 8,813, FTSE MIB -0.9% at 16,493, SMI -0.7% at 8,252, S&P 500 Futures -0.1%

2. Crude under pressure, gold prices steady

Oil prices are under pressure ahead of the open stateside, pulled down not by fundamentals, but on some profit taking after two sessions of strong gains.

A percentage of the overnight pullback can be attributed to position paring ahead of next week’s OPEC meeting in Algiers (Sept 27). Some dealers do not believe a deal on production can be struck. If history repeats itself, that would be true, however, some form of cooperation among exporters is possible.

Brent crude futures are down -25c, or +0.5% at +$47.40 a barrel. WTI crude futures are trading at +$45.98 per barrel, down -34c, or +0.7% from the close.

Gold price moves continue to be strongly tied to the mighty dollar. Prices are edging lower this morning (down -0.2% to +$1,334.71), backing away from yesterday’s two-week highs on a stronger dollar. The yellow metal is poised to close out a weekly gain of +2%, its highest return in two-months.

3. Global bond bear market put on hold

Loose monetary policy decisions by G3 central banks this month is supporting bond prices and flatting sovereign yield curves.

Central banks would prefer a steeper curve, in particular the BoJ who has shifted policy this week to shape their own curve, however, fear and search for foreign yield continues to support the long end.

China’s 10-year yield dropped -2bps to +2.74%. Aussie and Kiwi product fell to two-week lows of +2.00% and +2.40%, respectively.

In Europe, German bund yields have rallied +1bps to -0.08% following yesterday’s -10bps slide. Stateside, U.S 10’s are set to open up little changed at +1.62%, but down -7bps on the week.

4. Dollar still has some fight left

The ‘mighty’ buck is little changed against JPY (¥100.87) and EUR (€1.1213), but is up +0.5% against the pound (£1.3005) overnight.

Sterling briefly slipped below the psychological £1.3000 handle, paring back all of yesterday’s gains, while traders fear further jawboning comments by Japanese officials to underpin the USD.

Earlier this week the BoJ introduced a yield target for JGB 10’s of zero and would achieve this by adjusting the pace of its bond-buying program. Their loose policy actions weakened JPY only briefly, and reason enough for Japanese authorities to hold emergency talks on their currency’s value overnight. Nothing-significant came of today’s meeting, just rhetoric that the Government is concerned about a “slight nervousness” in the currency markets. But, are keeping a close eye on yen moves.

5. Eurozone composite PMI’s fall more than expected

Euro reports this morning show that the regions economy appears to have slowed slightly in Q3, mostly on the back of Germany’s services sector.

Data reveals that composite PMI’s for the region slipped to 52.6 this month from 52.9 in August, below expectations of a more modest drop to 52.8 and leaving the average reading for Q3 below that of Q2.

The ECB will be worried about the regions powerhouse Germany, whose data provided some mixed results. Its service PMI hit a 39-month low of 50.6, but its manufacturing activity picked up unexpectedly rising to a three-month high of 54.3.

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