Wednesday September 6: Five things the markets are talking about
For investors, looking past North Korea geopolitical concerns, another hurricane bearing down on the U.S and the American debt ceiling looming, there are two central banks decisions that should provide a test for capital markets – there is today’s Bank of Canada (BoC) decision (10 am ETD) and tomorrows European Central Bank (ECB) rate announcement and the accompanying press conference.
The BoC rate decision is a coin toss – Canadian policymakers hiked +25 bps in July to +0.75%. Recent consumer, housing and labor-market data also support getting on with hikes. However, the naysayers suggest that some receding in business activity indicators suggest policymakers can afford to take a more standard path of hiking on a quarterly schedule and wait until next month’s meeting (Oct. 25) to back up rates again.
Of all asset classes, the euro is likely to react the most to tomorrow’s European Central Bank (ECB) policy decision (07:45 EDT).
The ‘single’ currency strength is hindering the central bank’s efforts to drive inflation higher and may prompt the ECB to delay announcing plans to reduce monetary easing. Many expect President Draghi to address the pace of EUR (€1.1936) appreciation during his press conference accompanying the policy decision.
Later this afternoon, the market will focus on Fed’s Beige Book for inflation outlook clues (2pm EDT).
1. Stocks remain on the back foot
Global equity markets trade broadly weaker on uncertainty in U.S policy and North Korea’s latest nuclear test on the weekend.
In Japan, stocks ended little changed overnight as retail investors’ buying in small-to-mid sized stocks offset losses incurred when the market tumbled to four-month lows on heightened tensions in the Korean Peninsula. The Nikkei ended -0.1% lower, while the broader Topix ended +0.1% higher.
In Hong Kong, stocks retreated, mirroring Wall St. as geopolitical worries prompted investors to take profits on this year’s +25% rally. The Hang Seng index fell -0.5%, while the China Enterprises Index lost -0.6%.
The Kospi index in South Korea slid -0.3%, as did Australia’s S&P ASX 200 when Q2 GDP came in slightly lower than expectations.
In China, stocks dip but reform hopes largely offset N. Korea worries. The CSI300 index fell -0.2%, while the Shanghai Composite Index closed little changed.
In Europe, regional bourses trade largely lower following Asia and Wall St., although the indices trade off the session lows on market jitters ahead of the ECB rate decision tomorrow.
U.S stocks are set to open in the ‘black’ (+0.1%).
Indices: Stoxx600 -0.3% at 372.5, FTSE -0.5% at 7336, DAX -0.1% at 12110, CAC-40 -0.2% at 5077, IBEX-35 -0.4% at 10141, FTSE MIB +0.4% at 21829, SMI =0.6% at 8817, S&P 500 Futures +0.1%
2. Oil markets subdued by Harvey fallout; gold higher
Ahead of the U.S open, oil is trading with caution, as crude demand and shipments remain subdued due to refinery closures following Storm Harvey and the arrival of an even bigger hurricane in the Caribbean.
Note: With many refineries, pipelines and ports beginning to come back on line, it’s expected to take weeks before the U.S petroleum industry is back to capacity.
As of yesterday, approximately 20% of U.S daily refining capacity remained shut, while several other refineries were running at reduced rates.
The markets attention is now shifting towards the massive Category 5 storm Hurricane Irma, which is now in the Caribbean and set to head towards Florida where it could disable other U.S refineries.
Brent crude futures have dipped -8c to +$53.20 a barrel, while U.S West Texas Intermediate (WTI) crude futures were at +$48.69 barrel, little changed from yesterday’s close.
Note: Fuel storage data due for release later today by API and EIA tomorrow should give a better view of the extent of Harvey’s impact on U.S fuel inventories.
Gold is up for a fifth consecutive day overnight as geopolitical risks over North Korea remain elevated, and as low U.S inflation concerns has left some Fed officials to back delays in further interest rate hikes. Spot gold is up +0.1% at +$1,339.87 per ounce – it touched an intraday high for the month at +$1,344.21 yesterday.
3. Sovereign yields track lower
Geopolitical safe haven demand coupled with insights from two of the most ‘dovish’ Fed officials yesterday has helped guide U.S 10-year Treasury yields to fresh low yields for the year.
Governor Brainard has urged monetary policy makers to “wait for more realized progress” on the Fed’s inflation goal before lifting rates again, while Minneapolis Fed President Kashkari warned that the central bank’s tightening cycle “may have harmed the U.S economy.”
Note: Fed speak continues, with regional Fed Presidents Robert Kaplan and Loretta Mester slated to deliver remarks.
10-year Treasury yield dropped -10 bps to +2.07%, while the 10/30 curve spread has widened slightly to +62 bps.
In the U.K, 10-year Gilt yield fell -2 bps to +1.011%, the lowest in more than a week, while German Bund 10-year yield dipped less than -1 bps point to +0.34%, the lowest in more than 10-weeks.
4. Dollar under the weather
The USD price action is moving in tow with lower U.S treasury yield spreads that have been pressured by ‘dovish’ Fed remarks over the past 24-hours. U.S 2/10 spread has flattened to its lowest level in 12-months. Today’s Fed’s Beige book (2.00 pm EDT) should give investors an insight on how the Fed is thinking about inflation.
EUR/USD (€1.1940) is +0.25% higher outright as shape of yield curves Euro peripheral countries continued to return to normal levels as anticipation mounts that the ECB will taper–and eventually exit–its QE program. Tomorrow’s ECB press conference is expected to shed more light on that.
USD/JPY (¥108.70) is little changed, while GBP (£1.3048) has rallied to a four-week high ahead of the U.S open.
Down-under overnight, the AUD (A$0.7978) briefly held some strength for most of the session before falling back after Australia’s Q2 GDP came in slightly lower than expectations (see below).
5. Aussie economy solid in Q2
Despite being lower than expectations, the +0.8%, q/q, and +1.8%, y/y, solidly beat Q1 results.
The headline print should sit well with the RBA’s optimism about the economy there. Still, concerns hang over the combination of record-low wage growth and record household debt. The strong Aussie dollar is also a risk to growth.
The solid report prompted Treasurer Morrison to talk up the prospect of an improved deficit compared to forecasts in May’s budget. For that year, the Aussie government in May projected a -A$37.6B deficit.
Morrison says a more-conservative approach to forecasting has helped the government surpass market expectations and maintain its AAA credit rating.