After a sudden rout in financial markets that wiped $2 trillion in global market cap over the past week showed signs of easing, overnight stocks tried to stage another “BTFD-type” comeback with European stocks climbing for the first time in five days as oil and metals prices gained. S&P futures were modestly in green, although they faded earlier gains, on the back of a slide in the USDJPY which initially spiked to 103.31 only to fade back to the mid 102-range.
As DB’s Jim Reid summarizes, markets have been busy since the end of last week and after no +- 1% sessions for 43 days we’ve now seen 3 in a row as the S&P 500 (-1.48%) closed at its lowest level since July 7th. The VIX (+18% to 17.85) closed at its highest since June 28th and 10y Treasuries (+6.4bps) are now at their highest level since June 6th. So a lot has happened in a short space of time.
The moves haven’t just been confined to the US though with markets in Europe having also been sent into a tailspin in the last few days, while emerging market equities have tumbled nearly 4.5% since the close on Thursday. On this side of the pond the Stoxx 600 (-1.03%) was down for the fourth consecutive session yesterday and to the lowest level since August 4th while 10y Bund yields (+3.3bps) rose to 0.068% and are now at the highest yield since June 23rd. Yesterday was in fact the second day that we’ve seen bond and equity markets tumble in tandem since Friday and it’s interesting to see that the 20-day correlation between the 10y Treasury yield and the S&P 500 is now the most negative since 2007 (at -0.626).
The market continues to be glued to every move in long-rates, concerned that the upcoming change in BOJ monetary policy could deanchor Japan’s bond long-end. The possible spillover effects of rising bond yields into stock and commodity markets has hit financial assets as funds, betting on a long period of low volatility and suppressed bond yields, are being forced to reassess positions. As such, headlines like these were closely followed and did not inspire much confidence in today’s rebound:
- JAPAN’S 20-YEAR YIELD RISES TO 0.495%, HIGHEST SINCE MAR.14
- JAPAN’S 30-YEAR YIELD RISES TO 0.605%, HIGHEST SINCE MAR.17
- JAPAN’S 40-YEAR YIELD RISES TO 0.67%, HIGHEST SINCE MAR.11
Japan’s yield curve steepened amid speculation the BOJ will concentrate its bond-buying program more heavily on short-term securities. The five-year yield decreased two basis points to minus 0.19%, while the 30-year rate jumped six basis points to 0.58%. “Investors are expecting that the BOJ will adopt a more flexible stance on its bond-buying measures and couple that with an additional cut to the deposit rates,” said Katsutoshi Inadome, a senior bond strategist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo. “Superlong bonds are being sold amid speculation that’s starting to look more of a reality.”
apanese banks were among the biggest losers among Japanese shares after Nikkei newspaper said the BOJ is considering delving deeper into negative interest rates, a policy that squeezes lenders’ earnings. Slightly more than half the economists surveyed by Bloomberg forecast an expansion of monetary stimulus on Sept. 21. Some officials still favor stepping up purchases of bonds, according to people familiar with the discussions, suggesting that cutting a key interest rate further below zero, or expanding purchases of risk assets such as real-estate investment trusts, aren’t the only options. “The limits of monetary policy are being discussed, and it’s unclear whether the situation will improve even if the BOJ does add to its easing program,” said Kiyohide Nagata, a senior global strategist at Tokai Tokyo Research Institute Co.
Keep a close eye on the long end in Bunds and USTs for a sense of whether the recent freakout about central banks losing control over the long end, leading to more acute VaR shocks, will persist.
Europe led the global gains with the Stoxx Europe 600 Index pulled out of its steepest slide in two months and U.S. equity index futures rose. The ruble and other currencies of resources-exporting nations recovered some of the last session’s slide as the Bloomberg Commodity Index advanced with crude oil back above $45 a barrel after yesterday’s smalled than expected API inventory build. Treasuries edged higher along with sovereign securities across most of Europe after global yields surged to this quarter’s high on Tuesday amid concern global central banks are turning less accommodative. The yen weakened after some Bank of Japan officials were said to still favor stepping up purchases of government bonds.
As we predicted last Thursday – correctly identifying the culprit for the ongoing risk-flaring episode in the face of the BOJ – volatility has roared back into financial markets over the past week as the Federal Reserve weighed the case for a U.S. interest-rate increase. Cited by Bloomberg, Harvard University Professor of Economics Kenneth Rogoff said that “markets are losing confidence in the ability of central banks to boost inflation and there is a limit to how much quantitative easing programs can accomplish”. European Central Bank president Mario Draghi refrained from adding to stimulus last week and the BOJ is conducting a comprehensive review of the costs and benefits of its policies.”
“We are coming back from a very quiet summer period when volatility was unusually low,” said Daniel Murray, head of research at EFG Asset Management in London. “Markets woke up again, and investors have started to reposition their portfolios
Helping push risk modestly higher, crude oil rose 0.5 percent to $45.11 a barrel in New York following a 3% tumble in the last session. Official figures due Wednesday are forecast to show U.S. supplies rose by 4 million barrels, exacerbating a glut. Money managers have been slashing bets on falling oil prices at the fastest pace in five months before major producers meet this month in Algiers to discuss output constraints.
Amusingly, the Mexican peso erased its advance after a Bloomberg Politics poll of Ohio showed Donald Trump leading Hillary Clinton by 5 percentage points.
The Stoxx 600 climbed 0.4% in early trading. Glencore Plc and Anglo American Plc climbed at least 3.4 percent, pushing a gauge of basic-resource companies to the biggest gain of the 19 industry groups on the index as base metals rose. Richemont fell 2.9% after the maker of Cartier jewelry said first-half operating profit will probably decline about 45 percent. Hermes International SCA slid 6.8% after abandoning its mid-term annual sales growth target.
S&P 500 Index futures were little changed after the gauge of U.S. equities ended Tuesday 1.5 percent lower amid declines in commodity-related companies. Bayer AG rose as people familiar with the matter said Monsanto Co.’s top managers support an improved takeover offer from the German company. Emerging-market stocks extended the longest selloff since June. The MSCI Emerging Markets Index fell 0.3 percent, paring its 2016 gain to 11 percent. The Shanghai Composite Index closed down 0.7 percent and has shed 2.5 percent this week, the most since May.
More importantly than stocks, which have become a derivative play on rate volatility, were the ongoing sharp moves in global bonds. Euro zone bond yields rose across the board after European Central Bank Executive Board member Sabine Lautenschlaeger said the central bank should hold off on new monetary easing measures. Most yields touched their highest levels since Britain’s vote to leave the European Union in late June, extending a rise that started after the ECB’s policy meeting last week, when it disappointed investors by introducing no new easing measures. German 10-year bond yields rose 2 basis points to 0.05 percent on Wednesday, having climbed as high as 0.09 percent in early trades.
The ield on 10Y Treasury fell one basis point to 1.72%, following a 6 bps gain on Tuesday. The yield on the Bloomberg Barclays Global Aggregate Index climbed to 1.24 percent Tuesday, the highest since June 23. Portuguese bonds slid for a fifth day, trailing behind their euro-area peers, as the nation prepared to sell securities maturing in 2023 and 2037. The yield on the nation’s 10-year bond yields reached 3.36 percent, the highest since June 27.
“Markets have continued to be spooked by the potential for central banks to scale back the level of monetary support on almost a global basis,” Peter Chatwell, head of euro rates strategy at Mizuho said. “Lautenschlaeger’s comments did little to ease fear of withdrawal of central bank’s support.”
Morgan Stanley said trades most vulnerable to any unwind, are equities as well as bullish bets on the Japanese yen, emerging market currencies and Asia ex-Japan bonds.
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Market Snapshot
- S&P 500 futures up 0.2% to 2126
- Stoxx 600 up 0.4% to 340
- FTSE 100 up 0.5% to 6696
- DAX up 0.1% to 10402
- German 10Yr yield down 2bps to 0.05%
- Italian 10Yr yield down less than 1bp to 1.32%
- Spanish 10Yr yield down 2bps to 1.08%
- S&P GSCI Index up 0.3% to 351.5
- MSCI Asia Pacific down 0.6% to 136
- Nikkei 225 down 0.7% to 16614
- Hang Seng down 0.1% to 23191
- Shanghai Composite down 0.7% to 3003
- S&P/ASX 200 up 0.4% to 5228
- U.S. 10-yr yield down 1bp to 1.72%
- Dollar Index down 0.06% to 95.58
- WTI Crude futures up 0.4% to $45.06
- Brent Futures up 0.1% to $47.15
- Gold spot up 0.2% to $1,322
- Silver spot up 1.1% to $19.07
Top Global Headlines
- Monsanto Board Said to Back Bayer Bid After Improved Offer: German company said to double break fee to about $3b
- Global Yields Highest Since June as El-Erian Says Fed Should Act: Japan L/T yields are highest since March on BOJ outlook
- Trump Has 5-Point Lead in Bloomberg Poll of Battleground Ohio: The poll was taken Friday through Monday
- Facebook Probe in Antitrust and Privacy Gray Zone, Vestager Says: Facebook has “a very dominant position” as social network
- Valeant’s New CFO Will Review 2016 Numbers, CEO Papa Says: Asset sales will be announced in next six months, Papa says
- Wells Fargo Eclipsed by JPMorgan as World’s Most Valuable Bank: Bank stocks pressured as traders bet against Fed rate hike
- Icahn Is Seeking Approval to Own Up to 50% of Herbalife: Billionaire says Ackman’s short is increasingly risky
- Oil Industry May Cut Spending for Third Year in Row, IEA Says: Upstream 2016 capex set to drop 24%, more than last est.
- Oi Top Shareholders Reach Accord Ending Legal Power Struggle: Societe Mondiale ends effort to call two shareholder meetings
- Philip Morris Raises Quarterly Div. to $1.04/Shr: Increased regular quarterly div. by 2% to annualized rate of $4.16/share
Looking at regional markets, we start in Asia where markets traded mixed following a negative lead from the US where sentiment was dampened alongside declines in oil after a bearish market forecast by the IEA. This initially pressured ASX 200 (+0.5%) and Nikkei 225 (-0.7%) at the open and although markets in Australia staged a recovery, Japanese stocks were not so resilient as energy names and financials suffered after yesterday’s 3% drop in WTI and reports the BoJ could explore cutting rates deeper into negative territory. Chinese markets were lower with Shanghai Comp (-0.7%) underperforming and Hang Seng (-0.1%) ahead of tomorrow’s extended weekend in the mainland and after the PBoC kept its liquidity injections firm. 10yr JGBs traded higher amid weakness in risk appetite, although yields in 20yr and 30yr JGBs rose to their highest since March amid reports BoJ could discuss shifting some purchases from 25yr+ debt into shorter term bonds to curb the declines in long term yields.
BoJ are said to explore delving deeper into negative rates and plans to make NIRP centre of future monetary easing, according to reports in Nikkei. The report further added that the BoJ will also discuss reducing purchases of 25yr+ JGBs and the increase of shorter-term bond purchases due to declines in long-term yields. Further source reports have also suggested that the BoJ could debate extending rates further in to negative territory and offer new forward guidance.
Top Asian News
- PBOC Boosts Weekly Injections as Yuan Climbs Amid Stability Bets: Yuan interbank rates in Hong Kong surge before China holidays
- China’s Credit Growth Rebounds in Aug. as Growth Stabilizes: Broadest measure of new credit exceeded estimates in August
- Japan Banks on Wildest Ride Since Global Crisis Before BOJ: Steeper yield curve fueled rally that’s now reversing course
- Japan Said Planning to Seek $5b From Kyushu Railway IPO: Listing planned for Oct. 25
- Samsung Limits Note 7 Battery Charging to Prevent Overheating: Software update from Sept. 20 will cap capacity at 60%
- China Brewer Said to Mull Bid for $6b of SABMiller Assets: China Resources Beer would join Asahi, private equity bidders
- Last Holdout in Korean War Sees Busy Docks Idled by Hanjin: More than 11,000 jobs in Busan at risk if shipping line folds
- Thailand Holds Key Rate as Economic Recovery Gains Momentum: Consumer prices rose for fifth month after year of deflation
- Singapore Air Won’t Extend Lease on Airbus A380 Jet Next Year: Carrier yet to decide on future of 4 other A380s on lease
The European session has got off to a tentative start, with equities opening in the green but failing to hold onto their gains, to trade relatively flat by mid-morning (Euro Stoxx 50: flat). In terms of a sector breakdown, luxury names are the notable laggards, with Richemont (-3.8%) and Hermes (-6.4%) weighing on the indices after performance updates. Elsewhere, energy and material names are among the best performers, retracing some of their recent weakness. Furthermore, a BBC journalist has reported that sources suggest that a Commons decision on Hinkley is likely today or tomorrow and is expected to be a ‘Yes, with conditions.’ Finally, fixed income markets initially opened lower, however in a similar fashion to equities, pared the early move to trade flat by mid-morning with fixed income related newsflow once again on the light side ahead of tomorrow’s deluge of US data and central bank decisions.
Top European News
- Richemont, Hermes Slump as Luxury-Goods Malaise Worsens: Richemont says 1H earnings will probably drop 45%
- U.K. Labor Market Shows Continued Resilience to Brexit Vote: Unemployment rate stayed at 11-year low in 3 months through July
- ZF Raises Offer for Haldex to Match Rival Bid for Brakemaker: Knorr-Bremse says it can offer Haldex a ‘better future’
- Unilever Chief Says Brands Can Profit Despite Global Turmoil After Brexit, time for politicians to ‘cool down’: Polman
- Imaginary VW Deadline Prompts Flood of Real Investor Lawsuits: More than 1,000 cases will be filed by Sept. 19
- Telecom Italia’s Cattaneo Says He’s Ready to Fight Niel’s Iliad: Co. preparing counter measures to compete with Iliad
In FX, the Bloomberg Dollar Spot Index, a gauge of the greenback against 10 peers, was little changed after climbing 0.7 percent on Tuesday. Goldman Sachs Group Inc. is holding fast to a bullish call on the U.S. currency, undeterred by waning expectations for a Fed interest-rate increase this month. The yen fell 0.2 percent as investors weighed the BOJ’s options. The Mexican peso was little changed, erasing gains of about 0.4 percent, after the Bloomberg Politics poll of Ohio, a key swing state, showed Trump leads Clinton 48 percent to 43 percent among likely voters in a two-way contest and 44 percent to 39 percent when third-party candidates are included. The currency has shown signs of acting as a barometer of the presidential contest, according to data compiled by Bloomberg. It tends to drop when Trump gains ground in RealClearPolitics’s average of presidential poll results, and increases when he falls. The yuan strengthened 0.1 percent in Shanghai amid speculation China’s central bank was shoring up the exchange rate before this week’s holidays. HSBC Holdings Plc said a daily fixing for the currency was set stronger than it expected on Wednesday and yuan borrowing costs jumped in Hong Kong, making its costlier to bet on depreciation in the offshore market. The MSCI Emerging Markets Currency Index was little changed, paring losses of as much as 0.3 percent, as the Russian ruble strengthened 0.5 percent, the biggest gain in a week, and the South African rand advanced 0.4 percent.
In commodities, the Bloomberg Commodity Index rose 0.3 percent after dropping 1.3 percent on Tuesday. Gold reversed earlier losses to trade 0.2 percent higher, set for its first advance in six days. Crude oil rose 0.5 percent to $45.11 a barrel in New York following a 3 percent tumble in the last session. Official figures due Wednesday are forecast to show U.S. supplies rose by 4 million barrels, exacerbating a glut. Money managers have been slashing bets on falling oil prices at the fastest pace in five months before major producers meet this month in Algiers to discuss output constraints. Nickel gained 0.5 percent, after slumping almost 5 percent over the last two sessions. Mines in the Philippines, the world’s largest supplier, are being shut amid a nationwide audit of welfare and environmental standards that’s set to end this week. The government said more closures are coming and Goldman Sachs has warned that nickel ore stockpiles could sink to “critically low” levels by March or April 2017.
Looking at the day ahead, its another quiet day for data in the US with the import price index reading the only data due.
Full US Event Calendar
- 7am: MBA Mortgage Applications, Sept. 9 (prior 0.9%)
- 8:30am: Import Price Index m/m, Aug., est. -0.1% (prior 0.1%)
- 10:30am: DOE Energy Inventories
Bulletin Headline Summary From RanSquawk and Bloomberg
- European equities trade with little firm direction after failing to hold on to their opening gains
- USD/JPY made new highs through 103.00, on fresh reports of negative rates, but has since slipped back into the mid 102.00’s
- Looking ahead, highlights include US DoE Crude Oil Inventories, New Zealand GDP and a speech from RBA Assist Gov Debelle
- Treasuries rise during overnight trading, rebounded from yesterday’s drop as Japanese funds, Asian banks added 5Y, 10Y duration “in decent size,” Seaport Global managing director Tom di Galoma said in note.
- Traders who complained all summer about markets stuck in a zombie state are getting what they wanted, and probably will be for a while
- Bayer AG has reached an agreement to acquire Monsanto Co. for about $56 billion to create the world’s biggest maker of seeds and pesticides, according to people familiar with the matter
- Some BOJ officials still favor stepping up purchases of government bonds if the board decides it needs to expand stimulus, according to people familiar with the discussions
- As activist short sellers descend on Japan’s stock market for the first time, one local analyst is emerging from obscurity to contend for the title of Tokyo’s most influential bear
- U.K. unemployment rate stayed at an 11-year low in the three months through July as the economy added jobs, according to figures from the Office for National Statistics
- If everyone was caught out by the U.K.’s vote to leave the EU, at least some people in financial markets are going to be right about the next referendum that threatens to upend a country’s politics
DB’s Jim Reid concludes the overnight wrap
Markets have been busy since the end of last week and after no +- 1% sessions for 43 days we’ve now seen 3 in a row as the S&P 500 (-1.48%) closed at its lowest level since July 7th. The VIX (+18% to 17.85) closed at its highest since June 28th and 10y Treasuries (+6.4bps) are now at their highest level since June 6th. So a lot has happened in a short space of time.
The moves haven’t just been confined to the US though with markets in Europe having also been sent into a tailspin in the last few days, while emerging market equities have tumbled nearly 4.5% since the close on Thursday. On this side of the pond the Stoxx 600 (-1.03%) was down for the fourth consecutive session yesterday and to the lowest level since August 4th while 10y Bund yields (+3.3bps) rose to 0.068% and are now at the highest yield since June 23rd. Yesterday was in fact the second day that we’ve seen bond and equity markets tumble in tandem since Friday and it’s interesting to see that the 20-day correlation between the 10y Treasury yield and the S&P 500 is now the most negative since 2007 (at -0.626).
While yesterday’s losses for risk assets in particular were fairly broad-based across sectors, energy names were again at the epicentre of things following a tumble across the Oil complex. WTI (-3.00%) closed back below $45/bbl following the latest bearish update from the IEA. The agency said that ‘supply will continue to outpace demand at least through the first half of next year’ and that ‘it looks like we may have to wait a while longer’ for the market to return to balance. Energy credits were hit hard too as a result with CDX IG eventually finishing over 3.5bps wider. European credit indices outperformed relatively (Main +2bps) given the lower exposure to energy.
The bigger story for credit at the moment continues to be the glut of new issues hitting the market. Despite a weak day for indices, over $30bn was said to have priced in the US IG market according to Bloomberg across 15 tranches. That’s only the second time this year that daily issuance has topped the $30bn mark. Perhaps more notable though was the latest deal in the Sterling market. National Grid yesterday raised £3bn across four tranches, attracting over £6bn of orders in the process. The deal is said to be the biggest Sterling deal by a non-financial ever and comes just one day after the BoE announced that the power company is eligible to be bought under the BoE’s corporate purchasing program.
So while Oil was a driving force yesterday the last few days have shown that markets are clearly on edge with global Central Bank uncertainty (and to a degree disappointment) as high as its been in sometime. Speculation as to what the BoJ might do from a purchasing perspective has seen yield curves steepen globally but the 22% probability of a September Fed hike has now returned us back to the lowest likelihood in four weeks. With US and global economic surprise indices also at their lowest in two months and persistent concerns about valuations and weak corporate earnings it’s not just central banks that are to blame. It does however seem like one eye is already on the BoJ next week though which is the next big event for markets before we move straight on to the FOMC.
On that subject, another story which caused a few heads to turn was the report out of the Nikkei newspaper yesterday suggesting that the BoJ board is expected to conclude in its comprehensive assessment next week that the benefits of negative rates outweigh the side effects. The article suggests that the BoJ is exploring the idea of cutting rates further with asset purchase expansion now near their effective limit. Supposedly BoJ Governor Kuroda and his deputy governors are unanimous on the point and the rest of the board members are expected to show similar support. The same report also suggests that the BoJ may consider lowering purchases of JGB’s longer than 25 years in a bid to push long-end yields up, while purchases of short-end JGB’s may by increased to compensate.
The Yen was -0.70% weaker yesterday and is down another -0.30% this morning (around 102.90) however weakness in energy stocks has seen the Nikkei and Topix fall -0.36% and -0.30% respectively. Elsewhere it’s a bit more mixed this morning in Asia. Bourses in China are also struggling (Shanghai Comp -0.59%) however the Hang Seng (+0.08%), Kospi (+0.40%) and ASX (+0.23%) are all firmer. Oil has recovered slightly (WTI +0.51%) while Gold is flat. Looking at the JGB curve, 2y yields are unchanged this morning however 30y yields have surged over 6bps with the curve again steepening.
Staying in Asia, following on from the stabilization in August economic activity indicators in China yesterday, our Chief China Economist Zhiwei Zhang also noted a strengthening in property sales last month, both in volume terms (+19.8% yoy) and in value terms (+31.8% yoy) reflecting rising property prices in tier 1 cities especially, as well as some tier 2 cities. In his mind the latest developments in the property sector puts upside risk to his H2 GDP forecast of 6.5% in Q3 and 6.4% in Q4, but downside risks to his 2017 forecast of 6.5%. Zhiwei believes that a bubble is building in some of the tier 2 cities and that he had previously though that the government would have started to tighten liquidity conditions and contain the risk of a bubble in the summer, but property sales and land auctions have continued to boom. While this poses some upside risk into year end, the development of the property sector is critical to his growth and policy outlook in 2017. On that, Zhiwei has revised his policy outlook. He no longer expects an RRR or interest rate cut in 2016 and instead expects further policy easing to happen in the first half of 2017.
Before we look at the day ahead, a quick wrap-up of the relatively small amount of economic data released yesterday. In Europe the main focus was on Germany’s ZEW survey which dipped 2.5pts this month to 55.1 (vs. 56.0 expected). While lower relative to August that reading is still some 5pts above the post-Brexit slump the index tumbled to in July. The expectations survey held steady at 0.5. Also released in Germany was the final August CPI revisions however there were no surprises with the print left at 0.0% mom and +0.4% yoy. In the UK headline CPI in August was +0.3% mom which was a shade lower than the consensus of +0.4%. RPI printed at +0.4% mom and in line, while PPI input prices were up only +0.2% mom (vs. +0.6% expected).
Looking at the day ahead, this morning in Europe we’ve again got some more inflation data, this time in France where the final August CPI figure is due. In the UK it’s worth keeping an eye on the latest employment indicators covering July and August, while the other data due out this morning is the industrial production reading for the Euro area in July. It’s another quiet day for data across the pond this afternoon with the import price index reading the only data due.
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