European stocks rose and US S&P futures fell after the dollar strengthened following the latest hawkish comments from Fed vice-chair Stanley Fischer signalled that a 2016 rate hike is still being considered and again boosted speculation that US rates will rise this year. The rising dollar pressured commodities and notably oil, which dropped 2% breaking a 7 days stretch of increases; emerging markets retreated.
Top news stories include Pfizer reportedly nearing Medivation deal, ChemChina winning CFIUS approval for Syngenta acquisition, Renesas said to be in talks to buy Intersil.
Bloomberg’s dollar index climbed to a one-week high after Fed Vice Chairman Stanley Fischer said Sunday the U.S. economy is already close to meeting the central bank’s goals and that growth will pick up. On the other side of the Pacific, the Yen fell following comments from Kuroda that more September easing may be on the table. Emerging-market shares and currencies declined for a second day, oil fell below $48 a barrel and silver led losses among precious metals. European equities advanced after their biggest weekly slide in two months and government bonds rebounded. The chart below shows the USD’s reactions to just last week’s Fed jawboning.
Global markets have been buffeted over the past week by comments from Fed officials flagging the possibility of higher borrowing costs as early as next month, even though minutes of the central bank’s last meeting struck a more dovish tone. The focus will shift to Janet Yellen’s speech this week at a gathering of global central bankers in Jackson Hole, Wyoming. Futures traders on Friday assigned a 22 percent probability to a September rate increase by the Fed, up from 16 percent a week earlier.
Still, as we showed last night, being hawkish – or dovish – is nothing new for the Fed, which has seen it share of contradictory statements in the past several months, all largely market, and economy, dependent.
Responses were mixed: “The Fed is a bit all over the shop so it’s going to be Janet Yellen’s job this Friday to try to centralize all of these messages into a coherent message that markets can react to,” says Matthew Sherwood, head of investment strategy at Perpetual Ltd. in Sydney.
“We’ve had a full spectrum of messages in the past week or so,” said Josh O’Byrne, a currency strategist at Citigroup Inc. in London. The dollar will “probably hold if indeed she backs up Fischer,” he said. “ I think the consensus is that she will be a bit more dovish.”
While it remains to be seen if Yellen will announce anything truly market moving, the recent dollar strength has led to some early selling in crude oil, while dropped 2.0% to $47.28. Selling was accelerated after OPEC’s second-biggest producer, Iraq, said it will boost exports by about 5% in coming days. Another downside catalyst was the previously reported ceasefire announcement by the militant Niger Delta Avengers, as well as the record collapse in short WTI positions, which has led to speculation the short squeeze may be largely over. Oil had jumped 9.1% last week on speculation that OPEC talks next month could lead to an output freeze. U.S. drillers added rigs for an eighth week, the longest run since April 2014.
The stronger dollar also pressured previous metals with silver dropping as much as 3% to a seven-week low, while gold was down 0.6% amid the dollar’s advance.
The MSCI Emerging Markets Index slid 0.6 percent, with shares in Shanghai dropping 0.8 percent, the most in three weeks. Saudi Arabia’s Tadawul All Share Index led losses in Gulf stocks, sliding 1.5 percent.
In equity markets, Europe’s Stoxx 600 Index added 0.7%, with banks leading gains while trading volumes were about 40 percent lower than the 30-day average. Automakers advanced as the euro weakened, while miners were the only industry group to decline. Syngenta jumped 12 percent, the most in more than a year, as China National Chemical Corp. received approval from U.S. national security officials for its $43 billion takeover of the Swiss chemical company.
S&P 500 Index futures were down 0.2% after U.S. stocks slipped for the first time in three days on Friday, with a recent rally showing signs of tiring amid elevated valuations and rising speculation that borrowing costs will increase before year-end. Medivation Inc. jumped 21% in premarket New York trading after people familiar with the situation said Pfizer Inc. is close to an agreement to buy the biotechnology company for about $14 billion.
Market Snapshot
- S&P 500 futures down 0.2% to 2181
- Stoxx 600 up 0.8% to 343
- MSCI Asia Pacific down 0.2% to 139
- US 10-yr yield up 1bp to 1.59%
- Dollar Index up 0.24% to 94.74
- WTI Crude futures down 1.5% to $47.79
- Brent Futures down 1.7% to $50.04
- Gold spot down 0.6% to $1,334
- Silver spot down 1.7% to $18.99
Top Global News
- Fischer Signals 2016 Rate Hike With Economy Nearing Fed Goals: Fed vice chair talks days before Yellen’s Jackson Hole address
- Pfizer Said Close to $14b Deal to Acquire Medivation: Deal may be announced as early as Monday, according to people familiar with the situation
- ChemChina Clinches U.S. Security Nod for Syngenta Purchase: Deal would be biggest in record year of Chinese takeovers
- Renesas Said to Be in Talks for $3b Intersil Acquisition: Discussions may not result in a deal, person familiar says
- Nomura Back in Hiring Mode for U.S. Bankers After Cutting Costs: COO Ozaki sees “tremendous business opportunities for M&A”
- ‘Ben-Hur’ Remake Stumbles to Fifth Place in Box-Office Debut: Warner Bros.’ ‘Suicide Squad’ holds onto No. 1 for third week
- Marvell Said to Continue Steps Exploring Sale: DealReporter
- China to Scrap Anti-Dumping Measures on EU, Japan Steel Tubes
- Focus Financial Partners Said to File for IPO: WSJ
- Former Travelers CEO Fishman Has Died, Dasburg to Be Chairman
- Lockheed Martin Gets 10-Yr C-130J Air Force Contract for $10b
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Looking at regional markets, Asian stocks began the week in a choppy fashion which followed Friday’s subdued US close, where market-thin trade and a pull-back in energy hindered sentiment. Nikkei 225 (+0.3%) outperformed its counterparts, underpinned by a weaker JPY after dovish comments from BoJ Governor Kuroda over the weekend, while trade in the ASX 200 (-0.2%) was flat after mixed earnings. Markets in China were also indecisive with both the Hang Seng (flat) and Shanghai Comp (-0.8%) swinging between gains & losses despite the PBoC increasing its liquidity injections, as debt concerns persisted. Price-action in 10yr JGBs was subdued amid the increased risk-appetite seen across Japanese equities, while participants look to tomorrow’s 20yr auction. BoJ Governor Kuroda commented that he wouldn’t rule out cutting rates deeper into negative territory and added that there is a sufficient possibility the BOJ will add to its easing programme in September. India picked RBI Deputy Governor Urjit Patel as the central bank’s next governor to succeed Governor Rajan when his term ends next month. Deputy Governor Patel is seen as a hawkish, continuity candidate to follow Rajan. PBoC set CNY mid-point at 6.6652 (Prey. 6.6211) and injected CNY 110bIn via 7-day reverse repos.
Top Asian News
- India’s New Central Banker Faces Nervy Markets After Rajan Rally: Patel’s inflation hawk reputation seen reducing rate- cut odds
- Paul Singer’s Elliott Seizes on Bank of East Asia’s Profit Slide: Paul Singer’s fund gets more ammunition for shake-up campaign
- China Overseas Land 1H Net HK$19.7b vs HK$16.3b Year Ago: Co. raises FY16 sales target by 17%
In Europe, the morning has seen a subdued start to a, so far, typical mid-August week, with a particularly light calendar for the day. European equities trade in positive territory across the board, with Syngenta (+11.8%) the notable outperformer after announcing US clearance for their USD 44b1n ChemChina deal. Elsewhere, material names drag on the FTSE, with the likes of Anglo-American (-3.2%), Glencore (-1.9%) and Rio Tinto (-2.5%) among the worst performers on the continent. Finally, fixed income markets have been particularly subdued this morning, with bunds trading in modest positive territory and above 167.00. In terms of going forward, participants will be looking ahead to the BoE 3-7yr Gilt purchases this afternoon.
Top European News
- London Housing Boom to End in 2017 as Brexit Bites, Broker Says: Countrywide sees home values falling for first time since 2009
- VW Restarts Talks as Supplier Feud Expands to Golf Production: Six factories face partial production halt beginning Monday
- Getinge Ousts CEO After Less Than 18 Months as Views Differ: Surgical Workflows unit head Lindoff appointed acting CEO, shares fall
- Europe Plans for Life After Brexit as Merkel Meets Allies at Sea: Renzi hosts Merkel, Hollande on Italian warship off Naples
- Teleperformance to Buy LanguageLine Solutions for $1.52b: Co. sees deal accretive to EPS by ~10% on a pro forma basis for 2016
- Sanofi Updates NDA on Diabetes Product; Pdufa Date Now in Nov.
- Linde-Praxair Plan to Put Headquarters in Europe: Handelsblatt
In FX, the Bloomberg Dollar Spot Index rose 0.3% in early trading, after losing ground in each of the last two weeks. The yen dropped 0.5% to 100.75 per dollar. Bank of Japan Governor Haruhiko Kuroda Kuroda told the Sankei newspaper that the BOJ is conducting a comprehensive review of Japan’s economy and finances and said there is “sufficient chance” of more easing at next month’s policy meeting. Hedge funds and other large speculators raised net wagers for a weaker pound to a record in the week ended Aug. 16. That’s the seventh straight week of increases. The U.K currency gained 0.3 percent against the dollar to $1.3109. The MSCI Emerging Markets Currency Index dropped 0.3 percent. South Africa’s rand, South Korea’s won and the Taiwanese dollar posted the biggest declines among 16 major currencies measured against the greenback, sinking at least 0.5 percent. Turkey’s lira lost 0.6 percent. Fitch Ratings cut the outlook on the country’s investment grade credit to negative from stable after a failed coup attempt in July increased political risks. The rupee weakened 0.2 percent after India named Urjit Patel to take over from Raghuram Rajan as central bank governor from Sept. 4.
In commodities, the Bloomberg Commodity Index declined 0.8 percent, after slipping from a one-month high in the last session. Crude oil slid 2.0% to $47.65 a barrel in New York after Iraq, OPEC’s second-biggest producer, said it will boost exports by about 5 percent in coming days. The price jumped 9.1 percent last week on speculation that OPEC talks next month could lead to an output freeze. U.S. drillers added rigs for an eighth week, the longest run since April 2014, Baker Hughes Inc. data show. Silver dropped as much as 3 percent to a seven-week low, while gold was down 0.6 percent amid the dollar’s advance. Silver has rallied 37 percent this year while gold jumped 26 percent as the Fed refrained from tightening and other central banks embraced negative rates, benefiting bullion which doesn’t pay interest. Base metals fell, with aluminum declining for a third day and nickel sagging as much as 1.8 percent.
It’s a quiet start to the week today with only the Chicago Fed national activity index in the US this afternoon to note of
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Bulletin Headline Summary from RanSquawk and Bloomberg
- European equities enter the North American crossover higher with the FTSE 100 the notable laggard amid softness in commodity names
- JPY lost ground against the major overnight amid dovish rhetoric from Kuroda who hinted at further easing next month
- Looking ahead, the calendar is particularly light with Chicago Fed National Activity at 1330BST
- Treasuries dropped during Asia, European sessions after Fed Vice Chair Stanley Fischer said U.S. economy is close to the central bank’s goals; started paring drop toward end of overnight trading as European equities reversed gains.
- Fed fund futures pricing 50/50 chance of rate hike in Dec. 2016; fully pricing next rate hike around June 2017, implied rate 62bp, near midpoint of 50-75bp target range
- Pimco’s largest international bond fund and China are piling into negative-yielding Japanese debt, buying securities that pay out less than the purchase price. And there’s a way to turn a tidy profit off the trade
- The world’s largest banks are racing to meet a deadline next month when billions of dollars in new collateral requirements will begin to hit the over-the-counter derivatives market
- GDP is so 20th century. Whether compiled by production, income or expenditure approaches — GDP is increasingly struggling to keep up with the pace of economic change
- The U.K. economy has shown some post-Brexit strength. All it needs now is stamina as the focus is on whether the economy can sustain the initial robust readings that came last week
US Event Calendar
- 8:30am: Chicago Fed Nat Activity Index, July, est. 0.20 (prior 0.16)
DB’s Jim Reid concludes the overnight wrap
There won’t be much skiing this weekend at the Jackson Hole symposium but there will be focus on Yellen’s speech on Friday where we’ll see whether she brings the Fed’s message back on piste after a few recent moguls created by various Fed speakers over the last week.
Indeed the usually dovish NY Fed President Dudley caused the first bump when he said on Tuesday that a September hike was ‘possible’ and that ‘we’re edging closer towards the point in time where it will be appropriate to raise rates further’. Dudley also made the comment that he thought 10y Treasuries were ‘pretty low given the circumstances’. On the same day Atlanta Fed President Lockhart (a centrist) added that he thought at least one rate increase could be appropriate later this year. Late on Thursday we then heard from San Francisco Fed President Williams (also largely seen as a centrist) who said that every meeting should ‘be in play’, including September.
The latest addition to the debate over the weekend was Fed VC Stanley Fischer who suggested that the Fed “are close to their targets”. Although he didn’t comment on when they should hike it was a generally upbeat reflection on the US economy. The main theme of the speech though was the slowdown in productivity in recent years and how monetary policy wasn’t equipped to reverse the slump and that fiscal and regulatory policy were likely to be more effective. Although Fischer is known to be on the hawkish side (albeit moderately) and Yellen on the more dovish side, he probably wouldn’t want his comments in the week of the Jackson Hole get together to be interpreted in a manner completely different to his boss. So this sets up an interesting Friday.
In terms of Fed hike pricing, we went into last week with September and December probabilities of 16% and 42% respectively. Post Dudley’s comments we went to 22% and 51%. The FOMC minutes on Wednesday moderated things a little with September staying unchanged at 22% but December nudging down to 49%. Following Williams we ended the week back at 22% and 51% however.
Indeed the US Dollar also took heart from Williams’ comments late last week with the Dollar index finally closing up on Friday (+0.38%) for the first time in six sessions. It’s up a similar amount this morning too while US 2y and 10y Treasury yields, which closed up 4.4bps and 4.3bps respectively at 0.748% and 1.579% are also higher this morning (+2.8bps and +1.5bps respectively). Emerging market currencies were the biggest losers on Friday while US equity markets (S&P 500 -0.14%) and credit indices (CDX IG +0.9bps) ended a touch weaker.
Elsewhere this morning equity markets are off to another mixed start in Asia. A weaker sessions for the Yen (-0.55%) is providing some respite for the Nikkei (+0.24%) and Topix (+0.40%), while the ASX (+0.10%) is also up slightly. The Hang Seng (-0.45%), Shanghai Comp (-0.34%) and Kospi (-0.65%) all appear to be following the lead from the US on Friday however. US equity index futures are in the red by a similar amount this morning although there’s also been a bit of M&A focus over the weekend with the news that Pfizer is nearing a $14bn takeover of Medivation.
Moving on. Along with the various chatter out of the Fed, the relentless move higher for Oil last week was the other big focus for markets. Indeed WTI climbed +9.06% last week and even more impressively is up nearly 16% over the last 8 sessions. The prospect of some sort of coordinated major producers production freeze has been at the centre of the rally however our commodity strategists don’t think that a freeze would have much fundamental impact. Indeed they highlighted in their report on Friday that as before, the parameters of the proposed deal are likely to be very weak. They note that this is before we consider the impact of national oil companies who may try to ‘game’ the system by ramping up volume this month to set a high-water mark before the meeting on the sidelines of the International Energy Forum in Algeria on 26-28th September. They go on to note that since the terms of a deal are unlikely to pose upside constraints to Libya, Iraq or Nigeria, OPEC production could still exceed their 2017 assumption of 33.5mmb/d in the event of an agreement. Their fair value models currently suggest that oil is close to fair value of $46.6/bbl.
Elsewhere, it was a very quiet end to the week on Friday for economic data. There were no reports out in the US while in Europe the only data we got came in Germany, where PPI rose +0.2% mom (vs. +0.1% expected) in July, and also the UK where public finances (excluding bank groups) were in surplus to the tune of £1bn in July, boosted by a 3.4% rise in receipts. European equity markets actually ended the week on a bit of a sour note with the Stoxx 600 closing -0.81% as Italian equities (-2.18%) and Bank Stocks (-1.40%) struggled in particular.
Turning now to this week’s calendar. It’s a quiet start to the week today with only the Chicago Fed national activity index in the US this afternoon to note of. Tomorrow morning we kick off in Asia where we’ll get the flash manufacturing PMI reading for August in Japan and also the MNI business indicator out of China. During the European session we’ll get the August flash PMI’s for the Euro area, Germany and France (manufacturing, services and composites) along with CBI trends data for the UK. In the US we’ll also get the flash manufacturing PMI along with the Richmond Fed manufacturing index and new home sales for July. The Euro area consumer confidence reading for August will also get released in the afternoon. Turning to Wednesday the highlight of the morning session in Europe will likely be the final Q2 GDP revisions for Germany, along with the various subcomponent readings. The data in the US on Wednesday is focused on the housing market with existing home sales for July and the FHFA house price index reading due. With little in the way of data to note of in Asia on Thursday we’re starting in France where the August confidence indicators are due to be released. Shortly after that the IFO survey in Germany for August is due. There’s a number of important releases in the US on Thursday starting with the flash durable and capital goods order data for July, along with the remaining flash PMI’s (services and composite), initial jobless claims and the Kansas City Fed’s manufacturing index. The end of the week on Friday is a big one for data. In Japan we’ll get the July CPI report early on. German and France consumer confidence readings follow this, along with UK Q2 GDP. We then end the week in the US with the second reading of Q2 GDP and core PCE, the advance goods trade balance reading in July and the final University of Michigan consumer sentiment reading.
Away from the data the other big focus will be Fed Chair Yellen speaking at the Jackson Hole Policy Symposium on Friday. Another potentially interest event to keep an eye on is a meeting between Merkel, Hollande, Renzi and Tusk today in Italy where they are due to speak on Brexit
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