With the US taking the day off to celebrate the unofficial end of the summer, global markets have been relatively quiet, aside from the dramatic moves in the energy sector over the past few hours, where crude soared in early trading as reported previously on a much-hyped joint statement by the energy ministers of Saudi Arabia and Russia, only to see the spike fizzle after the two disappointed in failing to implement any tangible action, merely revealing they would launch a “working group” to “monitor the market”, even as the Saudi said there was “no need for an oil production freeze for now.” With the market left wondering ‘if not now, when’, the initial HFT euphoria has promptly fizzled.
Stepping away from crude, the drop in the USD which started on Friday after U.S. payrolls data showed hiring moderated more than forecast, continued even as financial markets still reflect the potential for a September interest-rate increase. The chance of the Fed hiking this month ended last week at 32 percent, futures show, having been 34 percent on Thursday. The probability fell briefly to 20 percent in the wake of the jobs report, however was rescued by an unexpected Goldman report hiking the odds of a September rate hike to 55%.
However the main reason for the overnight plunge in the USDJPY was a speech delivered by the BOJ’s Kuroda in Tokyo on Monday, in which he did not signal aggressive stimulus is planned at central bank meeting on Sept. 21. Even more troubling to the liquidity addicts, Kuroda also stated that the fall in lending rate has been achieved at the expense of bank profits and that there are limits in what BoJ can do in regards to inability to underwrite debt due to legal constraints.
In other words, helicopter money remains a long way off.
That said, he declined to rule out new initiatives to stoke inflation as the central bank conducts a comprehensive review of its policies and their effectiveness. As Bloomberg noted, Kuroda emphasized that the review, to be completed by the Sept. 20-21 board meeting, won’t result in any reduction in monetary stimulus, as is “being called for by some market participants.” “There is ample room for further monetary easing in either of three dimensions — quantity, quality, and the interest rate — and other new ideas should not be off the table,” Kuroda said in prepared remarks at a conference. He declined to specify what other options might be considered if needed.
“Of course, it’s possible for the BOJ to introduce a fourth easing measure in addition to the existing three because Kuroda continues to say there’s no limit to monetary policy,” Takeshi Minami, chief economist at Norinchukin Research Institute, said after Kuroda’s speech. “But when you look at market reactions, I don’t think they are buying what the BOJ is saying. Markets feel Kuroda is reaching limits.”
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The other notable overnight news was the final collapse of the Brexit scaremongering campaign, after the Markit UK Services PMI surged to 52.9 from a seven-year low of 47.4 in July, smashing expectations of a 50 print, and the biggest monthly gain since the survey began two decades ago. The median estimate of economists in a Bloomberg News survey was for a rise to 50, the level that divides expansion from contraction. The move a dded to evidence of an economic rebound following the shock inflicted by the
decision to leave the European Union. Almost as if Brexit was good for the UK, as we speculated all along.
So with the US closed today, and liquidity virtually non-existent, the dollar weakened, pushing stocks and emerging markets higher, after Friday’s jobs data cooled speculation that the Federal Reserve will raise interest rates this month (even if Goldman disagrees). Oil surged, then pared gains as Saudi Arabia’s energy minister released details of talks with Russia. The U.S. currency fell against all but two of 31 major peers, with South Korea’s won and South Africa’s rand among the biggest climbers. The Stoxx Europe 600 Index climbed to an eight-month high and the MSCI Asia Pacific Index jumped by the most in eight weeks. The pound rallied after a gauge of U.K. services jumped the most on record. Financial markets in Canada, India and the U.S. are shut on Monday for holidays.The chance of the Fed hiking this month ended last week at 32 percent, futures show, having been 34 percent on Thursday. “The jobs report probably reduces the probability of a Fed hike in September, but it wasn’t so weak that it detracts from the whole concept of an underlying economic recovery, said Daniel Murray, head of research at EFG Asset Management in London. “That’s a completely reasonable backdrop for global equities.”
The MSCI Emerging Markets Index rose 1.2 percent, following a 1 percent gain on Friday. The Hang Seng China Enterprises Index of mainland companies listed in Hong Kong climbed 1.5 percent to the highest level this year, while benchmarks in South Korea and Taiwan rose more than 1 percent. Tencent Holdings Ltd., the online gaming company and owner of the instant messaging application WeChat, jumped 4.2 percent. That boosted the market value to $HK1.99 billion ($256.6 billion), surpassing China Mobile Ltd. to become the country’s most valuable corporation. Elsewhere, China’s services output picked up in August, data showed
Monday. Leaders of the Group of 20 nations are attending an annual
summit, which is being held in Hangzhou, China.
S&P 500 Index futures were little changed, with U.S. markets shut Monday for a holiday.
Market Wrap
- Equities: FTSE 100 unchanged, DAX up 0.3%; MSCI Asia Pacific up 1.3%
- Bonds: German 10Yr -2bps to -0.06%, Spanish 10Yr unchanged at 1.03%
- FX: Dollar Index down 0.2% to 95.65
- S&P 500 futures up 0.1% at 2180.1
- Vstoxx Index up 2.6% at 18.77
- U.S. markets closed for Labor Day holiday
Looking at regional markets, as usual we start in Asia where stocks started the week upbeat with all major indices positive after Friday’s NFP miss which dampened prospects of a September Fed hike. Nikkei 225 (+0.7%) was initially among the outperformers on a weaker JPY after USD/JPY briefly broke above 104.00, although some gains were later pared alongside a pull-back in the currency. ASX 200 (+1.1%) was led by commodity names after WTI found support at USD 43/bbl and Gold rallied post-US jobs data, while better than expected Q2 company operating profits also added to the tone in Australia. Chinese markets conformed to the heightened risk appetite across the region with the Hang Seng (+1.7%) and Shanghai Comp (+0.2%) both higher following a strong Caixin Services PMI release, although gains in the mainland were capped following a weak liquidity injection by the PBoC. 10yr JGBs tracked losses seen in T-Notes amid increased appetite for riskier assets while demand for government paper was also dampened by the BoJ’s absence in the market, which resulted in 10yr yields increasing to its highest in nearly six months. BoJ Governor Kuroda stated he does not share the view there are limits to easing, while he added that there is ample room for further cuts in NIRP and expansion of size in quantity dimension. However, BoJ Governor Kuroda also stated that the fall in lending rate has been achieved at the expense of bank profits and that there are limits in what BoJ can do in regards to inability to underwrite debt due to legal constraints.
In Europe, the Stoxx Europe 600 Index was little changed after earlier gaining as much as 0.4 percent. SBM Offshore NV and Tullow Oil Plc advanced at least 3.4 percent as crude climbed. ArcelorMittal and AngloAmerican Plc led miners higher as leaders of the Group of 20 major economies mentioned the global steel glut in their communique at a meeting in China. SFR Group SA jumped 6.6 percent after Patrick Drahi’s Altice NV agreed to buy the 22 percent of the telecommunications company that it didn’t already own for 2.4 billion euros ($2.7 billion). Altice gained 1.2 percent. Hugo Boss AG retreated 1.8 percent after UBS Group AG downgraded the fashion company to sell from neutral, citing a downside risk to 2017 earnings.
In FX, the Bloomberg Dollar Spot Index, a gauge of the greenback against 10 major peers, fell 0.3 percent as of 11:28 a.m. London time. The measure slid as much as 0.5 percent on Friday following the release of the payrolls data, before erasing its decline as investors weighed the significance of the revised July figures. New Zealand’s dollar, which offers the highest yield among Group of 10 currencies, strengthened 0.5 percent and South Africa’s rand rose 0.6 percent. South Korea’s won led gains in Asia with a 1.1 percent advance. “The interpretation of the payrolls data is a bit mixed: It has missed expectations but it’s not terrible,” said Sim Moh Siong, a currency strategist at Bank of Singapore Ltd. “Asian currencies should stay supported because the softer-than-expected payrolls should reduce the chance of a Fed rate hike in September.” The pound jumped to its strongest level in more than seven weeks versus the dollar as services became the latest part of the economy to show a bounce back after the Britain’s vote to leave the European Union. It rose 0.5 percent to $1.3327, after touching $1.3376, the highest since July 15.
In commodities, crude rose 2.3 percent to $45.46 a barrel in New York, after earlier jumping as much as 4.7 percent. Saudi Arabia and Russia discussed actions to stabilize the global oil market — including an output freeze — at a meeting in China, Saudi Energy Minister Khalid Al-Falih told reporters Monday after meeting his Russian counterpart Alexander Novak at the G20 summit. Cooperation among all producers is needed to shore up the market, he said. The Organization of Petroleum Exporting Countries and other major producers are due to hold talks this month in Algiers. Gold held near its highest level in more than a week, having rallied 0.9 percent on Friday following the payrolls data.
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DB’s Jim Reid concludes the overnight wrap
Although today should be relatively quiet due to it being Labor Day in the US, the will they or won’t they argument as to Fed rate hiking in September will continue through the week. The below consensus 150k payroll print on Friday didn’t prevent the hawks in the market suggesting that the Fed could still pull the trigger this month. The market implied probability only dipped from 34% before the number to 32% at the close, while December continues to hover around the 60% mark.
Tomorrow’s non-manufacturing ISM will be the next major chance for reappraisal. Interestingly last week the manufacturing number went back below 50 (49.4) for the first time since February and in the payroll report manufacturing payrolls fell -14k. This sector only accounts for just under 10% of the economy so it’ll be important to see if weakness is transmitting across to services as it usually does in most cycles. The bulls would suggest that energy woes are still driving manufacturing and is not yet infiltrating the rest of the economy so you can continue to have a divide.
Perhaps the other major event of the week is the ECB meeting on Thursday. Our Euro economists had originally pencilled in additional easing (extending QE for 9-12 months) at this meeting but on Friday they pushed this back to the December meeting. Brexit hasn’t led to a data shock yet and they cite that Euro bank lending and the credit impulse has not seen deterioration. However they expect a dovish tone to the meeting.
Looking at the weekend news, there are a couple of notable stories to highlight. Over in Germany, unofficial results suggest that Chancellor Merkel’s Christian Democratic Party (CDU) has lost more support at the latest regional elections to the anti-immigrant Alternative for Germany party (AfD), although this was somewhat expected following recent approval ratings. According to the BBC, the AfD has pushed the CDU into third place in rural Mecklenburg-Vorpommern, with the Social Democrats (SPD) holding onto first place again. The BBC is reporting that the SPD polled 30% of the votes, with AfD taking 21% and the CDU just 19%. The CDU previously took home 23% at the same region back in the 2011 elections. The FT is also highlighting that the AfD is now represented in 9 of Germany’s 16 regions. While all other parties have ruled out forming a governing coalition with the AfD, the result was seen as
something of a test for Merkel ahead of the general election next year and so will only further pressure the ruling Chancellor.
Meanwhile, over at the G20 meeting in China the rising threat of populist parties and the subsequent knock on to global trade appears to have been a hot topic between leaders. Indeed UK PM Theresa May highlighted that ‘we can’t ignore the fact that there’s sentiment out there which is antiglobalization’ and that ‘we need to consider how, when we put these free trade arrangements in place, they’re actually going to benefit everybody’. IMF Chief Lagarde also criticised trade as being ‘too low and has been way too low for a long time’ while China President Xi made special mention to the global economy being ‘at a crucial juncture’ and that the ‘growth drivers from the previous round of technological progress are gradually fading, while a new round of technological and industrial revolution has yet to gain momentum’.
On the whole though there wasn’t a great deal of market moving news from the G20 while the Euro is also little changed this morning following the Germany elections. The rest of Asia has kicked off the new week on the front foot though. Indeed the Nikkei (+1.27%), Hang Seng (+1.46%), Shanghai Comp (+0.32%), Kospi (+0.93%) and ASX (+0.98%) are all notably higher reflecting in part the gains on Wall Street on Friday as you’ll see below, and also perhaps supportive comments from BoJ Governor Kuroda this morning. He said that ‘there is ample room for further monetary easing in either of three dimensions – quantity, quality and the interest rate – and other new ideas should not be off the table’. Kuroda also said that he doesn’t share the view that there is a limit to monetary easing and that the BoJ will continue its utmost efforts to achieve its price target, and so maintaining its 2% inflation target. The Yen is currently +0.25% stronger though following the comments. Meanwhile there’s also been a bit of data in China this morning. The private Caixin services PMI was reported as increasing 0.4pts last month to 52.1. Together with the manufacturing data from last week, the composite for August has nudged down 0.1pts to 51.8.
Moving on and wrapping up the rest of Friday’s employment report in the US. Along with the below-consensus payrolls number, private payrolls (126k vs. 180k expected) also printed well below expectations, while the 21k downward revision to the June nonfarm payrolls was cancelled out by a 21k upward revision to July (and so to a bumper 275k). The unemployment rate stayed put at 4.9% (4.8% expected) while the rest of the report was also on the softer side. Average hourly earnings (+0.1% mom vs. +0.2% expected) came in below market and took the YoY rate down three-tenths to +2.4%, while average weekly hours (34.3 vs. 34.5 expected) fell marginally from 34.4 hours in July. The remainder of the data was a bit of sideshow on Friday. Factory orders rose +1.9% mom in July (vs. +2.0% expected), the trade deficit ($39.5bn vs. $41.5bn expected) shrunk more than expected in the same month while the final services PMI for last month was revised up 0.1pts to 51.0. After all that the Atlanta Fed revised up their Q3 GDP forecast to 3.5% from 3.2% as a result of the trade data, and so back to where it was prior to the soft ISM manufacturing data earlier in the week. The NY Fed kept its 2.8% forecast for Q3 GDP unchanged meanwhile.
The initial reaction to the employment report saw US Treasury yields and the USD spike lower. 2y yields touched an intraday low of 0.746% which was 5bps or so lower than the pre-report levels, while 10y yields were down at 1.539% (and also 5bps lower) and the USD index tumbled as much as -0.70%. Those moves were fairly short lived however and markets quickly reversed as the hawks continued to push the hiking case. The USD index closed +0.20% by the end of the day, while 2y and 10y yields finished at 0.788% (+0.4bps) and 1.603% (+3.4bps) respectively. US equities also ended up gaining with the S&P 500 and Dow finished +0.42% and +0.39% respectively after utility stocks That said energy stocks also provided a bit of a boost after WTI (+2. 7%) finally had a positive day. It was still down nearly -7% for the week however.
European equity markets also had one of their better days in a while. The Stoxx 600 finished +1.97% with a rally also for energy and utility names playing a big part. It was in fact the biggest gain for the index since June 29th while the Spanish IBEX advanced +1.67% and 10y Spanish yields rallied 2.6bps despite the news that PM Rajoy lost the second round vote of confidence vote by a score of 180 to 170 votes. That continues the nine-month long political stalemate and with it political uncertainty in Spain with the next event being the regional elections in the Basque Country and Galicia on September 25th which will be a key event to keep an eye on.
Before we wrap up and take a look at the week ahead where you’ll see that we’ve got some more regional Fed President’s due to speak, the hawkish nonvoter and Atlanta Fed President Lacker spoke on Friday and argued that the Fed Funds rate should be ‘significantly higher than it is now’ based on a range of economic analysis. His comments came after the payrolls report which he also described as ‘reasonably strong’ and ‘perfectly close enough to expectations’. Lacker also added that he is ‘deeply sceptical of raising a central bank’s inflation target as a means of providing more stimulus’.
Turning over to this week’s calendar. This morning in Europe the main will be confirmation of the final August PMI’s (services and composites) as well as a look at the data for the UK and the periphery. Euro area retail sales data is also due out, along with the Sentix investor confidence reading. With US markets closed there’s no data today across the pond. During the morning session on Tuesday we’ll get the RBA rate decision in Australia. Here in Europe tomorrow we’ve got Germany factory orders and the final Q2 GDP report for the Euro area due up. Over in the US the highlight is the ISM non-manufacturing, while the final PMI’s (services and composite), and IBD/TIPP economic optimism data will be released. In Asia on Wednesday we’ve got the latest foreign reserves data due in China, along with Japan’s leading index. In Europe we’ll get July industrial production data for Germany and the UK, along with trade data in France. It’s quiet in the US on Wednesday with just JOLTS job openings due, along with the Fed’s Beige Book. Turning to Thursday it’s a busy morning in Asia with China trade data for August and also Japan’s final Q2 GDP reading. In Europe we’ll get business sentiment data in France before all eyes turn to the ECB meeting just after midday. In the US initial jobless claims and consumer credit data get released. We close the week in Asia with more important data in China in the form of the August CPI and PPI prints. Germany then releases its July trade data, followed by industrial production in France and then trade data out of the UK. We finish the week in the US with wholesale inventories and trade sales in July.
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