Markets on Tenterhooks

Markets on Tenterhooks

  • The global capital markets are stabilizing in Europe after continued selling was seen in Asia and the US slide yesterday. 
  • India’s central bank delivered a larger than expected 50 bp rate cut
  • Spain reported a sharp fall in September price pressures, and initial data from German states point to lower inflation as well
  • For the second time this year, Germany is reducing its bond issuance; government is also considering boosting funding to help asylum seekers
  • Today the Brazilian central bank will hold both a FX credit line auction and a FX swap auction; Brazil also reports IGP-M wholesale inflation

Price action:  The dollar is narrowly mixed against the major currencies.  The Scandies are outperforming, while the Aussie and the euro are underperforming.  The euro is slightly lower near $1.1220 despite a stronger than expected eurozone confidence reading.  Sterling remains heavy and continues to trade just below $1.52.  Dollar/yen is trading flat near 120.  EM currencies are mostly weaker.  TRY, HUF, and ZAR are outperforming while MYR, KRW, and RON are underperforming.  INR was unchanged despite the larger than expected 50 bp cut from the RBI.  MSCI Asia Pacific fell 3%, with the Nikkei down 4.1%.  China stocks were lower, with the Shanghai Composite down 2% and the Shenzen Composite down 1.5%.  The Dow Jones Euro Stoxx 600 is down 0.2% around midday, while S&P futures are pointing to a lower open.  The US 10-year yield is flat at 2.10%, while European bond markets are mostly softer.  Commodity prices are mixed, with oil prices up around 1%.

  • The global capital markets are stabilizing in Europe after continued selling was seen in Asia after the US slide yesterday.  The dollar is narrowly mixed against the major currencies.  Higher oil and copper prices have helped steady the Australian dollar.  After briefly dipping below $0.6940, it recovered to $0.6985 in the European morning.  The US dollar recorded new multi-year highs against the Canadian dollar near CAD1.3430, before pulling back to CAD1.3400.
  • The euro rose to $1.1280 in Asia, and as commodity producers and commodities stabilized, the euro slipped back toward $1.1220 in Europe.  The intra-day technicals warn of the risk of another run at $1.1300-1.1320.  The dollar has been tracing out a large symmetrical triangle against the yen since late-August.  As we have noted, the pattern is 1) mostly seen as a continuation pattern, which in this context is dollar negative and 2) subject to false breaks.
  • Before the weekend, the dollar broke to the upside, but the close failed to confirm it.  Weighed down by sliding equities and lower bond yields, the dollar tested the lower end of the triangle in the JPY119.30 area today, and it held.  The dollar has bounced back to trade briefly through JPY120 in the European morning.  However, the greenback met new sellers and was pushed back toward JPY119.50 seems likely in North America today.
  • The news stream is light, and what news there is appears to be overshadowed by a general anxiety spurred by the commodity-equity market link.  The splitting of Alcoa, the UK steel plant that announced closure, and the performance of some large commodity producers (like Glencore) are worrying investors, and may be exacerbating the quarter-end portfolio adjustments.
  • There are four developments to note today.  First, India’s central bank delivered a larger than expected 50 bp rate cut today.  The market had anticipated a 25 bp cut.  This was sufficient to spur a recovery in Indian equities.  It is also notable that the rupee was not punished by the rate cut.  This is largely because the equity flows tend to dominate foreign flows in India, and the currency is not as commonly used for carry trades as some of its peers are.
  • Second, given that the ECB is seen on the verge of extending, expanding, or altering the composition of assets it is buying, investors are sensitive to data that may push officials one way or the other.  Spain reported a sharp fall in September price pressures.  The EU harmonized measure fell to -1.2% from -0.5%.  The Bloomberg consensus was for a -0.7% reading.  The monthly increase was 0.4%.  The consensus had forecast a 1.0% rise.
  • Separately, the German states have reported their preliminary September inflation as well.  Nearly every state saw a 0.2-0.3% decline in their year-over-year rates.  This warns of downside risks for the national figures, which will be reported later today.  The consensus is for a decline to zero from 0.1%.  Recall that the ECB staff cut its inflation and growth forecasts earlier this month.  As we have noted, every central bank that has adopted unorthodox monetary policy has chosen to do more than it initially anticipated.
  • Third, for the second time this year, Germany is reducing its bond issuance.  The government announced an 11 bln euro reduction for the entire year, of which Q4 issuance will be 6 bln less than previously anticipated.  While this may play on supply concerns as the ECB continues to buy bonds under its QE operations, most of the supply cuts involve the bills sector, which is not including in the asset purchase scheme.  Germany is reducing the 2-year supply by 1 bln euros, but at -26 bp, the yield on the two-year disqualifies it from QE as well.  At the same time, the German government is considering boosting funding by 6.7 bln euros to help the nearly one million asylum seekers anticipated this year.  German tax revenues are exceeding forecasts, and there are savings from debt servicing as well.
  • Fourth, UK mortgage approvals rose to 71.0k in August from a revised 69.0k in July.  This is the most since December 2013.  Lending rose to GBP3.4 bln from GBP2.8 bln.  This is the most since 2008.  Sterling itself hardly responded.  It has been confined to less than half a cent range and is within yesterday’s range, which itself was within Friday’s range.  The euro is flat against sterling now, though earlier in the session, the euro rose to its best level (~GBP0.7435) since early May.
  • The North American calendar is light today.  The main feature is the S&P/CaseShiller house price indices.  The heavy week of Fed speakers takes the day off, but tomorrow Yellen, Dudley, Bullard, and Brainard speak.  Tomorrow also sees the ADP employment estimate and the Chicago PMI.  Canada will report July GDP figures tomorrow as well.
  • Today, the Brazilian central bank will hold both a FX credit line auction and a FX swap auction.  Separately, September IGP-M wholesale inflation is due, and is expected to rise 8.2% y/y vs. 7.6% in August.  Market pricing now suggests several hikes in Q4 and Q1 that would take the SELIC rate to 16% by Q1 2016.  That’s very aggressive, and is almost certainly due more to risk aversion pushing up the local yield curve than to expectations for actual hikes.  Brazil then reports August consolidated budget data on Wednesday, with the primary balance seen at –BRL12.4 bln.  If so, the 12-month total would narrow slightly.  The weak economy is likely to keep upward pressure on the budget deficit.  The price action last week in BRL should be discarded.  That short-covering bounce is likely over, with markets looking to sell BRL into any strength.  Break of the 4.11 area (62% retracement of last week’s fall in USD/BRL) sets up a test of the 4.25 all-time high from September 24.