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Calmer Capital Markets…for the Moment

Overview:  The capital markets are quiet today. Equity markets and bond yields have a slight upside bias, while the dollar is little changed. Despite…

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Overview:  The capital markets are quiet today. Equity markets and bond yields have a slight upside bias, while the dollar is little changed. Despite reports that the lockdown in Chengdu is easing, Chinese equities underperformed in the Asia Pacific region. Japan, Hong Kong, Taiwan, and Australia eked out modest gains. After sliding around 2.4% over the past two sessions, the Stoxx 600 is up fractionally. US futures have edged slightly higher. The US 10-year yield is firmer by around three basis points near 3.44%, while European benchmark yields are mostly 1-2 bp firmer. Most of the major currencies are +/- 0.2% changed on the day. A similar picture is evident among emerging market currencies. Gold settled below $1700 yesterday and has continued to retreat today. It has tested the $1685 area to approach the year’s low set in late July near $1680. The next key chart area may be closer to $1676, the 200-day moving average, which the yellow metal has not traded below since late 2018. December WTI has cut yesterday’s 1.3% gain in half and is trading below $87. Rail disruption in the US ahead of the potential strike starting Saturday helped lift the US natgas price over 10% yesterday. It is off 3.3% today. The EC’s reluctance to support a cap on gas prices has seen the European benchmark climb higher. It is up 4.5% today after gaining 8.2% yesterday. Iron ore was practically flat today. It fell almost 2.5% yesterday. December copper has steadied after falling 2.5% over the past two days. December wheat has come back offed after yesterday’s 1.4% advance.  

Asia Pacific

In unadjusted terms, Japan's trade deficit doubled in August to JPY2.82 trillion (~$19.7 bln) from JPY1.43 trillion in July. This is a record shortfall and is the 13th consecutive month in deficit. Consider that this year's average shortfall is JPY1.53 trillion a month. Last year, the monthly average through August was a JPY73.5 bln surplus. Prior to the pandemic, Japan recorded an average monthly deficit in the first eight months of 2018 of about JPY163 bln. The weak yen helped boost imports by nearly 50% from a year ago. Japan imports most of its energy. Exports rose an impressive 22.1%, slightly less than expected but better than July's 19.0% increase from a year ago. On a month-over-month basis, imports rose 1.5% whiles exports slipped by about 0.7%.

Australia's August jobs report was mixed. After losing almost 41k jobs in July, Australia grew 33.5k in August, which was near expectations. The details were even better, with an increase of nearly 59k full-time positions (it lost ~87k in July). Part-time positions fell by a little more than 25k (gained 46k in July). The participation rate increased to 66.6% from 66.4%. The record was set in June at 66.8%. However, the increase in the participation rate saw the unemployment rate tick up to 3.5% from 3.4%. The data did not change the market's assessment of the outlook for the central bank meeting on October 4. The market sees a downshift from 50 bp to 25 bp as most likely. The futures market has about a 35% chance of a 50 bp move discounted, virtually unchanged from yesterday. However, it settled last week at less than a 15% chance. Separately, the Melbourne Institute of Consumer Inflation Expectations eased to a four-month low of 5.4%, down from 5.9% previously. A year ago, the reading was at 4.4%. Lastly, we note that New Zealand report Q2 GDP rose 1.7% quarter-over-quarter, well above median forecasts (Bloomberg's survey) for 1.0% and follows the 0.2% contraction in Q1. The RBNZ meets on October 4. The swaps market is comfortable with another 50 bp hike.

The dollar is consolidating in a JPY142.80-JPY143.80 range today. It is trading within yesterday's range. The 10-year JGB yield is a whisker below the 0.25% cap, which is another front in the tension between the market and officials. After having been large buyers of Japanese bonds in July and August, foreign investors reversed course and sold JPY2.57 trillion last week. To put last week's sales in perspective, it offset the August purchases in full. Soft demand at today's 20-year bond auction did not help matters. The Australian dollar extended yesterday's recovery but found sellers lurking around $0.6770 that capped it. The consolidative tone looks set to continue through North America today. The dollar gapped higher against the Chinese yuan yesterday and reached a new high for the move today, slightly above CNY6.98. Reuters reports that five large Chinese banks cut the personal deposit rates by 10-15 bp even though the one-year medium-term lending facility was unchanged at 2.75%. Some observers link it to last month's cut in the loan prime rate. Meanwhile, the PBOC continues to manage the yuan's leg lower by continuing to set the dollar's reference rate well below market expectations (CNY6.9101 vs. CNY6.9631). The dollar can move only 2% from the reference rate.

Europe

The EC shied away from recommending a cap on natural gas prices and this disappointment seems helping lift prices today. Instead, a cap on profits on low-cost producers and a level on fossil fuel producers is intended to raise 140 bln euros to be used to help blunt the impact of higher energy prices. The EC will begin formal talks with Norway in hopes to negotiate a lower price for natural gas. It proposed a 5% mandatory cut in consumption in peak hours. To address the liquidity squeeze of margin calls, it proposes to boost the threshold for clearing to 4 bln euros from 3 bln. It also wants bank guarantees to be accepted for margin calls. The formal heating season begins next month and there is much negotiation needed before then. This is still very much a work in progress. It will likely require the EU Council where the heads of state can make these decisions.

Although Italy holds its general election in 10 days, Prime Minister Draghi is pushing for a new 13.5 bln euro energy assistance package, to include extra tax breaks and the possibility of paying utility bills in installments. Earlier this month, the German government announced a new 65 bln euro initiative and earlier this week, the French government announced a 15% cap on increase of energy prices to households starting next year. It is also considering a one-off payment of 200 euros for the poorest households. The new UK government is going to cap prices to households about 25% above current levels and next week is expected to provide plans to help businesses, though Parliament is on recess from September 22.

Meanwhile, Sweden's Prime Minister Andersson will resign today following the close election over the weekend that has seen the center-right win the slimmest of majorities. Law-and-order and immigration appears to have played a strong role in boosting the Swedish Democrats. Although it became the second-largest party after the Social Democrats, the head of the Moderate Party is likely the next prime minister. The head of Swedish Democrats is not acceptable to the center-right coalition that is needed in the fragmented political system. It may take some time to put together the new government and it will be recognized as fragile unless it proves otherwise.

After traveling in a two-cent range on Tuesday, the euro trading in a 3/4 of a cent range yesterday, and today is in less than half-of-a-cent range today below $1.00. There are 1.3 bln euros in options at parity that expire today. We would have thought that these have been offset. Above there, another set of options for 1.15 bln euros at $1.0050 will also be cut today. The euro is trading near session highs late in the European morning, which is stretching the intraday momentum indicators. In the bigger picture the euro is consolidating in its trough following the US CPI surprise on Tuesday. Sterling is also trading quietly, confined to a little less than half-of-a-cent range too, above $1.1500. However, it is on session lows late morning turnover. Yesterday's low was near $1.1480. The intraday momentum indicators are not quite stretched, seeming to allow for a test on yesterday's low, but we would not look for much more than that today.

America

After the inflation reports over the past two sessions, real sector data is in the spotlight today, with August retail sales and industrial production. Falling gasoline prices likely dragged headline retail sales, but excluding autos and gas, sales are expected to increase by 0.5%. That would match the 2019 average but would be the slowest since last November. Industrial output looks softer. Manufacturing output is the culprit. It rose for the first time in three months. The 0.7% gain drove the 0.6% rise in the overall measure of industrial production. The manufacturing surveys warn of weakness and the median forecast in Bloomberg's survey forecasts a 0.1% decline in manufacturing output. Manufacturing employment has risen by an average of 37k this year through August, 50% more than the average in the first eight months of 2021. July business inventories will be reported. In addition, weekly jobless claims, the import/export prices, and the September Empire State manufacturing survey and the Philadelphia Fed surveys are due. Taken together, economists will update their GDP forecasts. That Atlanta Fed's GDPNow tracker will be updated from it 1.3% estimate from September 9. 

It is not just that monetary policy is tightening in the US, but fiscal policy is tightening more than many seem to appreciate. The deficit will fall this year from almost 11% of GDP last year to close to 4% this year. It took several years after the Great Financial Crisis to reduce the deficit as much. In Canada it is even more pronounced. The OECD projects it to fall from 13.2% last year to about 2.5% this year. Earlier this week, Canada's government offered targeted aid to low-income families (doubling the sales tax rebate for six months), housing benefit (tops up an existing program for low-income renters) and fund a dental care plan (for children under the age of 12 who do not have access). Some of the funds have previously been allocated. Estimates suggest, the measures will boost borrowing by C$3.1 bln. This seems too small for the C$1.7 trillion economy to make much of a difference in terms of inflation or growth. The Bank of Canada sees the neutral rate between two and three percent. The target rate is currently 3.25%. The swaps market favors a 50 bp hike in October and a 25 bp hike in December. It has begun considering a hike in Q1 23 (~38% chance).  

The US dollar briefly poked above CAD1.32 yesterday. It was the fourth time in the past two months, but it has not closed above it once. It is consolidating quietly in a narrow range roughly between CAD1.3155 and CAD1.3185. Yesterday's low was near CAD1.3140 and this looks safe. The intraday technicals seem to favor the greenback, which may mean weaker US stocks. The US dollar is hovering around MXN20.00, the middle of the MXN19.80-MXN20.20 range that has dominated for the past month. The range looks to have narrowed lately to MXN19.90-MXN20.10. When the dollar is offered, the peso is among the market's favorites. Note the leaving aside the Russian rouble for obvious reasons, the next three best performing emerging market currencies are from Latam this year:  Brazil (~8%), Peru (~3%) and Mexico (~2.7%). 


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Government

Washington Gave $28M To Chinese Entities For Joint Research Since 2015: Report

Washington Gave $28M To Chinese Entities For Joint Research Since 2015: Report

Authored by Rita Li via The Epoch Times (emphasis ours),

Recently…

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Washington Gave $28M To Chinese Entities For Joint Research Since 2015: Report

Authored by Rita Li via The Epoch Times (emphasis ours),

Recently released findings show U.S. government agencies sent over $28 million in taxpayers’ dollars “directly to Chinese entities” for joint research over a five-year period ending 2021.

A technician works at a DNA tech lab in Beijing on Aug. 22, 2018. (Greg Baker/AFP/Getty Images)

From fiscal years 2015 through 2021, “the CDC [Centers for Disease Control and Prevention], NIH [National Institutes of Health], and DOD [Department of Defense] provided 22 awards totaling $28.9 million directly to Chinese entities including universities and other research institutions,” the Government Accountability Office (GAO) said on Sept. 29 following a trove of analyses.

Researchers found the federal funding focused on “multiple scientific disciplines,” aiding Chinese entities in conducting research on “disease surveillance, vaccination studies, and the development of new drugs,” as well as “alternative technologies to propel vehicles such as drones.”

The release of its 38-page report (pdf) follows a January request from House Republican Conference Chairwoman Elise Stefanik (R-N.Y.) and Michael McCaul (R-Texas), the top Republican on the House Foreign Affairs Committee. They asked GAO to review federal funds provided to China or entities controlled by the Chinese Communist Party (CCP) for collaborative research, and U.S. contributions to multilateral institutions.

Stefanik described such funding as “troubling.”

“China’s deception and stonewalling of the truth behind the origins of COVID-19 has led to millions of senseless deaths and trillions of dollars in economic destruction across the globe,” the congresswoman said in a statement to The Epoch Times.

The three agencies awarded a total of 13 Chinese entities for joint publications, information sharing, and workshops, while 84 percent of the direct funding went to the University of Hong Kong, Peking University, and the Chinese Center for Disease Control and Prevention, known as the Chinese CDC.

Receiving almost $5 million from the NIH and the CDC over the past years, the Chinese CDC had been suppressing information about the outbreak domestically and snubbed U.S. offers of assistance, despite how any health data would have been crucial to formulate a more effective COVID-19 containment strategy and minimize the disease’s global spread.

Health workers wearing personal protective equipment walk on a street in a neighborhood during a COVID-19 lockdown in the Jing’an district in Shanghai on April 8, 2022. (Hector Retamal/AFP via Getty Images)

“Even more frightening,” Stefanik continued, “we still have no idea how much total money has been sent to China due to lax reporting requirements. Make no mistake, the Chinese Communist Party’s deception throughout the pandemic confirmed that China is not a reliable partner.”

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Tyler Durden Thu, 10/06/2022 - 17:40

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Spread & Containment

Meet Florence, WHO’s AI-powered digital health worker

An artificial intelligence-powered digital health worker has been unveiled by the World Health Organisation (WHO) as its latest
The post Meet Florence,…

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An artificial intelligence-powered digital health worker has been unveiled by the World Health Organisation (WHO) as its latest tool for disseminating reliable health information to the public.

Originally developed by New Zealand tech company Soul Machines with support of the Qatar Ministry of Health, the first version of the virtual health worker was used to combat misinformation about the pandemic.

The new version – dubbed Florence 2.0 – covers a broader range of topics. Along with advice on COVID-19 vaccines and treatments it can also share advice on mental health, give tips to de-stress, provide guidance on how to eat healthily and be more active, and quit tobacco and e-cigarettes, according to the WHO.

The chatbot can currently converse in English, with Arabic, French, Spanish, Chinese, Hindi and Russian to follow.

It’s an interesting move for the WHO, which hasn’t been on the front lines of the digital health revolution, and an indicator of the growing acceptance of AI to help support health.

The topics chosen for Florence are some of those that have the greatest burden on health around the world, and according to her developers she could help support healthcare workers in areas where there are shortages in healthcare staff.

It is estimated that one in every eight people globally lives with a mental disorder while tobacco use and unhealthy diets kill 16 million people every year, and physical inactivity plays a role in another 830,000 preventable deaths from cancer, heart disease, lung disease, and diabetes.

“Digital technology plays a critical role in helping people worldwide lead healthier lives,” said Andy Pattison, WHO’s Team Lead for Digital Channels.

“The AI health worker Florence is a shining example of the potential to harness technology to promote and protect people’s physical and mental health,” he added.  “AI can help fill gaps in health information that exist in many communities around the world.”

The WHO said it plans to continue to develop the digital health worker to help meet major health issues facing the world today.

Soul Machines co-founder and chief executive Greg Cross said the challenge with this kind of project is to bring an avatar to life that is empathetic, informative, and understanding.

“Our digital people operate and respond in real time, providing users with a unique and emotionally engaging experience,” added Cross. “We look forward to continuing our work on Florence as we aim to positively reshape and transform the healthcare industry.”

The latest version of Florence joins a growing list of chatbots that aim to deliver first-line primary care, currently within fairly limited health categories although their capabilities are expected to grow in the next decade.

Apps like Ada Health, Healthily and Sensely combine symptom checkers with information while some such as Woebot and OneRemission provide psychological and behavioural support to patients with specific health concerns,

Others are going even further, providing functions such as medication and appointment management, or connecting patients remotely with clinicians for diagnosis and treatment. Examples of these include Babylon Health‘s platform and Gyant.

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Government

Futures Slide As OPEC+ Cut Sparks Gas Inflation Fears And “Tighter For Longer” Fed

Futures Slide As OPEC+ Cut Sparks Gas Inflation Fears And "Tighter For Longer" Fed

Two days ago, when stocks were melting up even as oil was…

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Futures Slide As OPEC+ Cut Sparks Gas Inflation Fears And "Tighter For Longer" Fed

Two days ago, when stocks were melting up even as oil was storming higher and threatened to rerate inflation expectations sharply higher, we mused that algos were clearly ignoring this potentially ominously convergence.

And while yesterday we saw the first cracks developing in the meltup narrative as oil extended gains following OPEC's stark slap on the face of the dementia patient in the White House, it was only today that the "oil is about to push inflation sharply higher" discussion entered the broader financial sphere, with JPM writing this morning that "OPEC+ presents inflation risk", Bloomberg echoing JPM that "OPEC+ alliance’s plan to cut oil supply stoked inflation fears and as traders awaited labor-market data to gauge the risk of recession" and Saxo Bank also jumping on the bandwagon, warning that OPEC+ supply cut will worsen global inflation which "raises the risk of inflation staying higher for longer” and “sends the wrong signal to the US Federal Reserve... It could send a signal that they have to keep on their foot on the brake for longer.”

And sure enough, with oil rising above its 50DMA for the first time since Aug 30, futures have slumped overnight as oil kept its gains, with S&P and Nasdaq 100 futures both sliding 0.5% as of 730am, while Europe’s Stoxx 600 erased an advance and traded near session lows. US crude futures held on to weekly gains of about 11% after the oil cartel said it would cut daily output by 2 million barrels. Treasuries were steady, the 10Y trading around 3.77%, with the 2Y rate hovering about the 4.15% level.

In pre-market trading, Credit Suisse jumped as much as 5.2% after JPMorgan upgraded to neutral from underweight, saying it sees $15bn as a minimum value for the lender, in-line with the estimated value of the Swiss legal entity. Shares were 2% higher by 13:20pm CET in Zurich, after Bloomberg News reported that the lender is trying to bring in an outside investor to inject money into a spinoff of its advisory and investment banking businesses, citing people with knowledge of the deliberations. Other banks did not do as well, and slumped in premarket trading Thursday, putting them on track to fall for a second straight day. Twitter shares fell as much as 1.1% to $50.75, trading nearly 7% below Elon Musk’s offer price of $54.20 as investors await progress in the revived deal. Here are the other notable premarket movers:

  • Pinterest (PINS US) shares jump as much as 5.8% in US premarket trading after Goldman Sachs upgraded the social networking site to buy from neutral on improving user growth and better engagement trends, even as the backdrop for digital advertising remains uncertain.
  • Biohaven Ltd. (BHVN US) shares rise 9.7% in US premarket trading, set to extend a 75% gain over the past two days as regular trading in the newly constituted drug developer began following an unusual deal with Pfizer Inc.
  • SurgePays (SURG US) shares soar as much as 11% in premarket trading after the company gave an update on subscriber numbers for its subsidiary SurgePhone Wireless.
  • Flutter (FLTR LN) gained 3.3% in premarket trading as it was initiated at outperform at Exane as the best-placed online gambling name, while Entain also at outperform and DraftKings started at underperform.
  • Richardson Electronics (RELL US) rose 8.2% in extended trading after reporting year-over-year growth in net sales and earnings per share for the fiscal first quarter.

While higher energy prices could stoke inflation, some have speculated that this will also divert discretionary income from core items thus pushing core inflation lower and hit company earnings -- potentially encouraging the Federal Reserve to slow monetary tightening.

While such expectations fueled equity gains this week, several money managers are cautioning that the economic path to a less aggressive Fed could be painful: “If you want to preempt the Fed, you are playing a very high-stakes game,” said Kenneth Broux, a strategist at Societe Generale SA. “The Fed do not want financial conditions to loosen; they don’t want equity markets to take off and get too comfortable.”

That said, investors are wary of placing large-scale equity bets as they await a report on US initial jobless claims later Thursday and the official nonfarm payrolls data Friday. A Bloomberg survey shows the US economy will have added 260,000 jobs last month; a higher-than-anticipated number may spook markets.

In Europe, the Stoxx 50 dropped -0.3% to session lows. Stoxx 600 outperforms peers, adding 0.2%, FTSE MIB lags, dropping 0.5%. Energy and insurance underperform while real estate and travel lead gains. Here are all the notable European movers:

  • Imperial Brands shares rise as much as 4.7% after the tobacco company said it will buy back up to £1b worth of stock. The move was welcomed by analysts, with RBC calling it a “big deal” and Citigroup saying the announcement was earlier than expected.
  • Home24 SE gains as much as 126% to EU7.53 after XXXLutz offered to buy all outstanding shares in the German online furniture retailer for EU7.50 apiece. The bid is generous and the deal is straightforward from a regulatory perspective, according to Tradition.
  • Credit Suisse jumps as much as 5.2% after JPMorgan upgraded to neutral from underweight, saying it sees $15b as a minimum value for the lender, in-line with the estimated value of the Swiss legal entity.
  • CMC Markets climbs as much as 6.5% after the online trading firm said it sees first- half net operating income up 21% y/y, with market volatility in August and September boosting the results. Numis upgraded the stock to add from hold following the report.
  • Shell drops as much as 5% as analysts say the oil and gas major’s trading update looks “weak” and may mean that FY consensus proves too ambitious.
  • Kloeckner falls as much as 12% as the company faces a “high likelihood” of an imminent profit warning, Bankhaus Metzler says, double-downgrading the stock to sell from buy.
  • Swiss Re is among the weakest members of the Stoxx 600 insurance index on Thursday, declining as much as 4.0%, as Morgan Stanley lowers its price target ahead of third-quarter earnings.
  • Accor drops as much as 2.5% after the hotel chain owner was downgraded to underweight from equal-weight at Barclays, which sees short-term risks as bigger for the company compared with peers and feels investors are looking more at potential negative factors heading into FY23 than 2022 upgrades.

Earlier in the session, Asian stocks rose for a third day as hardware technology stocks in South Korea and Japan advanced on views they may have reached a bottom. The MSCI Asia Pacific Index climbed as much as 0.9%, lifted by TSMC, SoftBank and Sony. The benchmark trimmed gains later in the day, but remains on track to advance for the week, following a seven-week losing streak that was the longest since 2015.Korea’s Kospi Index was the region’s best-performing major benchmark, jumping about 1%. The advance was helped by chipmakers extending their gains amid Morgan Stanley’s bullish view on the sector. Hong Kong stocks retreated after Wednesday’s catch-up rally.

Trading volume in the region was light as mainland China remains closed for the Golden Week holiday. The MSCI’s Asian benchmark has rebounded this week from its lowest in more than two years. The move tracked a nascent revival in global equities on bets that the Federal Reserve may turn less aggressive in its tightening. In a potential harbinger of shifting market views, Morgan Stanley strategists upgraded emerging-market and Asia ex-Japan stocks to overweight from equal-weight.   Investors are also optimistic that monetary policies in China and Japan, which have bucked the global wave of tightening to remain loose, could provide further support to the nations’ equities.  “While the rest of the world is tightening, Japan and China are still easing, especially China where we are going to see more easing policies going forward,” Chi Lo, senior investment strategist for Asia Pacific at BNP Paribas Asset Management, said in an interview with Bloomberg TV. “That makes us more positive on EM Asia.”

Japanese equities gained for a fourth day as investors awaited domestic corporate earnings coming out later this month.  The Topix rose 0.5% to 1,922.47 as of the market close in Tokyo, while the Nikkei 225 advanced 0.7% to 27,311.30. Sony Group contributed the most to the Topix’s gain, increasing 1.7%. Out of 2,168 stocks in the index, 1,564 rose and 490 fell, while 114 were unchanged. “There is relatively little concern about corporate earnings for Japanese stocks with the economy restarting and the yen weakening,” said Shogo Maekawa, a strategist at JPMorgan Asset Management.

In FX, the Bloomberg Dollar Spot Index consolidated within the recent day’s ranges, while Britain’s pound slipped 0.4% and gilt yields rose after Fitch Ratings lowered its outlook on the nation to negative. The greenback advanced against most of its G-10 peers. The euro steadied just below $0.99. Euro hedging costs are on the rise again as traders position ahead of Friday’s payrolls print and next week’s US inflation report. Commodity currencies were the worst performers along with the pound. Australian and New Zealand dollars gave up an Asia-session advance. The yen traded in a narrow range.

In rates, Treasuries were slightly cheaper across the curve after paring declines led by gilts in London trading after a Bank of England survey found expectations for higher prices. Focal points of US session include several Fed speakers and potential for risk-reduction ahead of Friday’s September jobs report Friday. US yields cheaper by less than 2bp across the curve in bear- flattening move, 10-year by 2bp vs 17bp for UK 10-year, the downside leader in developed market sovereign bonds.  German and Italian bond curves flattened modestly as yields on shorter-dated notes rose, while those further out fell.

In commodities, West Texas Intermediate futures traded near $88 a barrel, while Brent crude held near $93.30. The output-cut plan drew a warning from the White House about negative effects on the global economy. Goldman Sachs Group Inc. increased its fourth-quarter price target for Brent to $110 a barrel.

To the day ahead now, and data releases include German factory orders for August, the German and UK construction PMIs for September, Euro Area retail sales for August, and the weekly initial jobless claims from the US. Meanwhile from central banks, we’ll get the ECB’s account of their September meeting, as well as remarks from the Fed’s Evans, Cook, Kashkari, Waller and Mester, and the BoE’s Haskel.

Market Snapshot

  • S&P 500 futures down 0.3% to 3,783.50
  • STOXX Europe 600 up 0.3% to 400.25
  • MXAP up 0.4% to 145.05
  • MXAPJ up 0.3% to 471.37
  • Nikkei up 0.7% to 27,311.30
  • Topix up 0.5% to 1,922.47
  • Hang Seng Index down 0.4% to 18,012.15
  • Shanghai Composite down 0.6% to 3,024.39
  • Sensex up 0.6% to 58,403.02
  • Australia S&P/ASX 200 little changed at 6,817.52
  • Kospi up 1.0% to 2,237.86
  • German 10Y yield little changed at 2.05%
  • Euro little changed at $0.9886
  • Brent Futures up 0.3% to $93.62/bbl
  • Gold spot up 0.0% to $1,716.69
  • U.S. Dollar Index little changed at 111.24

Top Overnight News from Bloomberg

  • UK bond markets face a potential “cliff edge” when the Bank of England exits the market at the end of next week, leaving traders to navigate a turbulent backdrop without the support of a buyer of last resort
  • Millions more Britons will be dragged into higher rates of income tax over the next three years, costing twice as much as Prime Minister Liz Truss’s personal tax cuts, according to calculations by the Institute for Fiscal Studies
  • Britain’s construction industry turned more pessimistic in September after rising interest rates and the risk of recession held back new orders
  • The European Union plans to examine whether Germany’s massive plan to shelter companies and households from surging energy costs respects the bloc’s rules on public subsidies, EU Commissioner Thierry Breton said
  • German factory orders dropped in August after the previous month was revised to show an increase, hinting at a lack of momentum as the economy stands on the brink of a recession
  • Societe Generale SA cut its exposure to counterparties on trades in China by about $80 million in the past few weeks as global banks seek to guard against any potential fallout from rising geopolitical risks in the world’s second-largest economy

A more detailed look at global markets courtesy of Newsquawk

Asia-Pac stocks traded mixed as the region partially shrugged off the lacklustre lead from the US where the major indices snapped a firm two-day rally and finished the somewhat choppy session with mild losses amid higher yields and as Fed rhetoric essentially pushed back against a policy pivot. ASX 200 lacked direction amid underperformance in the Real Estate and the Consumer sectors, although the downside was also limited by strength in energy after oil prices were lifted by the OPEC+ output cut. Nikkei 225 was positive with notable gains in exporter names and with Rakuten leading the advances as Mizuho looks to acquire a 20% stake in Rakuten Securities for USD 555mln. Hang Seng was lacklustre and took a breather after the prior day’s more than 5% jump with the mood also not helped after Hong Kong PMI slipped into contraction territory for the first time in 6 months.

Top Asian News

  • Haikou city in China's Hainan imposed a COVID lockdown for Thursday, according to Bloomberg.
  • Malaysia PM May Propose Parliament Dissolution, Bernama Reports
  • Why Polio, Once Nearly Eradicated, Is Rebounding: QuickTake
  • Legoland Korea’s Default Flags Risks for Nation’s Developers
  • Paris Club Seeks China Collaboration in Sri Lanka Debt Talks
  • Yen Rout Is Over on Peak US Rate Hike Bets, Says Top Forecaster

European bourses are under modest pressure as sentiment broadly takes a slight turn for the worst amid limited newsflow as participants look to Friday's NFP. Currently, European benchmarks are lower by 0.1-0.3% while US futures are posting slightly larger losses of circa 0.7 ahead of Fed speak.

Top European News

  • Fitch affirmed the UK at AA-; Outlook revised to Negative from Stable, while it stated that the fiscal package announced as part of the new UK government's growth plan could lead to a significant increase in deficits over the medium-term, according to Reuters.
  • The UK Treasury is set to impose GBP 21bln of additional income taxes despite the "tax-cutting mini-budget", according to a study by the Institute for Fiscal Studies. (Times)
  • BoE Monthly Decision Maker Panel data - September 2022; looking ahead, DMP members expected CPI inflation to be 9.5% one-year ahead, up from 8.4% in the August survey, and 4.8% in three years’ time.
  • BoE's Cunliffe says the FPC will publish its next financial policy statement and record on October 12th, liquidity conditions in the run up to the BoE gilt intervention were "very poor", MPC will make a full assessment of recent developments at its November 3rd meeting.
  • UK government has proposed easing the fee cap for illiquid assets in pensions, according to a rule consultation publication by the government.
  • Swedish Economy Shrinks More Than Estimated on Weak Industry
  • UK Tech M&A Spree Pauses as Buyers Pull Out Amid Chaotic Markets

FX

  • USD benefits from the mentioned risk tone, with the DXY extending to a 111.35 peak to the modest detriment of peers.
  • However, EUR is relatively resilient and holding around 0.99 vs the USD as we await the ECB Minutes account for near-term guidance.
  • Cable faded sub-1.1400 and reversed through 1.1300 again amid the USD's move and prior to a letter exchange from the BoE to Treasury re. the Gilt Intervention.
  • Antipodeans under pressure given the USD move and associated action in metals, while the Yuan initially lent a helping hand but this has since dissipated.
  • Given the broader tone, the traditional havens are holding near unchanged levels though yield dynamics are a hinderance.

Fixed Income

  • Gilts are once again the standout laggard following rating agency action and the BoE DMP showing inflation pressures were already elevated MM before the fiscal update.
  • As such, the UK yield has extended back above 4.10%; in the US, yields are also bid though to a much lesser extent before Fed speak and Friday's jobs.
  • Back to Europe, Bunds are pressured though only modestly so vs UK counterparts awaiting the ECB's September account

Commodities

  • Crude benchmarks are modestly firmer at present, extending marginally above yesterday’s best levels with fresh newsflow limited as participants digest yesterday’s OPEC+ action.
  • WTI and Brent are towards the mid-point of circa. USD 1/bbl ranges, though Brent Dec’22 briefly surpassed the 200-DMA at USD 94.11/bbl before moving back below the figure.
  • Acting Kuwaiti Oil Minister said the OPEC+ decision to cut output will have positive ramifications for oil markets, while they understand consumers' concerns about prices increasing but added that the main motive in OPEC+ is balancing supply and demand, according to Reuters.
  • US National Security official stated the US sanctions policy on Venezuela remains unchanged and there are no plans to change the sanctions policy without constructive steps from Maduro, according to Reuters.
  • Norway's Budget proposes changing the temporary tax rules for the petroleum sector, entails that the uplift is reduced to 12.40% (prev. 17.69%), via Reuters.
  • Saudi sets the November Arab Light OSP to N.W Europe at Ice Brent +USD 0.90/bbl; to the US at ASCI +USD 6.35/bbl, via Reuters citing a document; to Asia at Oman/Dubai +USD 5.85 (Unch.), via Reuters sources.

Geopolitics

  • North Korea launched two short-range ballistic missiles which were fired from Pyongyang and landed outside of Japan's exclusive economic zone, according to the South Korean military cited by Yonhap. Furthermore, North Korea said that its missile launches are counteraction measures against the US and South Korean military drills.
  • North Korean jets and bombers have been seen flying in an exercise, according to Yonhap; South Korean jets take off in response, via Reuters.
  • US State Department condemned North Korea's ballistic missile launch and said North Korea's missile launches pose a threat to regional neighbours and the international community, while it added that the US remains committed to a diplomatic approach to North Korea and called on North Korea to engage in dialogue, according to Reuters.
  • The EU has approved the 8th round of Russian sanctions; as expected.

US Event Calendar

  • 08:30: Sept. Continuing Claims, est. 1.35m, prior 1.35m
  • 08:30: Oct. Initial Jobless Claims, est. 204,000, prior 193,000

Central bank Speakers

  • 08:50: Fed’s Mester Makes Opening Remarks
  • 09:15: Fed’s Kashkari Takes Part in Moderated Q&A
  • 13:00: Fed’s Evans Takes Part in Moderated Q&A
  • 13:00: Fed’s Cook Speaks on the Economic Outlook
  • 13:00: Fed’s Kashkari Discusses Cyber Risk and Financial Stability
  • 17:00: Fed’s Waller Discusses the Economic Outlook
  • 18:30: Fed’s Mester Discusses the Economic Outlook

DB's Henry Allen concludes the overnight wrap

After an astonishing rally at the beginning of Q4, markets reversed course yesterday as investors became much more sceptical that we’ll actually get a dovish pivot from central banks after all. The idea of a pivot has been a prominent theme over recent days, particularly after the financial turmoil during the last couple of weeks, thus sparking the biggest 2-day rally in the S&P 500 since April 2020 as the week began. But over the last 24 hours, solid US data releases have created a pushback against that narrative, since they were seen as giving the Fed more space to keep hiking rates over the coming months. And if markets had any further doubt about the Fed’s intentions, San Francisco Fed President Daly explicitly said yesterday that she didn’t expect there to be rate cuts next year, in direct contrast to futures that are still pricing in rate cuts from Q2. Indeed for a sense of just how volatile the reaction has been, 10yr bund yields were up by +16.3bps yesterday, which is their largest daily rise since March 2020 during the initial wave of the pandemic.

Looking at the details of those releases, it was evident that markets are still treating good news as bad news at the minute, since they sold off even as data pointed to a more resilient performance from the US economy than had been thought. For example, the ISM services index came in above expectations at 56.7 (vs. 56.0 expected), and the employment component moved up to a 6-month high of 53.0. So that’s a noticeably different picture to the manufacturing print on Monday, when there was a surprise contraction in the employment component. Furthermore, there was another sign of labour market strength from the ADP’s report of private payrolls, which came in at +208k in September (vs. +200k expected), and the previous month’s reading was also revised upwards. We’ll see if that picture is echoed in the US jobs report tomorrow, but there was a clear reaction to the ISM print in markets, as investors moved to upgrade the amount of Fed hikes they were expecting whilst the equity selloff accelerated.

Those expectations of a more hawkish Fed were given significant support by comments from Fed officials themselves. The most obvious came from San Francisco Fed President Daly, who was asked about the fact that futures were pricing in rate cuts, and said “I don’t see that happening at all”. In fact when it came to rates, she not only said that they were raising them into restrictive territory, but that they would be “holding it there” until inflation fell. Atlanta Fed President Bostic struck a similar tone, emphasising rate cuts in 2023 were not likely and that “I am not advocating a quick turn toward accommodation. On the contrary.” He said he wanted fed funds rates between 4% and 4.5% by the end of this year, “and then hold at that level and see how the economy and prices react.”

That backdrop led to a sizeable cross-asset selloff yesterday on both sides of the Atlantic. The effects on the rates side were particularly prominent, with 10yr US Treasury yields bouncing back +12.0bps to 3.75%. And that move was entirely driven by real yields, which rose +15.1bps as investors moved to price in a more hawkish Fed over the months ahead. You could see that taking place in Fed funds futures too, with the rate priced in for December 2023 up by +8.9bps to 4.19%, thus partially reversing the -22.2bps move lower over the previous two sessions. This morning, 10yr yields are only down -1.0 bps, so far from unwinding those moves.

The hawkish tones also proved bad news for equities, with the S&P 500 taking a breather following its blistering start to the week, retreating -0.20% after being as low as -1.80% in the New York morning. European equities did not enjoy the benefits of a New York afternoon rally, leading to a transatlantic divergence, and the STOXX 600 was down -1.02% on a broad-based decline. The energy sector outperformed in both the S&P 500 and STOXX 600 following a rally in crude oil which saw both Brent crude (+2.81%) and WTI (+2.53%) oil prices hit a 3-week high. That followed a decision from the OPEC+ group, who cut output by 2 million barrels per day. Those gains have continued in overnight trading as well, with Brent Crude now at $93.48/bbl.

In Europe, the performance of sovereign bonds echoed that for US Treasuries, as yields on 10yr bunds (+16.3bps), OATs (+17.6bps) and BTPs (+29.0bps) all saw their largest daily increases since March 2020. As in the US, that reflected growing scepticism about a dovish pivot from the ECB, but another factor not helping matters was the rebound in energy prices, with natural gas futures up +7.25% on the day to close at €174 per megawatt-hour, alongside the oil rebound mentioned above. That’s been reflected in inflation expectations too, with the 10yr German breakeven up another +8.0bps yesterday to 2.15%, after having closed beneath 2% on Monday for the first time since Russia’s invasion of Ukraine began.

Here in the UK, we also saw several key assets lose ground once again following their rally over the last week. For instance, sterling ended a run of 6 consecutive daily gains against the US Dollar to close -1.31% lower, closing back at $1.13. And that wasn’t simply a story of dollar strength, as the pound weakened against every other G10 currency as well. Gilts were another asset to struggle, with real yields in particular seeing significant daily rises of at least +30bps across most of the yield curve, including a +33.0bps rise for the 10yr real yield, and a +36.7bps rise for the 30yr real yield. That came as the Bank of England said they didn’t buy any gilts under their emergency operation for a second day running. In the meantime, there were fresh signs that the turmoil after the fiscal announcement was impacting the mortgage market, with Moneyfacts saying that the average 2yr fixed-rate mortgage had risen to 6.07%, which is the highest since November 2008. Last night that was then followed up by the news that Fitch had downgraded the UK’s outlook from stable to negative.

Overnight in Asia there’s been a mixed performance from the major equity indices. Both the Nikkei (+0.94%) and the Kospi (+1.25%) have recorded solid advances, which continues their run of having risen every day this week. In addition, futures in the US and Europe are both pointing higher, with those on the S&P 500 up +0.49%. However, the Hang Seng is down -0.43% and Australia’s S&P/ASX 200 is down -0.05%, whilst markets in mainland China remain closed for a holiday. The dollar index has also lost ground overnight, falling -0.25%, which comes in spite of those hawkish comments from Fed officials pushing back against rate cuts next year.

Looking at yesterday’s other data, the final services and composite PMIs mostly echoed the data from the flash readings. The composite PMI for the Euro Area was revised down a tenth to 48.1, and the US composite PMI was revised up two-tenths to 49.5. There was a bigger rise in the UK however, where the composite PMI was revised up seven-tenths to 49.1.

To the day ahead now, and data releases include German factory orders for August, the German and UK construction PMIs for September, Euro Area retail sales for August, and the weekly initial jobless claims from the US. Meanwhile from central banks, we’ll get the ECB’s account of their September meeting, as well as remarks from the Fed’s Evans, Cook, Kashkari, Waller and Mester, and the BoE’s Haskel.

Tyler Durden Thu, 10/06/2022 - 08:02

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