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Futures Flat, Dollars Steamrolls To New Record Highs Ahead Of Fed Speaker Barrage

Futures Flat, Dollars Steamrolls To New Record Highs Ahead Of Fed Speaker Barrage

S&P futures swung in illiquid overnight trading, first…

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Futures Flat, Dollars Steamrolls To New Record Highs Ahead Of Fed Speaker Barrage

S&P futures swung in illiquid overnight trading, first sliding below the key 3,900 level after the Japan open, only to recover all losses after Europe opened, with the dollar storming to new record highs and steamrolling all FX competitors as traders braced for a slew of hawkish Fed speakers to assess the path of monetary policy and its impact on the economy. S&P 500 futures edged 0.1% higher at 7:15 a.m. in New York after the underlying benchmark fell six out of the last seven sessions, while Nasdaq 100 futures rose 0.3%, as both European and Asian market slumped. The Bloomberg Dollar index hit a new record high as the Yen plunge below 144 for the first time since 1998 and the Chinese yuan flirted with the key 7.00 level. Bitcoin recovered modestly after tumbling to new 2022 lows and oil erased a decline after Russian President Vladimir Putin underlined that his country won’t supply oil and fuel if price caps on the country’s exports are introduced..

In premarket trading, UiPath tumbled 21% after the application software company gave weaker-than-expected third-quarter revenue forecast. Meanwhile, Gitlab gained 3% in US premarket trading after second-quarter earnings. While analysts were broadly positive on the software development platform’s increased revenue guidance, especially given a tough backdrop, Piper Sandler flagged “noise” around a deceleration in billings. Here are the other notable premarket movers:

  • Coupa Software (COUP US) rises about 12% in premarket trading on Wednesday after boosting its full-year earnings guidance and posting better-than-expected second-quarter results, helped by strong billings in North America. While analysts were positive about the results, they remained cautious about softness in Europe.
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  • Keep an eye on shares in US utilities and energy suppliers, incuding PG&E (PCG US), Edison International (EIX US) and Sempra Energy (SRE US) amid a deepening power crisis in California, where a heat wave is piling pressure on the US state’s power grid.
  • Watch US digital health companies, as Truist initiates coverage on 16 firms, with a positive view on the industry overall. Progyny (PGNY US), Privia Health (PRVA US), Accolade (ACCD US), Agilon (AGL US) and R1 RCM (RCM US) all started with buy ratings.
  • Watch Petco (WOOF US) stock as it was initiated with an outperform rating and $17 PT at RBC, with the broker saying near-term risks are reflected in the shares and the long-term picture is positive for the pet health company.
  • Keep an eye on Guidewire (GWRE US) as RBC Capital Markets says that the software company has reported a “mixed” quarter amid macroeconomic headwinds with “muted” guidance.
  • Alvotech (ALVO US) stock may be in focus as it was initiated with an equal-weight rating at Morgan Stanley, with broker flagging “many knowns” and a wide range of possible outcomes of the biotech’s US launch of its lead product, the biosimilar Humira.
  • Newell Brands (NWL US) fell 4.6% in US postmarket trading on Tuesday after the consumer-products company cut its normalized earnings per share guidance for the full year. The firm has “limited” visibility and is buffeted by macroeconomic pressures, Morgan Stanley says.

On today's calendar, no less than four Fed officials including Vice Chair Lael Brainard and Cleveland President Loretta Mester are set to speak before the release of the US Beige book later this afternoon. Richmond President Thomas Barkin already said rates must stay high until inflation eases. Investors will closely monitor their comments for clues about the pace of interest rate hikes in the face of slowing growth and still-elevated inflation. The consumer-price index reading due next week will also be paramount for the Fed’s September decision.  Bets on another 75 basis points Fed interest-rate hike to tackle high inflation have spurred a selloff in Treasuries, while traders are bracing for a European Central Bank rates decision due on Thursday, with the potential for a similar-size move.

Aside from tightening monetary settings and an apparently unstoppable dollar, markets are also contending with a debilitating energy crisis in Europe and Covid lockdowns in China. Concerns are growing about the outlook for company earnings given the various global economic headwinds and a rebound seen in equity markets since mid-June is fading.

The S&P 500 rose too much in July and is overvalued by about 10% compared to macroeconomic fundamentals, according to Joachim Klement, head of strategy, accounting and sustainability at Liberum Capital. He expects the Federal Reserve to hike rates by 75 basis points even if inflation declined in August. “The current wait-and-see mode of the US market should be short-lived,” he said. “We expect another leg down in the S&P 500 into the fourth quarter before we find a bottom.”

“At this point, we see no positive triggers to keep the rally going, while there are rising risks moving into autumn amid a gloomier economic backdrop,” Amundi SA Chief Investment Officer Vincent Mortier and his deputy, Matteo Germano, wrote in a note. “To cope with this environment, we believe investors should adjust their asset allocation stances.”

Europe’s Stoxx 600 Index fell 0.4%, with tumbling miners leading the declines; IBEX outperforms, adding 0.4%, FTSE 100 lags, dropping 0.7%. Banks, miners and retailers are the worst-performing sectors.

Earlier in the session, Asiun stocks were pressured amid spillover selling from Wall St owing to the higher yield environment and as participants digested the latest Chinese trade data. ASX 200 weakened from the open with the index dragged lower by the energy and mining-related sectors and with somewhat mixed GDP data not doing much to spur risk appetite. Hang Seng and Shanghai Comp were subdued amid the ongoing COVID woes and following the softer than expected Chinese trade data in which all metrics missed forecasts.

Japanese stocks also fell as the yen slumped to a level that leaves it on track for its worst year on record, prompting government warnings and putting traders on edge as volatility rises.  The Topix Index fell 0.6% to 1,915.65 as of market close Tokyo time, while the Nikkei declined 0.7% to 27,430.30. Sony Group Corp. contributed the most to the Topix Index decline, decreasing 2.3%. Out of 2,169 stocks in the index, 492 rose and 1,610 fell, while 67 were unchanged.  While currency weakness is generally seen as favorable for exporters, rapid depreciation raises input costs and can complicate business decisions.  “With the yen this weak, it’s difficult for the stock market to rally,” said Ayako Sera, a market strategist at Sumitomo Mitsui Trust Bank Limited.

In Australia, the S&P/ASX 200 index fell 1.4% to close at 6,729.30, dragged by declines in banks and mining shares.  Energy-related shares fell after oil retreated to the lowest level since January on concern a global slowdown will cut demand in Europe and the US just as China’s Covid Zero strategy hurts consumption.  In New Zealand, the S&P/NZX 50 index fell 0.4% to 11,548.30.

In India, key equity indexes dropped on Wednesday, tracking a selloff in Asia, with companies such as ICICI Bank and Reliance Industries putting pressure on the market. The S&P BSE Sensex closed 0.3% lower at 59,028.91 in Mumbai, while the NSE Nifty 50 Index fell 0.2%, extending its decline for a second day. Still, all but five of the 19 sector sub-gauges compiled by BSE Ltd. gained, led by an index of basic material companies. Automobile stocks were the worst performers. However, the broader market, including mid- and small-cap companies, gained as basic material stocks advanced on the back of recent decline in commodity prices. The S&P BSE MidCap Index fell as much as 0.5%, before closing higher by an equal measure and climbing to its highest level since Jan. 17.

In FX, the Bloomberg dollar index surged to a fresh record as strong US data and hawkish comments from a Federal Reserve official reinforced aggressive tightening bets.   The Bloomberg Dollar Spot Index gained as much as 0.4% fuelling weakness among all of its Group-of-10 peers.

Fed’s Richmond President Thomas Barkin said in an interview with the Financial Times that the central bank must raise interest rates to a level that restrains economic activity and keep them there until policy makers are “convinced” that rampant inflation is subsiding.

  • The yen fell to a fresh 24-year low, prompting Japan’s top spokesman Hirokazu Matsuno to say he’s concerned about recent rapid, one-sided moves in the yen and the country would need to take “necessary action” if these movements continue. But despite this verbal intervention, “markets appear quite happy with testing their tolerance” and 145.00 might be the line in the sand, Francesco Pesole, a strategist at ING Groep NV wrote in a note. USD/JPY rose as high as 144.99. The Bank of Japan said it would boost scheduled bond purchases as Japan’s benchmark 10- year yield hit 0.24% -- approaching the 0.25% upper limit of the BOJ’s tolerated trading band
  • GBP/USD fell 0.4% to 1.1471 erasing gains made after reports of Prime Minister Liz Truss’s energy support package. The pound has managed to “discount much of the bad news but that does not mean that it will bound higher anytime soon,” Steve Barrow, a strategist at Standard Bank wrote in a note.
  • AUD/USD lost 0.2% to 0.6722; a drop below the July 14 low of 0.6682 would take it to the lowest since 2020

In rates,Treasuries hold gains, reversing some of Tuesday’s declines, amid a bull-steepening rally in gilts where 2-year yields are richer by around 25bp on the day as BOE speakers discuss inflation outlook amid proposed government action. US yields richer by 2bp to 4bp across the curve with gains led by front-end, steepening 2s10s spread by around 1bp; 10-year yields at 3.33%, richer by 2.5bp and underperforming bunds and gilts in the sector by 3.5bp and 6bp.Sharp bull-steepening in gilts follows dovish comments from BOE’s Tenreyro; UK 2s10s, 5s30s spreads widen 8bp and 7bp into the front-end led rally.Fed speaker slate includes Vice Chair Brainard on the economic outlook; Chair Powell has an appearance scheduled for Thursday; August CPI report to be released Sept. 13 falls during the blackout period.IG dollar issuance slate includes IFC $2b 3Y SOFR and IADB 7Y SOFR; more than $35b priced Tuesday with issuers paying just over 10bps in concessions on deals 2.8x covered, and at least three borrowers stood down.

WTI crude drifts 0.6% higher to trade near $87.38 after Putin said Russia won’t supply oil, fuel or gas if price caps are introduced; gold adds about ~$3 to $1,705.  Bitcoin prices slipped overnight to under USD 19,000 whilst Ethereum tested 1,500 to the downside; and gold recovered to trade above $1,700 an ounce.

To the day ahead now, and there’s plenty on the central bank side, as the Bank of Canada announce their latest policy decision and the Fed release their Beige Book. We’ll also hear from Bank of England Governor Bailey, as well as the BoE’s Pill, Mann and Tenreyro as they testify before the Treasury Select Committee. In addition, there are scheduled remarks Fed officials, including Vice Chair Brainard, Vice Chair Barr, and Mester and Barkin. Otherwise, data releases include German industrial production and Italian retail sales for July.

Market Snapshot

  • S&P 500 futures up 0.1% to 3,915.00
  • STOXX Europe 600 down 0.5% to 412.19
  • MXAP down 1.3% to 150.62
  • MXAPJ down 1.2% to 496.50
  • Nikkei down 0.7% to 27,430.30
  • Topix down 0.6% to 1,915.65
  • Hang Seng Index down 0.8% to 19,044.30
  • Shanghai Composite little changed at 3,246.29
  • Sensex down 0.2% to 59,092.96
  • Australia S&P/ASX 200 down 1.4% to 6,729.34
  • Kospi down 1.4% to 2,376.46
  • Brent Futures down 0.3% to $92.56/bbl
  • Gold spot up 0.1% to $1,703.64
  • U.S. Dollar Index little changed at 110.31
  • German 10Y yield little changed at 1.59%
  • Euro up 0.1% to $0.9916
  • Brent Futures down 0.3% to $92.57/bbl

Top Overnight News from Bloomberg

  • The Federal Reserve must raise interest rates to a level that restrains economic activity and keep them there until policy makers are “convinced” that rampant inflation is subsiding, Fed Richmond President Thomas Barkin said in an interview with the Financial Times
  • All 31 economists surveyed by Bloomberg expect Bank of Canada policy makers led by Governor Tiff Macklem to raise the benchmark overnight rate by at least 50 basis points, and most say it will be 75 basis points
  • The ECB’s interest-rate hikes may fail to fully filter through into markets without a shift in its policies. Interest-rate rises are already struggling to be reflected across money markets because there’s too much cash chasing scarce high-quality securities, depressing their yields
  • The euro-area economy expanded by more than initially estimated in the second quarter, with the revision revealing greater support from consumer and government spending. Output rose 0.8% from the previous three months -- stronger than an earlier reading of 0.6%
  • “Give us turbines and we’ll turn on Nord Stream tomorrow, but they won’t give us anything,” President Vladimir Putin said at the Eastern Economic Forum in Vladivostok
  • The European Commission recommends member states cap the price of electricity from producers like wind farms, nuclear and coal plants at EU200 per MWh, the Financial Times reported, citing a draft of proposals it has seen
  • The yen has slumped to a level that leaves it on track for its worst year on record, prompting the strongest warnings to date from senior Japanese government officials aimed at stemming the slide
  • The world’s original and longest-running experiment in negative interest rates will finally end this week as Denmark raises borrowing costs in tandem with the euro zone. The move is likely as the ECB delivers a large hike on Thursday, because Danish monetary policy often shadows such moves to protect the krone’s peg to the single currency
  • Developed economies are taking a hit from the dollar’s appreciation to multi-decade highs in ways that were once more familiar to their emerging-market peers
  • China’s export growth slowed in August and imports stagnated, a sign of a darkening global economic picture and weak domestic growth hit by Covid lockdowns and a property slump. Exports in US dollar terms expanded 7.1% last month from a year earlier, far weaker than economists had predicted
  • China sent its most powerful signal yet on its discomfort with the yuan’s weakness by setting its reference rate for the currency with the strongest bias on record

A more detailed look at global markets courtesy of Newsquawk

Asia stocks were pressured amid spillover selling from Wall St owing to the higher yield environment and as participants digested the latest Chinese trade data. ASX 200 weakened from the open with the index dragged lower by the energy and mining-related sectors and with somewhat mixed GDP data not doing much to spur risk appetite. Nikkei 225 declined despite a further weakening in the JPY as the recent rapid currency depreciation raised further questions surrounding the BoJ’s dovish resolve. Hang Seng and Shanghai Comp were subdued amid the ongoing COVID woes and following the softer than expected Chinese trade data in which all metrics missed forecasts.

Top Asian News

  • Japanese Chief Cabinet Secretary Matsuno believes relaxation of border control measures could be an advantage with the weak JPY, while they are concerned by recent rapid, one-sided currency moves and are ready to take appropriate action on FX market moves if necessary, according to Reuters.
  • Japanese Finance Minister Suzuki, when asked about the chance of currency intervention, says will take necessary steps, according to Reuters.
  • Japan's former MOF FX head Watanabe said there is no need for Japan to intervene in the currency market to stem the yen's declines and that Japan intervening solo in the FX market would be meaningless as current FX moves are driven by broad dollar gains, while he noted that intervening solo would be a waste of money as markets would know Tokyo has limited to how much reserves it can tap to continue with such actions. Wakatabe also stated that USD/JPY is overshooting somewhat now and may briefly reach 145 later this month but such increases likely won't last long, while he doesn't think the BoJ will raise rates just to stem JPY's declines.
  • Xi, Putin to Meet for First Time Since Russia’s War in Ukraine
  • China’s Xi Has Broad Support for Continued Rule, Envoy Says
  • Korean Won Still Near 13-Year Low After Central Bank Warning
  • Vietnam Wins Rating Upgrade From Moody’s on stronger Growth
  • China State-Backed Expo Pulls Ukraine Trade Event at Last Minute
  • Goldman Sachs, BNP Paribas at Odds Over Asia Earnings Outlook

European bourses have trimmed the losses seen at the open, but still trade mostly lower. European sectors are mostly lower after opening with a mild defensive bias – that bias has since eased somewhat, with some cyclicals making their way up the ranks. Stateside, US equity futures were softer in early trade, but to a lesser extent than peers across the pond, and have since mostly moved into the green as yields ease

Top European News

  • UK PM Truss spoke with US President Biden with Truss said to be looking forward to working with Biden to tackle shared challenges, particularly extreme economic problems from Russian President Putin's war, while they discussed domestic issues and agreed on the importance of protecting the Good Friday Agreement, according to Downing Street.
  • UK PM Truss will not activate the emergency Article 16 override provision in the Northern Ireland protocol in the coming weeks and pulling away from an early confrontation with the EU over Brexit, according to FT citing the PM's allies.
  • BoE Governor Bailey noted that we have had volatile markets in the last six weeks, still seeing extreme volatility in energy markets. On the UK exchange rate, said there are dollar-specific factors in play; said the Fed is more focussed on bringing demand shock under control. Bailey added a review of the Bank's mandate would not be a recognition that the BoE regime is failing.
  • BoE Chief Economist Pill said he does not want to comment on fiscal stimulus without seeing the details. He expects headline inflation to decline in the short-term. Pill emphasised the importance of BoE inflation target as an anchor, not considering new regime.
  • BoE's Mann said trade, financial flows, and GBP may have heightened role in the next year. Mann added that more forceful bank rate moves open door for policy to be on hold or a reversal later. She added that short-term inflation spikes are getting increasingly embedded in domestic prices.
  • BoE's Tenreyro said demand is already weakening, and added when close to equilibrium rate, gradual hikes allow BoE to react before it tightens too far into contractionary territory. "Even without rate increases in August, rates were at a sufficient level to return inflation to target over the medium-term."

FX

  • DXY maintains bullish momentum but remained under 110.50 throughout most of the European session in a 110.17-69 range (at the time of writing).
  • JPY underperforms with USD/JPY extending above 144.00 despite a slew of verbal intervention by Japanese officials, whilst the Yuan shrugged off another firm CNY fixing by the PBoC.
  • EUR, and CHF are all trading mid-range vs the USD whilst the NZD, AUD, and CAD track risk sentiment.

Fixed Income

  • Debt futures are hovering just below best levels having extended rebounds to fresh intraday highs in the run up to UK and German auctions that saw solid demand.
  • Bunds sit under their 145.24 peak (+44 ticks vs -33 ticks at one stage), Gilts skirt 106.00 from 106.11 (+38 ticks vs -59 ticks at the Liffe low).
  • 10yr T-note holds closer to 115-27 than 115-13+ following some hefty block purchases (two 10k clips in particular)

Commodities

  • WTI and Brent futures have been bouncing off worst levels after printing multi-month lows.
  • Spot gold fluctuates on either side of USD 1,700/oz, driven largely by bond yields.
  • Base metals are mostly lower with upside hampered by disappointing Chinese trade data overnight.
  • Indian PM Modi said keen to boost ties with Russia; said Russia and India can work closely on coking coal supply.

US Event Calendar

  • 07:00: Sept. MBA Mortgage Applications, prior -3.7%
  • 08:30: July Trade Balance, est. -$70.2b, prior -$79.6b
  • 14:00: U.S. Federal Reserve Releases Beige Book

Fed Speakers

  • 09:00: Fed’s Barkin Speaks at MIT
  • 10:00: Fed’s Mester speaks at MNI virtual event
  • 12:40: Fed’s Brainard Discusses the Economic Outlook
  • 14:00: Fed’s Barr Speaks on Financial System Fairness and Safety

DB's Jim Reid concludes the overnight wrap

The air of feral fog will lift from our house this morning as the kids go back to school. Only about 12-50 years, depending on the debts we collectively leave to our children, until they leave home. After the summer she's had looking after them I'm slightly worried my wife will leave first. A big fingers crossed she doesn't.

On this theme, today I've just launched a back-to-school survey as part of our regular monthly series. This month we ask whether you think Europe will make it through winter without gas rationing, whether you are thinking about using less energy, at recession probabilities, whether the next big move in bonds and equities will be up or down, your inflation expectations and which if any central banks are likely to make a policy error and in which direction. All help filling it in very much appreciated as usual. See here for the survey.

Yesterday I released my latest chartbook, which also has a back-to-school vibe as we review where we are on important issues facing global markets and the economy over the coming months. Among the charts, we look at how August was the worst month for European bonds in decades, why inflation isn’t going away over the medium-to-longer term, the latest on the European energy crisis, and also briefly examine the upcoming Italian election and the Chinese property sector’s troubles. As ever, it’s full of big easy-to-read figures and titles that explain our biases. Here’s the link. ***

With different asset classes swinging between gains and losses over the last 24 hours, it’s been difficult to point to a single factor behind the various moves. On the one hand, investors remain cautious about the growing array of risks on the horizon, ranging from the European energy situation to Chinese lockdowns to hawkish central banks. But on the other hand, the latest ISM services index for August added to the recent run of US data releases that’s pointed to an improving outlook, suggesting that the Fed can afford to be more aggressive in raising rates, which in turn led to a sharp selloff in Treasuries that leaves them on track for their 6th consecutive weekly decline.

In terms of the details of that ISM print, the headline measure unexpectedly rose in August to a 4-month high of 56.9 (vs. 55.3 expected), with improvements in the new orders and employment components as well. That follows in the footsteps of the ISM manufacturing reading last Thursday that was similarly better than expected, the weekly initial jobless claims that fell for a 3rd week running, and the Conference Board’s consumer confidence measure that hit a 3-month high in August. Now all this might be a last hurrah before our long expected 2023 recession, but there’s no doubt that recent data has been more positive than expected, and is coming alongside some other tailwinds of note like falling gasoline prices.

Given the stronger data, there were growing expectations (again) that the Fed might hike by 75bps in a couple of weeks’ time, with the hike priced in for September up by +2.9bps to 68.0bps. Treasury yields surged across the curve in response (with also a small catch-up after being closed on Monday), with some of the increase likely exacerbated by a banner day for corporate debt issuance ahead of the next Fed meeting (not to mention ahead of the next crucial CPI print), with the 10yr yield up +16.0bps on the day to 3.35%, and the 30yr yield (+15.6bps) even hitting a post-2014 high of 3.50%. That was driven by a rise in real yields, with the 10yr real yield (+15.0bps) rising to a post-2019 high of 0.87%. This morning in Asia, yields on the 10yr USTs are fairly stable. Bear in mind that it was less than -1% in early March after Russia invaded Ukraine, so we’ve seen an incredible shift in real borrowing costs over the last 6 months.

With US real yields reaching new heights, the dollar index advanced +0.62% to reach its strongest level in over two decades. However, it was bad news for equities and the S&P 500 (-0.41%) built on its run of 3 consecutive weekly declines to close at a 7-week low. The more interest-sensitive sectors were particularly affected, and the NASDAQ (-0.74%) and the FANG+ index (-1.50%) saw even larger declines, while there was a clear preference for defensive sectors with real estate (+1.02%) and utilities (+0.22%) outperforming the rest of the pack. Over in Europe there was a moderately better performance however, with the STOXX 600 up +0.24%, and the German Dax (+0.87%) recovering somewhat from the previous day’s heavy losses. Futures are weak this morning though with contracts on the S&P 500 (-0.52%), NASDAQ 100 (-0.53%) and DAX (-1.15%) lower.

When it comes to the energy situation, there wasn’t much respite yesterday as we look forward to Friday’s meeting of EU energy ministers. Natural gas futures in Europe fell by -2.47% to €240 per megawatt-hour, and German power prices for next year were also down -6.02% to €536 per megawatt-hour. But relative to their levels from last year they are still incredibly elevated. One piece of news we did get was from German Chancellor Scholz, who said that when it came to a cap on power prices, “If we have our way, it will take weeks rather than months”. In the meantime, European sovereign bonds lost further ground, with yields on 10yr bunds (+7.4bps), OATs (+3.5bps) and BTPs (+3.3bps) all moving higher.

Here in the UK, Liz Truss was appointed as the new Prime Minister yesterday, succeeding Boris Johnson after three years in the job. In her initial speech in front of Downing Street, she said that action would be taken on the energy crisis this week, so that’s one to keep an eye out for, with reports across the press (as we previewed yesterday) indicating that bills will be frozen around current levels rather than going up in October. That came as gilts strongly underperformed their continental counterparts yesterday, with 10yr yields up by +15.7bps to 3.09%, which is their highest closing level since 2011. Interestingly however, there was a major steepening in the yield curve, with 2yr yields down -2.0bps as investors reacted to the prospect of lower short-term inflation in light of the potential freeze on bills.

Asian equity markets are weak this morning with the Hang Seng (-1.65%) leading losses followed by the Kospi (-1.50%) and the Nikkei (-0.95%). Over in Mainland China, the Shanghai Composite (-0.05%) and the CSI (-0.08%) are wavering between gains and losses in early trade.

The latest trade data coming out of China this morning showed exports growing at a slower pace in August (+7.1% y/y) against market forecast of a +13.0% increase and compared to July’s +18.0% rise as global demand continued to soften. At the same time, imports rose only +0.3%, falling short of expectations for a +1.1% gain. Elsewhere, Australia’s GDP expanded +0.9% in the second quarter, in-line with market expectations as consumers kept spending while energy exports boomed. The growth figure for the previous quarter (+0.7%) was downwardly revised though.

In FX news, the Japanese yen (-0.90%) this morning slid to a fresh 24-year low of 144.09 against the US dollar. Widening rate differential is the main reason for yen’s depreciation while yesterday’s better than expected US data probably also pushed the yen weaker. Separately, the People’s Bank of China (PBOC) fixed the yuan at 6.9160 to the dollar, its strongest bias on record and the 11th successive increase as the authorities continue to fight the global trend of a strong dollar against virtually every currency.

In energy markets, oil prices are trading lower in Asian trade with Brent futures down -1.45% at $91.48/bbl as the demand could remain under pressure amid China's Covid-19 lockdowns.

There wasn’t a great deal of other data yesterday, though in Europe we did get the German and UK construction PMIs for August, which were both in contractionary territory at 42.6 and 49.2 respectively. German factory orders in July also contracted by a faster-than-expected -1.1% (vs. -0.7% expected). Otherwise in the US, the final composite and services PMI for August painted quite a different picture to the ISM numbers, with the final services PMI revised down to 43.7 (vs. flash 44.1) and the final composite PMI revised down to 44.6 (vs. flash 45).

To the day ahead now, and there’s plenty on the central bank side, as the Bank of Canada announce their latest policy decision and the Fed release their Beige Book. We’ll also hear from Bank of England Governor Bailey, as well as the BoE’s Pill, Mann and Tenreyro as they testify before the Treasury Select Committee. In addition, there are scheduled remarks Fed officials, including Vice Chair Brainard, Vice Chair Barr, and Mester and Barkin. Otherwise, data releases include German industrial production and Italian retail sales for July.

Tyler Durden Wed, 09/07/2022 - 07:52

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What Is the New York Stock Exchange and What Does It Do?

What Is the New York Stock Exchange in Simple Terms?With more than 2 billion shares trading hands each day, the New York Stock Exchange (NYSE) is the world’s…

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The New York Stock Exchange is located on Wall Street in New York City.

wdstock from Getty Images Signature; Canva

What Is the New York Stock Exchange in Simple Terms?

With more than 2 billion shares trading hands each day, the New York Stock Exchange (NYSE) is the world’s largest exchange for securities trading, which is the buying and selling of debt or equity, such as stocks and bonds. The NYSE is located in a historic building in the heart of New York City’s financial district at 11 Wall Street.

The NYSE was known for centuries as the "Big Board" because brokers would use an auction-based system to buy or sell shares of stock from its trading floor, and share prices were updated throughout the day on a large board that traders could see from the trading pit. 

A ringing bell signaled the beginning and the end of the trading day. The opening bell signaled the start of the trading day at 9:30 AM, and the closing bell happened at 4:00 PM, marking the end of the trading day. Trades at the NYSE took place on an actual trading floor up until the onset of the COVID-19 pandemic, when everything moved online; floor trading resumed for vaccinated brokers in May 2021.

Is the NYSE a Stock Exchange or a Stock Index?

The NYSE was a privately-owned exchange, or a place for trading, from its inception in the late 1700s until 2006, when it was bought by Intercontinental Exchange, which took shares public. Its ticker symbol is ICE.

However, since the New York Stock Exchange is the world’s largest trading exchange, with over 80% of the S&P 500 companies trading on it, the NYSE Composite, made up of 2,000 stocks listed on the NYSE, has come to be known as a benchmark stock market index. Glancing at how it’s doing gives investors a sense of the overall health of the financial markets. An exchange-traded fund (ETF) based on the NYSE Composite was introduced in 2004; its ticker symbol is NYA.

In addition, the New York Stock Exchange owns a smaller stock exchange, the American Stock Exchange, which it acquired in 2008. Now known as the NYSE American, it is where small-cap companies trade on lower volumes.

What Does the New York Stock Exchange Do? Who Works There? How Does It Make Money?

The NYSE has two purposes:

1. It facilitates buy-and-sell trades of securities.

2. It enables companies to raise capital by selling stock.

The NYSE was originally founded as a space exclusively for securities trading under the Buttonwood agreement in 1792. Prior to that, traders had to sell securities alongside commodities like coffee and tobacco and often had to do so outside, in rain and snow, which is how they got the nickname curbstone brokers.

The Buttonwood Agreement also established regulations and set standard commission fees that brokers could charge clients. Now, with a roof above their heads, traders could call out buy and sell orders from the trading floor; those transactions would be recorded, which provided a level of transparency as well as liquidity that before had not been possible. It was the beginning of efficient market operations as we know them.

Today, computers do most of the buying and selling at the NYSE, although there are still several hundred brokers and traders who shout their orders from the trading pit each day. The scene plays host to dozens of media outlets as well as executives and celebrities who ring the opening bell.

The NYSE makes money through revenues from transaction fees it charges to brokerages, asset-management companies, and market makers. In addition, all members of the NYSE are required to pay yearly membership fees as well as an additional fee to apply.

What Are the New York Stock Exchange’s Hours? Can I visit the NYSE?

The NYSE operates Monday–Friday from 9:30 AM–4:00 PM eastern time. It is closed in observance of the following holidays; when the holiday falls on a Saturday, it closes the Friday before.

  • New Year’s Day
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Which Companies Are Listed in the New York Stock Exchange? How Does a Company Get Listed?

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What Is the Difference Between the NYSE and the Nasdaq?

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In addition, there are several other key differences:

Differences between NYSE and Nasdaq Exchanges

The NYSE sets prices through an auction market, which means that shares are bought directly by buyers from sellers, and share prices are set based on the highest price a bidder is willing to pay and the lowest price a seller will accept.

The Nasdaq uses a dealer market, which means that buyers and sellers do not interact directly; rather, the trades are handled by a dealer, often a larger brokerage known as a market maker, which maintains inventories of stocks and facilitates trades from its own accounts.

Where Is the New York Stock Exchange at Right Now?

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Volatility Snaps Near-Term Conviction

Overview:  The markets seem to lack conviction today. Stocks in the Asian Pacific region advanced. Europe’s Stoxx 600 is giving up its earlier advance,…

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Overview:  The markets seem to lack conviction today. Stocks in the Asian Pacific region advanced. Europe’s Stoxx 600 is giving up its earlier advance, and US futures are heavier. Australian and New Zealand bonds played catch-up after the rise in the US and Europe yesterday. Their benchmark yield rose 14 bp and 10 bp, respectively. The US 10-year Treasury yield is firm near 3.77%, while European bonds are narrowly mixed, though Gilts are under pressure. The 10-year yield is up 10 bp to 4.12%. The dollar is mixed with the dollar-bloc currencies, sterling and the Norwegian krone on the weaker side. Those G10 currencies like the euro, Swedish krona, and Swiss franc are barely holding on to gains. Gold snapped a six-day rally yesterday and is a little lower today. It still looks poised to retest $1700. December WTI is little changed against rallying more than 10% in the first three sessions this week. It is near $86.70 after settling last week slightly below $78.75. US natgas is rising for the third consecutive session. Its 1.4% gain follows a 7% increase in the past two sessions. Europe’s natgas benchmark is off 3.1% to offset a good part of yesterday’s 3.5% gain. Iron ore rose for the third consecutive session, but it is flat on the week. December copper is also rising for a third session, but it is up about 3.5% this week. December wheat is extending its slide into a fourth session. It is off about 3% this week after rising 7% over the past two weeks.  

Asia Pacific

Australia reported a smaller than expected trade surplus for August. Exports rose 3% after a 10% fall in July, while imports rose 4% after a 0.5% increase previously. Economists in Blomberg's survey had expected a small decline in imports. The surplus of A$8.3 bln missed the median forecast for a $10 bln surplus and was smaller than July’s nearly A$9 bln surplus. Still, in the first eight months of the year, the average monthly surplus was A$11.1 bln compared with A$10.2 bln in the same period last year. In Jan-Aug period in 2019, the average monthly trade surplus was A$5.7 bln.

Japan weekly portfolio flow data showed that into the end of the fiscal half year, Japanese investors continued to divest foreign bonds. Japanese investors some JPY886 bln of foreign bonds. This bring brings the four-week total JPY3.3 trillion (~$23 bln). Japanese investors bought foreign equities for the third consecutive week for a cumulative total of JPY876 bln (~$6.1 bln). Meanwhile, foreign investors continued to be significant sellers of Japanese bonds. They sold JPY1.56 trillion in the last week of September to bring the four-week total to a whopping JPY6.4 trillion (~$45 bln). This appears to be a record outflow. Foreign investors were net sellers of Japanese stocks for the sixth consecutive week. Over the past four-weeks, they sold JPY2.6 trillion ($1.8 bln), the most in six months.

The US dollar recovered from yesterday's seven-day low against the yen (~JPY143.55) to JPY144.70. It remains firm, though in a narrow range and has not traded much below JPY144.40. Market participants continue to seem uncomfortable buying dollars above JPY145.00. The Australian dollar tried to extended yesterday's recovery off the $0.6415 area and made it $0.6540 before being turned lower. It traded to around $0.6480 in the European morning and could slip a little more. There are options for almost A$600 mln at $0.6475 that expire today. We assume they have been neutralized. The intraday momentum is oversold, suggesting a better tone is possible in North America. The base around $0.6400 looks firm. China's mainland markets remain closed for the Golden Week holiday. The US dollar fell to almost CNH7.0125 yesterday and has steadied today, remaining within in yesterday's range. Recall that it settled September (the last day mainland markets were open) near CNH7.1420. 

Europe

German factory goods fell 2.4% in August, more than three-times more than expected. On the other hand, the July series was revised sharply higher (+1.9% from -1.1%) on the back of large aerospace orders, according to the government, which looked like foreign orders. Domestic orders fell 3.4% in August after dropping 3.7% in July. Foreign orders fell 1.7% in August but rose 6.0% in July. Orders from the eurozone rose 4.5% in July and fell 3.8% in August. Separately, the construction PMI fell to 41.8 from 42.6. It has not been above the 50 boom/bust level since March. Tomorrow, Germany reports August retail sales (median in the Bloomberg survey calls for a 1.2% decline) and industrial output (expected to fall by 0.5% after a 0.3% drop in July. Note that the eurozone's aggregate retail sales were reported today. While the 0.3% decline was expected July's 0.3% gain was revised to a 0.4% decline.

A week ago, S&P lowered the outlook of its AA UK rating. However, this seemed to be catch-up as both Fitch and Moody's had the credit as the equivalent of AA-. Today, Fitch puts cut its outlook to negative, reflected the unfunded tax cuts. We await today's report, but on Tuesday and Wednesday the. BOE did not buy any bonds. This emergency program to address what had appeared as a threat to financial stability is to conclude at the end of next week. The concern is what is going to happen afterwards. The BOE's program aimed at the long-end of the curve. The UK's 30-year bond yield was around 3.5% in the middle of September. The yield jumped to almost 5.0% on September 27 as the market reeled from the mini-budget and the forced liquidation. The BOE stepped in and at the end of last week, the 30-year Gilt yield was about 3.82%. However, it has risen each session this week and now stands a little above 4.25%. Many expect the BOE to address this may either a new permanent facility and/or some other measures, including, perhaps, delaying further when it intends to sell bonds that it bought during the pandemic.

Parity capped the euro over the past two sessions. The euro was sold to $0.9835 yesterday and has recovered to trade in about a quarter-cent range on both sides of $0.9900. While the range can extend in North America, we suspect that the proximity of tomorrow's US jobs data is conducive to a consolidative tone. The $0.9950 area may offer a nearby cap. Similarly, sterling encountered strong resistance near $1.15 and was sold to almost $1.1225 yesterday. It recovered to a bit more than $1.1350 yesterday in North America and extended it a bit further today (~$1.1385). It retreated a cent by early European trading and found support near $1.1280. The intrasession momentum indicator is turning ahead of the North American open.

America

Yesterday's data prompted the Atlanta Fed's GDPNow to lift its Q3 estimate to 2.7%, the highest so far in the quarterly cycle. The strong dollar is expected to hurt US exports, but real (adjusted for inflation) have been strong. In August, real exports rose by about $2.8 bln while real imports fell by $1.4 bln. Net exports could contribute 2-3 percentage points to Q3 GDP. A combination of factors drove this, and it probably will not be repeated in Q4.

It seems rich for many observers to say that OPEC+ decision to cut output is a snub against the US. The Federal Reserve's monetary policy is making it more difficult for many countries but few of the OPEC+ critics want the Federal Reserve to sacrifice its domestic mandate,  The OPEC+ decision may be short-sighted, as the White House claims,  these countries pursuing what they think is their national interest. A few years ago, many of these critics thought OPEC was dead. Moreover, actions by the US and Europe, such as the embargo on Russian oil and cap on prices, impacts the oil market. The US official comment that the yesterday's decision shows OPEC is aligning with Russia shows a masterful grasp of the obvious. OPEC+ is set to continue through 2024. OPEC was struggling to be the swing producer, partly because of the rise of US production. The answer for the cartel to the competitive challenge was to increase its market share by forming the alliance. Some pundits suggest the US should stop selling weapons to Saudi Arabia and others in OPEC. Yet, what is missing is the understanding that the US does not assist in the defense of the Saudi Arabia or oil pipelines out of a sense of altruism, but because it is understood to be in the US national interest. Should the US really take on the position of Gandhi's mother who would fast (punish herself) when her prodigious son disappointed?  Implicit in Biden's threat yesterday will be to reanimate the NOPEC bill that has been in Congress for some time that would allow lawsuits against OPEC members for manipulated the energy market.

The US reports weekly jobless claims and the Challenger jobs cuts. In the last week in September, weekly jobless claims fell to five-month lows. The JOLTS data, earlier this week (August) disappointed, and tomorrow the national September figures will be reported. The median forecast in Bloomberg's survey calls for an increase of 260k after a 315k increase in August. Today, five Fed officials speak (Kashkari and Mester twice). These Fed officials' views are well known, and indeed, everyone seems to be singing from the same hymn sheet. The market recognizes this, and the implied yield of the December Fed funds futures contract is rising today for the sixth consecutive session.

The US dollar found a bottom against the Canadian dollar in the past two sessions near CAD1.3500. It recovered yesterday and closed above CAD1.3600. It initially pulled back in Asia, as US stocks were bid. It found support near CAD1.3565. The greenback has recovered in the European morning to reach the session high around CAD1.3665. Yesterday's high was just shy of CAD1.37. While taking cues from US equities, note that intraday momentum for the greenback overextended against the Canadian dollar. After a push to almost MXN20.60 in late September, the US dollar has returned to the MXN19.80-MXN20.20 range that has dominated since mid-August. It is in a narrow range (~MXN20.0175-MXN20.1050) today. It appears to have scope to test yesterday's high near MXN20.15. 


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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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