It took stocks only a few minute to "price in" the latest political shock out of Washington, and as of this morning Emini futures no longer care that Mueller has a grand jury, trading 0.08% in the green with European stocks and Asian shares all little changed as investors await the looming July jobs report, which is expected to show a slowdown in hiring from 222K to 180K but will have little impact on either the Fed's thinking or the market.
Stocks, gold and most metals headed for a fourth week of gains on Friday, as fresh political woes for U.S. President Donald Trump and the prospect of a trade war with China kept the dollar depressed ahead of payrolls. The Bloomberg Dollar spot index inched lower for a third day, hovering near the weakest in 15 months, while cable rose to $1.3154, the euro hit a fresh two-and-a-half year high against the dollar and oil retreated.
Global stocks were just barely in the green this morning with the MSCI All-Country World Index rising less than 0.05%. In key overnight macro moves, the Aussie dollar gained against the greenback despite RBA warnings about currency’s strength, while the USD/JPY fell as much as 0.2% to 109.85, the weakest since June 15, before paring decline to 110.03.
In Asia, Japan’s Topix index slid 0.2% and Australia’s S&P/ASX 200 Index lost 0.3%. South Korea’s Kospi was up 0.5 percent after sliding 1.7 percent on Thursday. Japan's Nikkei ended the week little changed, dropping 0.4 percent on Friday as a stronger yen weighed. Wall Street was expected to start marginally higher, having seen the Dow index break through 22,000 points this week. Hong Kong’s Hang Seng Index was little changed, while the Shanghai Composite Index swung between gains and losses.
European markets got off to an underwhelming start, with Britain's FTSE 100, Germany's DAX and France's CAC 40 all lower. The FTSE was on course for its best week in two months, boosted by the latest tumble in the pound. The Stoxx 600 traded sideways as Swiss Re AG’s profit drop weighed on insurers. The rising Euro, which ING now expects to rise as high as 1.20 in the next 4 weeks, has capped Stoxx gains in recent months, on concerns it will pressure exporter earnings. The U.K.’s FTSE 100 Index gained less than 0.05 percent to the highest in more than a week. Germany’s DAX Index jumped 0.1 percent.
The dollar index, which has just recorded its worst run of monthly losses since early 2011, was 0.1 percent lower at 92.766 on the day and about 0.6 percent during a week in which it fell to a 15-month low of 92.548. "We think things are overdone in terms of negative sentiment around the dollar," said PineBridge Investments fund manager Hani Redha, quoted by Reuters. "Overall we think global growth is going to be quite solid but we think the leadership is going to change back towards the U.S.," he added, saying Trump was also likely to get at least some fiscal stimulus measures through in the coming months.
As SocGen's Kit Juckes writes this morning, the US Treasury market is heading towards today's non-farm payroll data with 10s at 2.23%, in the bottom half of their 2.12-2.42 range. The RBA sees lower inflation thanks to the AUD's rise to date and a threat to growth from further appreciation, Japanese wages fell and even smoothed show the same lack of wage growth as we see everywhere, despite a tightening labour market.
Just taking those three bits of information I get a now-familiar snapshot of the world. Anchored US rates and yields will make sure that capital goes on flowing out of dollars and into anything that's perceived as more interesting. Other central banks will grumble (at the very least) about the weaker dollar trend and in Japan, the need to reboot inflation expectations remains as clear as ever, the difficulty of doing so likewise, and the danger that anchored US yields drag USD/JPY down and is pretty clear too.
Previewing today's payrolls report, the SocGen strategist writes that with consensus forecasts of +180k in NFP an 2.4% in average hourly earnings, "the BOJ, RBA and the ECB for that matter, will be hoping for an upside surprise. An NFP surprise would provide some relief, a huge upside surprise in wage growth would really help them a lot. That doesn't make it likely, sadly."
WTI fell below $49, extending its weekly loss with the Baker Hughes rig count due later. "It was very natural on the technical side that we should see consolidation around the 200 day moving average," Torbjorn Kjus, chief oil economist at DNB Bank, told Bloomberg. Brent is trading below 200-day MA Friday after moving above that level last week and settling above the marker for past 2 sessions; WTI also below Friday
In rates, Europe's 10-year benchmark government bond yield and U.S. equivalents were pinned near one-month lows of 0.45 and 2.23% respectively amid the U.S. political uncertainty. U.S. yields have been falling for most of 2017 as the President's travails have cooled expectations for growth and inflation. 10-year gilt yield +1bps to 1.16% after Bank of England kept rates on hold Thursday.
In commodities, West Texas Intermediate crude dipped 0.8 percent to $48.66 a barrel, the lowest in a week. Gold was steady at $1,269 an ounce and set to score and modestly weekly rise, which will be its fourth in a row. Copper advanced 0.2 percent to $2.88 a pound.
Market Snapshot
- S&P 500 futures up 0.05% to 2,473
- STOXX Europe 600 down 0.05% to 378.75
- MSCI Asia up 0.01% to 160.92
- MSCI Asia ex Japan up 0.2% to 529.07
- Nikkei down 0.4% to 19,952.33
- Topix down 0.2% to 1,631.45
- Hang Seng Index up 0.1% to 27,562.68
- Shanghai Composite down 0.3% to 3,262.08
- Sensex down 0.04% to 32,225.85
- Australia S&P/ASX 200 down 0.3% to 5,720.58
- Kospi up 0.4% to 2,395.45
- EUR/USD: +0.1% to 1.1880
- USD/JPY: steady at 110.09
- GBP/USD: +0.1% at 1.3154
- German 10Y yield rose 0.3 bps to 0.456%
- US 10-year yield +1bp to 2.23%
- Italian 10Y yield fell 2.6 bps to 1.697%
- Spanish 10Y yield rose 1.6 bps to 1.468%
- Brent Futures down 0.8% to $51.62/bbl
- Gold spot up 0.06% to $1,269.40
- U.S. Dollar Index down 0.1% to 92.75
Top Overnight News
- Payrolls May Show Stable Economy; Grand Jury Issues Russia Subpoenas; HNA Says It’s Not Raising Funds in N.Y.
- Toyota and Mazda to sell stakes to each other, worth about 50b yen each
- Special counsel Robert Mueller is using a federal grand jury in Washington to help collect information as he probes Russia’s meddling in the 2016 election and possible collusion by Trump campaign associates
- Pearson Plc made good on a pledge to cut costs, slashing 3,000 jobs and cutting its interim dividend to preserve cash as it works on a turnaround of its struggling education business
- Allianz SE and Canada Pension Plan Investment Board have agreed to buy a 20 percent stake in Spain’s Gas Natural SDG SA’s gas distribution business for 1.5 billion euros ($1.8 billion)
- The world’s biggest pension fund posted its fourth-straight quarterly gain, as global stocks rose and a decline in the yen against both the dollar and the euro helped boost the value of its overseas investments
- Teva Pharmaceutical Industries Ltd.’s warning to investors that it may breach debt covenants if cash flow weakens triggered its biggest bond selloff on record
- “Passive investing is in danger of devouring capitalism,” billionaire Paul Singer wrote in his firm’s second-quarter letter dated July 27
- BOE Is Said to Find Error Behind Spike in U.K. Mortgage Arrears
- Rosneft Aids Venezuela’s State Oil Producer With Prepayment
- Icahn-Backed Change in Biofuel Rule Is Said to Near EPA Rebuff
- McDonald’s Japan July Sales Helped by Desserts, Hawaiian Burgers
- Teva Debt Sells Off After Warning May Breach Covenants
Asian equity markets traded mixed, with the region indecisive ahead of key risk NFP data and after a lacklustre close in US where energy underperformed and the Russian probe seemed to have stepped up a notch. This saw early losses in ASX 200 (-0.2%) and Nikkei 225 (-0.3%), with financials the underperformer in Australia after big 4 bank CBA was accused of breaches to anti-money laundering and counter¬terrorism regulations. Shanghai Comp (+0.2%) and Hang Seng (+0.1%) were slightly positive after the PBoC upped its daily liquidity operations, although upside was capped as this still amounted to a net weekly liquidity drain. RBA Statement on Monetary Policy states recent AUD rise had modest effect on GDP and inflation forecast. Says:
- Holding policy steady consistent with growth and inflation target.
- Recent increase in AUD has modest dampening effect on economy.
- Further strength in AUD would reduce economic growth and inflation.
- RBA maintains inflation forecast for 2017 and 2018 at between 1.5%-2.5% for both, 2019 forecast kept at 2.0%-3.0%.
- Lowers GDP forecast for 2017 to 2.0%-3.0% from 2.5%-3.5%, 2018 forecast maintained at 2.75%-3.75%, while 2019 forecast was increased to 3.0%-4.0%.
Top Asian News
- China Hedge Fund Says Most ‘Violent’ Deleveraging Phase Over
- China Millionaires in Jeans Spur Wealth Manager Push Abroad
- Abe’s New Cabinet Shows Continuity in Japanese Economic Policy
- Summit Announces $1 Billion LNG-to-Power Project in Bangladesh
- Indonesia Sees Room to Ease If Inflation, Forex Rate Manageable
- JT to Buy Karyadibya Mahardhika for $1b Enterprise Value
- China Bulls’ Resolve Tested as Stocks Struggle to Pass Key Level
- Indonesia Says Google Agrees to Monitor Negative YouTube Content
- Hong Kong Stock Rally Buoyed by Bullish Profit Projections
The majority of EU bourses have come off worst levels, and now trade in marginal green territory. The biggest movers throughout the European morning have been UK Home Building names, with an overnight article from "PropertyWeek" circulating, which states that the Government is reviewing its 'Help to Buy' Scheme. Taylor Wimpey (TW LN) and Perisimmon (PSN LN) shares were both down over 5% for the session, as the former generated 45% of its sales from the Scheme. Later reports from a UK government spokesperson stated that it is incorrect to infer that the government are set to cancel the help to buy scheme, did see many of the loses retraced. NFP Friday trade has been evident in fixed income. markets today, with the 1 Oy bund holding its slim range. Underperformance has been seen in peripherals, with delays relaying slight profit taking in BTPs and Bonos. Corporate issuance once again came into fruition today, with Verizon printing AUD 2.2bn "kangaroo" bond, with BAT mandating banks for a multi-currency and multi-tranch bond deal.
Top European News
- BOE Says Companies Need Clarity as Brexit Crimps Investment
- German Factory Orders Jump in Sign of Robust Economic Growth
- Allianz Buys LV= Unit in Deal Valued at as Much as $1.3 Billion
- RBS’s Investment Bank Drives Second-Quarter Profit Beat
- Constellium Is Said to Weigh Options After Takeover Interest
- Swiss Re Drops as Earnings Succumb to Market-Pricing Pressure
- U.K. Housebuilders Fall After Reports of ’Help to Buy’ Review
- BOE Is Said to Find Error Behind Spike in U.K. Mortgage Arrears
- Rosneft Aids Venezuela’s State Oil Producer With Prepayment
In currencies, GBP has seen the majority of volatility this morning as EUR/GBP and GBP/USD both briefly broke out of the post EU trading range. Elsewhere, overnight volatility was seen in AUD, following the release of the RBA's statement of Monetary Policy, with no fears of an overvalued currency, AUD/USD begun to gain some bullish pressure, we have continued to see buying following the bounce of August's low, with bulls now looking to retest 0.80. USD & CAD will both await their jobs reports due at 13.30BST. However, it is worth noting the greenback did once again see concerning news as political tensions continue with US Special Counsel Mueller empanelling a Washington Grand Jury in Russia probe.
In commodities, Asian oil demand has been seen to shift back to the Middle East and Russia in Q4 following the recent rise in Brent. Elsewhere, OPEC has delivered a record high adherence to its oil cut in 2017, struggles do remain with Iraq and the UAE yet to show how they can meet their targets. Trade yesterday saw the USD 50.00/bbl level hold once again and the rejection has leaked into trade today, with WTI now trading around USD 48.80. Precious metals all trade in marginal positive territory, likely abiding to the risk tone following the recent acceleration in the US Russian probe.
Looking at the day ahead, Friday is relatively quiet day for data in both Asia and Europe with only German factory orders data for June due and Italy’s retail sales for June. The US will be in greater focus as the July nonfarm payrolls number is due (180k expected) along with other labor market data. Alongside that, we will also get the trade balance reading for June. Onto other events, the Baker Hughes US rig count will also be out. Notable US companies reporting include: Cigna, Berkshire Hathaway and CBOE. Notable European companies reporting include: Allianz, Swiss Re and Erste Group.
US Event Calendar
- 8:30am: Change in Nonfarm Payrolls, est. 180,000, prior 222,000;
- Change in Private Payrolls, est. 180,000, prior 187,000
- Change in Manufact. Payrolls, est. 5,000, prior 1,000
- Unemployment Rate, est. 4.3%, prior 4.4%
- Average Hourly Earnings MoM, est. 0.3%, prior 0.2%; Average Hourly Earnings YoY, est. 2.4%, prior 2.5%
- Labor Force Participation Rate, prior 62.8%
- Underemployment Rate, prior 8.6%
- 8:30am: Trade Balance, est. $44.5b deficit, prior $46.5b deficit
DB's Jim Reid concludes the overnight wrap
Hello Payrolls Friday. On a day we pore over how many people have been employed and how much they've been paid in the US, I'm still trying to come to terms with the €222 million buy out clause activated for the transfer of Brazilian Neymar from Barcelona to PSG. This is broadly equivalent to the annual GDP of the equatorial Marshall Islands (population over 53k) which is around the 190th biggest nation in the world. If you include his wages over a 5 year contract you can nearly double this and you get close to the annual GDP of Tonga - home to over 100k people. The Marshall Islands aren't a hot bed of economic activity although I did note that their income tax rates are 8% and 12% and corporation tax is at 3%. Anyone coming with me to set up a company? Although make sure you can afford your current buy-out first though.
Back to US jobs and consensus expectations are for a 180k gain (222k previous) today. Our US economists project a more optimistic figure of 200k for headline and private payrolls, which they expect to be sufficient to lower the unemployment rate a tenth to 4.3%. However, they note that the July ADP survey and the employment subcomponents of the manufacturing and non-manufacturing ISMs add some downside risks to their forecast as their payrolls model (which uses the first reported values of ADP and the ISM composite employment reading) projects private payroll gains of around 165k. Counterbalancing this risk however is the fact that private payrolls have recently fallen short of the levels implied by ADP and the ISMs, and payrolls (including revisions) have accelerated in the past following similar misses. On other detail aspects of the report, they expect that hours worked should remain steady at 34.5 along with a 0.3% gain in average hourly earnings (AHEs), which would lower the YoY growth rate of the series to 2.4% (with a risk of rounding up and remaining at 2.5%). However, as long as there is no material surprise in either direction, they do not expect this month's AHEs to meaningfully impact policymakers' intermediate-term inflation expectations. Finally, the team notes that even if July payrolls fall below their forecast, Amazon's hiring spree this month could result in an upside surprise in next month’s (August) data, which will likely factor more prominently into the Fed's decision process going into the September 20 meeting.
So another report where the market will look for any life in inflation and a reason for bonds to sell-off. This report comes on the back of a sizeable bond rally yesterday which seemed to be kickstarted by a relatively downbeat outlook from Mr Carney on a day the BoE cut their growth and wages forecast. Before we review this it's worth highlighting that the Wall Street Journal reported 30 minutes before the US close that Special Counsel Robert Mueller was said to have impaneled a grand jury in the ongoing Russia probe. It led to a small spike lower in risk (see below) into the close and it's another cloud for the Trump presidency to contend with.
Back to the BoE. As widely expected, the Bank left rates steady at 0.25% with the number of dissent votes declining from three to two, due to Kristin Forbes’ departure. The Bank reiterated future policy may need to be tightened slightly more than the current market yield curve implies (the first hike is priced in 2H18), but DB’s Mark Wall notes that Governor Carney made no attempt during the press conference to re-price dovish market expectations for this year. In Carney’s opinion, the UK was still experiencing exceptional circumstances ‘and would do so for some time’, with Brexit-related risks to the forefront. The bank has also cut its economic growth projections to 1.7% in 2017 (vs. 1.9% previous) and 1.6% in 2018 (vs. 1.7% previous). Looking ahead, with two new members on the MPC as of the September meeting, our team think it will be difficult for the hawks to gain a majority on the MPC without the support of the Governor. So our team continues to expect the BoE to NOT tighten monetary policy until Brexit related uncertainty has been sufficiently reduced.
Post the BOE release, Gilt yields dropped ~5bps in 10 mins of trading and continued to fall to close 9bps lower for the day. The more dovish rates outlook and cautious comments from Carney had a similar impact across most government bond markets with Gilts (2Y: -6bp; 10Y: -9bps), USTs (2Y: -2bps; 10Y: -5bps) and German bunds (2Y: +1bp; 10Y: -3bps) yields mostly notably lower. Elsewhere changes were a bit more modest with Italian BTPs (2Y: unch; 10Y: -2bps) and OATs (2Y: +1; 10Y: -3bp).
Turning to currencies there was a fair bit of intraday activity for Sterling after the meeting. It traded as high as 1.1202 in the morning session against the Euro, but then fell to as low as 1.1052 in the hours after the BoE announcement, before closing at 1.1069 for the day (-0.7% for the day). Sterling/USD also had similar intraday trends, before closing down -0.6% for the day. For other currencies, the USD dollar index dipped 0.2%, partly due to the softer ISM non-manufacturing data and the Euro/USD edged 0.1% higher. In commodities, WTI oil fell 1.3% as investors weighed up reports of rising US production against a decline in crude stockpiles. Elsewhere, precious metals were slightly up (Gold +0.1%, Silver +0.2%), copper was flat, but aluminium fell 0.8%.
Onto equities, the S&P also had its share of intraday action. The index was trading in a tight range for most of the day, but then fell ~0.3% post the Mueller news and closed -0.2% down for the day. The VIX also responded, rising ~+5.5% around that time to 10.5 but closed a bit lower at 10.44. Elsewhere, the Dow edged up ~+0.1%, breaking another fresh all-time high for the 7th consecutive day. Within the S&P, modest gains in the industrials and utilities sectors were more than offset by losses in energy (-1.3%) and materials (-0.7%). European markets broadly strengthened, the Stoxx 600 edged up 0.1%, the FTSE 100 up 0.9% (helped by the fx move) and the CAC (+0.5%), but the DAX fell 0.2%, impacted by Siemens (-3%).
Away from the markets, as noted earlier, the WSJ has reported that Special Counsel Mueller has impaneled a grand jury as part of his probe into Russia’s interference in the US election and possible ties with President Trump’s campaign. A grand jury suggests that the probe has gone beyond investigating what might have happened, to potentially charging people with crimes. Mueller’s office has declined to comment. However, a special counsel to the president (Ty Cobb) added later that he wasn’t aware that Mueller was using a grand jury, but also acknowledged that “…grand jury matters are typically secret…".
Elsewhere, US senators have introduced two bipartisan bills aimed at protecting Mueller on concerns that Mr Trump may look to dismiss him. We shall no doubt see more news flow on this in the coming weeks.
This morning in Asia, markets are mixed but little changed. The Nikkei is -0.4%, the Kospi recovering slightly (+0.2%) after yesterday’s -1.7% fall, with the Hang Seng flat and China slightly higher on balance.
Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, data was in line to slightly soft. The ISM nonmanufacturing composite for July was below expectations at 53.9 (vs. 56.9 expected; 57.4 previous), which is the lowest level since a similar downward spike in August last year. Digging into the details, new orders index fell 5.4pt to 55.1 and the employment index fell 2.2pt to 53.6. However, even after factoring in the employment indices from the twin ISM reports together, DB’s economist believes the employment indicators are still consistent with decent payrolls growth (~200k per month). Elsewhere, factory orders for June was in line at 3%, initial jobless claims for July was slightly lower than expectations at 240k (vs. 243k) and continuing claims was at 1,968k (vs. 1,958k expected). The final durable goods order stat for June was reported higher at 6.4% (vs. 0% expected).
Onto Europe and the June Eurozone retail sales were higher than expectations at 0.5% mom (vs. 0% expected) and 3.1% yoy (vs. 2.5% expected), while UK’s Markit services and composite PMI were also a tad higher than expectations at 53.8 (vs. 53.6) and 54.1 (vs. 53.8) respectively. Elsewhere, the final July services and composite PMI for the Eurozone (-0.1pt vs flash composite), France (-0.1pt) and Germany (-0.4pt) were also released and was slightly lower than the flash PMIs.
Looking at the day ahead, Friday is relatively quiet day for data in both Asia and Europe with only German factory orders data for June due (0.5% mom, 4.4% yoy expected) and Italy’s retail sales for June (0.1% mom expected). The US will be in greater focus as the July nonfarm payrolls number is due (180k expected, DB 200k) along with other labour market data. Alongside that, we will also get the trade balance reading for June. Onto other events, the Baker Hughes US rig count will also be out. Notable US companies reporting include: Cigna, Berkshire Hathaway and CBOE. Notable European companies reporting include: Allianz, Swiss Re and Erste Group.