Yields and central banks on the move

Central banks on the move: Norway’s central bank became the first in the G10 to raise rates after the pandemic, Turkey’s central bank – an outlier – lowered rates (to 18%), whilst the Bank of England and Federal Reserve sat on their hands but indicated they too are about to start moving. Yields are on the move too as bonds sell off on tightening expectations. Something has clearly changed and positioning on rates is shifting. US 10yr yields jumped to 1.44%, posting their biggest one-day gain since March, whilst 30yr bond yields jumped the most in a single day since March 2020. European bond yields are also marching higher.

Although the Fed and BoE remain fairly cautious and the dogma of transitory inflation persists, they’re starting to move beyond pandemic-era emergency mode. Investors see this and are moving too – rates steepening again as they did earlier this year. As we noted yesterday morning, whilst the initial reaction to the Fed’s announcement on Wednesday saw the yield curve flatten, the steepening as the long end picks up is the natural response to the Fed turning more hawkish – it was not just earlier for lift-off but also more hikes in 2023/24. Investors are also betting on higher inflation for longer. US inflation expectations ticked higher too, hitting a month high, helping gold to fend off the move in nominal rates to trade around $1,750, having put in a near-term low at $1,737. The dollar also made a strong move lower yesterday, adding further support.

Stocks rallied on Wall Street, mega cap growth just underperforming a bit as yields rose, helping financials do well. The S&P 500 recovered the 50-day SMA at 4,437 and closed above at 4,448.98. Small caps outperformed with the Russell 2000 picking up almost 2% as reflation trade thinking resurfaced. Energy was the top performer on the S&P 500 again as crude oil (Nov) broke through $73, whilst Brent is testing a 3-year high. Natural gas is back above $5 this morning.

Stocks trade weaker in the early part of the session in Europe as investors digest the selloff in global bonds and look ahead to the uncertainty of the German election on Sunday, which may be a factor for the DAX today. Helen Thomas of BlondeMoney has an excellent preview on the topic for us. The FTSE 100 sits around 7,050, slap in the middle of the range it’s treaded since April. AstraZeneca shares rose 3% as its Lynparza cancer drug performed well in its PROpel Phase III trials. Shares in Hong Kong fell over 1% with Evergrande down 13% as it apparently missed a deadline for an interest payment of $83.5m on an offshore bond.

The US dollar is drifting higher this morning after yesterday’s selloff with near-term momentum positive having briefly hit its highest since Aug 20th. Tweeted yesterday about topping pattern for USD and yesterday’s (just about) outside day candle could be the reversal signal.

Dollar Index 24.09.2021

GBPUSD is holding most of yesterday’s gains but has just pared back a touch to trade at 1.3710 after hitting 1.3750.

GBPUSD Chart 24.09.2021

Adelanto semanal: los bancos centrales, los protagonistas

La semana que viene, el panorama estará dominado por las declaraciones de tres bancos centrales, empezando por el Banco Central Europeo (BCE). Su perspectiva moderada choca con la del Banco de la Reserva de Australia (RBA) y el Banco de Canadá (BOC), los cuales han adoptado un tono más conservador recientemente. No prevemos importantes cambios en las políticas, pero avistamos sorpresas en el horizonte económico.

La última vez que pudimos conocer el parecer del BCE fue con motivo de las actas de su reunión de julio. En un mundo en el que los bancos centrales empiezan a adoptar sesgos más conservadores, el BCE aún se mantiene relativamente moderado.

El BCE anunció su primera gran política financiera estratégica en julio. Los objetivos de inflación se revisaron para procurar no mantenerlos por debajo del 2 %. Para ello, adoptaron un objetivo de inflación general específico del 2 %. Desde entonces, la inflación en la zona euro ha aumentado a un máximo de 10 años del 3 %, lo que probablemente avive a los conservadores del Consejo de Gobierno del BCE.

Hasta aquí, todo bien, pero, ¿qué ha sido de la covid-19? La pandemia aún sigue coleando, pero algunos importantes miembros del consejo del BCE confían en que ni siquiera el efecto de la variante delta propiciará una recaída en Europa.

Se esperan pocos obstáculos en el camino; el sentimiento es positivo.

«Diría que, en general, nos encontramos cerca del punto que esperábamos alcanzar en junio para todo el año», declaró Philip Lane, economista jefe del BCE, a Reuters este miércoles. «Es un panorama razonablemente bien equilibrado».

Cabe señalar que el BCE ha afirmado que mantendrá un sesgo «persistentemente acomodaticio» en adelante. Los tipos de interés probablemente se mantengan en sus actuales e insólitos mínimos. No prevemos asistir a un cambio hacia una postura más conservadora a corto plazo.

Viajamos a Australia, donde el RBA se ha mostrado bastante optimista en sus últimos comunicados. El RBA anunciará su nueva declaración de tipos el martes por la mañana y no prevemos que el banco se vaya a desviar de su rumbo actual.

Dicho esto, la reducción de su programa de compra de bonos continuará para disminuirlo a partir de septiembre. Los tipos probablemente también se encuentren en mínimos. No esperamos que suban, como pronto, hasta finales de 2022.

Casi todo depende de cuán firme sea el rumbo que tome la economía australiana al avista del aumento de los casos de coronavirus y los confinamientos de zonas aisladas.

«El consejo esta preparado para responder si aumentan las malas noticias en el frente sanitario, en caso de que eso dé lugar a un revés aún mayor para la recuperación económica», declaró el RBA en su acta de la reunión de agosto. «A día de hoy, la experiencia dicta que, cuando se contienen los rebrotes del virus, la economía se recupera rápidamente».

El gobernador Lowe y compañía han afirmado que no es probable que se produzca una rescisión, aunque las perspectivas de crecimiento se han revisado para este año: el RBA prevé que el crecimiento anual en 2021 ronde el 4 % —una previsión inferior al 4,75 % pronosticado en un primer momento—, pero aumentará al 4,25 % a finales de 2022.

El broche final al festival de declaraciones de bancos centrales lo pondrá el BOC, uno de los bancos centrales más conservadores del mundo, que no ha tardado en reducir su programa de compra de bonos, aunque mantiene su tipo a un día en el 0,25 %.

El BOC sí que señaló que una nueva ola de casos y confinamientos en el 2T inhibiría el crecimiento, pero se mostró seguro de que el crecimiento retornaría rápidamente a finales de año.

El banco central afirmó que, actualmente, el crecimiento previsto para la economía canadiense es del 6,0 % en 2021, una previsión menor que la de abril del 6,5 %. No obstante, revisó al alza su previsión de crecimiento para 2022 del 3,7 % al 4,6 %.

El crecimiento de la inflación sigue descontrolado: se espera que alcance o incluso supere el 3 % hasta 2022. La inflación no tiene freno y se sitúa en la parte alta del rango del BOC de entre un 1 % y un 3 %. No obstante, el banco considera que todo esto es transitorio, por lo que es probable que provoque un cambio de perspectiva en su política.

Principales datos económicos

Date  Time (GMT+1)  Asset  Event 
Tue 7-Sep  5.30am  AUD  RBA Rate Statement 
  5.30am  AUD  Cash Rate 
  10.00am  EUR  ZEW Economic Sentiment 
  10.00am  EUR  German ZEW Economic Sentiment 
       
Wed 8-Sep  3.00pm  CAD  BOC Rate Statement 
  3.00pm  CAD  Ivey PMI 
  3.00pm  CAD  Overnight Rate 
  Tentative  CAD  BOC Press Conference 
       
Thu 9-Sep  12.45pm  EUR  Monetary Policy Statement 
  12.45pm  EUR  Main Referencing Rate 
  1.30pm  EUR  ECB Press Conference 
  1.30pm  USD  Unemployment Claims 
  3.30pm  GAS  US Natural Gas Inventories 
  4.00pm  OIL  US Crude Oil Inventories 
       
Fri 10-Sep  1.30pm  CAD  Employment Change 
  1.30pm  CAD  Unemployment Rate 
  1.30pm  USD  PPI m/m 
  1.30pm  USD  Core PPI m/m 
  Tentative  GBP  Monetary Policy Hearings 

BlondeMoney Bank of England rate decision preview

BlondeMoney CEO Helen Thomas explains what to watch out for from the upcoming Bank of England policy decision.

Get more top insight from Helen with Blonde Markets every week on XRay.

Hong Kong dents optimism but stocks remain on track

US shares surged on Tuesday, with the Dow rising more than 2%, briefly trading above the 25k level again before closing a little short. The S&P 500 rose over 1%, traded above 3,000 for the first time since March 5th hitting a high at 3,021 before it too closed below this psychologically important level. The broad index traded above the important 200-day moving average but failed to close above this indicator.

Economies continue to reopen a little quicker than we’d feared. US airlines are reporting a uptick in passenger levels vs where they were last month, but were down about 80% from the same Memorial holiday weekend a year before. Globally, it seems as though countries are able to ease lockdown restrictions without sparking immediate secondary waves of infections – albeit the risk of such emerging down the line should not be ignored.

The higher the S&P 500 rises without earnings picking up the pricier it gets. PE multiples already look stretched and further gains for the index would come despite declining earnings, stretching these valuations still further. What happens when banks really lay bare all the non-performing loans they are going to need to write off?

US stock markets test key 200-day SMA

In the last two major recessions (see below chart), the 200-day simple moving average has been the ceiling for the market. A breakout here would be important for recovering market highs – failure could suggest it will contain price action for a while. I hate to say it but this time could be different – central bank largesse was not a factor like it is today. This only concentrates the power of the largest capitalised companies.

What’s going on in the real economy is not reflected by markets. Even as we reopen, the economic uncertainty and long-term health fears will support household deleveraging, boost savings rates and knock consumer spending.

Today the Fed will release its Beige Book providing anecdotal evidence of business activity across the US – there will be some very grim stories to tell and will underline how it will take a long time to get businesses and people moving at the same rate they were before the crisis.

Tensions in Hong Kong weigh on global equities – will the US sanction China?

The rally in global equities seen at the start of the week ran out of steam a little in Asia overnight though as tensions in Hong Kong hove into view once more. Riot police fired pepper pellets at groups gathering to protest a bill that would ban people from insulting the Chinese national anthem. This comes as tensions were stoked by China’s planned introduction of sweeping national security powers in Hong Kong.

There is a strong chance that the anti-Beijing feeling grows and leads to the kind of unrest we saw over several months last year. The US is said to be considering sanctions against China; Beijing said yesterday it was increasing its readiness for military combat. Whilst the eyes of the world are on Hong Kong, China is already engaged in a military standoff on its border with India.

Asia soft, European stocks firm

Asian shares fell broadly, although Tokyo held up as Japan said it will carry out another $1.1 trillion stimulus package on top of a $1.1tn programme already launched last month. The Hang Seng dipped by almost 1%. But European shares rose with the FTSE 100 recapturing 6100 and making a sally towards 6200 and to close the early March gap.

Yesterday the DAX made the move back towards its Mach 6th close at 11,541 to fill the gap but failed to complete the move on the close. This morning the DAX moved strongly through this level after a pause at the open, moving back to 11,600.

Euro, pound come off highs, retreat from key technical levels

In FX, both the euro and pound failed to really make any real breach despite a strong gain yesterday and have come off their highs. EURUSD moved back towards the middle of the recent range, having fallen short of a move back to 1.10 and was last trading around 1.0960.  GBPUSD has retreated under 1.23 having fallen short of the 50% retracement of the move lower over the last month around 1.2375.

After Germany and France proposed a €500bn bailout fund based on mutual debt issuance (what some have dubbed Europe’s Hamiltonian moment), EC President Ursula von der Leyen will present her plans, which will build on the Franco-German proposal and call for a €1 trillion plan. If the budget talks are successful it should lower the risk premium on EU sovereign debt, lowering bond yields and offering succour to the euro as well as to European equity markets. It would also mark a major step towards EU fiscal policy coordination and possible fiscal union. The frugal four remain a hindrance but Merkel’s weight is behind this.

We’re also looking at the appearance before MPs today by Michael Gove and UK Brexit negotiator David Frost.

Gold falls to test $1700, WTI crude oil edges down to $34

Gold was weaker, testing $1700 again as US yields rallied on economic reopening, but 10yr Treasury yields peeled back off the highs at 0.7% due perhaps to the US-China tension.

WTI (Aug) has retreated further from the $35 level and is testing support around $34. The pattern suggests a pause for thought as we try to figure out the mess of supply and demand. The pattern is one of consolidation with a bullish flag forming, with better demand forming the basis for the move alongside supply impairment that was evidenced by a new report from the IEA saying Covid-19 will cause investment in the energy sector to decline by $400bn this year. That is the kind of capex carnage that will remove a lot of supply and force rebalance quickly.

Chart: The 200-day line has been a ceiling in past recessions

Fed and ECB previews

First up, the Federal Reserve kicks off its two-day meeting today (Apr 28th) and whilst there is always scope for a surprise, we would not anticipate any change to the policy outlook, chiefly because the Fed is no longer waiting for scheduled policy meetings but is operating in ‘real-time’.  

 

There is virtually zero chance the Fed will remove any accommodation until the threat of Covid-19 has passed. But if anyone thinks the FOMC will go negative they are in for a shock – there is no appetite to cut rates any lower and go below the zero lower bound. Europe and Japan are hardly shining examples of that policy working. Jay Powel has already ruled it out, though that in itself is not a reason it won’t happen.

 

The Fed has already thrown the kitchen sink at the market and the economy, announcing unlimited bond buying  – QE4ever – and expansion of corporate debt buying to include junk. There is not a huge amount left for the Fed could realistically do, save buying stocks outright and taking rates negative, neither or which are palatable or likely in the near term, partly because the efforts so far have calmed market stress and prevented further dislocation.  

 

Markets will be looking for any signal from Jay Powell about how the Fed views the rebound – is he still confident of a bounce back in the second half? Formal projections are not due until June. 

 

It’s a fairly similar story for the European Central Bank (ECB). We think they will not commit to any further policy moves right now but will likely signal they are ready to do so by June. The Pandemic Emergency Purchase Programme (PEPP) QE lift has been initiated with an overall envelope of €750bn, and it appears likely to be expanded by an additional €500bn in the next month or three. 

 

Two key things will be the focus. First the communication needs to be crystal clear – we don’t want a repeat of the spreads widening fiasco from Christine Lagarde. Since then the ECB has been absolutely on-point. The ECB must be continue to show to the market that it stands four-square behind the functioning of markets, the single currency and supporting the EZ economy. And on this, I would anticipate a lot of the focus in the press conference to be on the European Council efforts on a bailout package. Watch the BTPs-Bund spreads for how the market views the ECB performance. 

 

EURUSD – as noted on Monday, speculators are dialling up their net long bets on the euro. The Commitment of Traders (COT) from the US Commodity Futures Trading Commission showed euro net longs rose to 87.2k contracts in the week to Apr 21st, the most since May 2017. Traders turned long at the end of March and have been adding to positions since then. We saw a shift like this in speculative EUR positioning in 2017 it preceded a 15% rally in EURUSD.

Sell in May and go Huawei: US-China ad nauseum

When can we stop talking about the US and China? European stocks called to open higher after a robust session in Asia showed investors are weighing the latest US-China spat over Huawei for what it is. SPX closed down 0.67% yesterday on the broad US-China-Huawei-Google spat, with tech stocks the worst hit. The Nasdaq 100 shipped 126 points to close 1.7% lower. Chip makers were rocked but look set to bounce back today – these rose in after-hours trading and Asian peers were much firmer overnight. 

US-China, Google-Huawei

After blacklisting the Chinese firm, the White House has issued three-month reprieve to allow US companies continue to do business with the group. It’s all rather like the way Trump slaps on tariffs but delays the execution to allow room for negotiation. Whether it’s Huawei or tariffs, I would see all of this in the broader context of giant tug-of-war between the two superpowers being played out in front our eyes. As such, the more this goes on the lower the chance of a meaningful resolution to any of it. Trade disputes ad infinitum, ad nauseum. 

China has vowed to retaliate but stocks in China rose overnight – the more damage the US tries to do the more the market expects stimulus from Beijing.

Brexit continues

We don’t even have a lot on the Brexit front to worry about today. Euro elections are centre stage this week – as noted in yesterday’s FX note, the Brexit Party is set to win in the UK, whilst Eurosceptics and populists of various hue will sweep about a third of the vote across the continent.  Watch therefore for action in EUR and GBP crosses, as well as Italian spreads.  

Economic indicators overnight have been less than stellar. South Korean exports shrunk by nearly 12% in May, having decline more than 8% in April. Singapore’s government has downgraded growth forecasts for 2019. Thailand GDP growth hit a 4-year low. Lots of trade related effects being felt, clearly.

Fed chair Jay Powell spoke yesterday but did not really go into monetary policy. His remarks were focused on financial stability, stressing that ‘business debt does not present the kind of elevated risks to the stability of the financial system that would lead to broad harm … should conditions deteriorate’.  He added though that ‘the level of debt certainly could stress borrowers if the economy weakens’. Move along, nothing to see here. Fed governor Richard Clarida speaks later – will have a lot more on policy and will be closely watched. FOMC minutes are due tomorrow.

Forex – dollar bid

The dollar continues to find bid, with the dollar index touching on 98 again, its strongest since May 3rd. Meanwhile EURUSD has also sunk to its weakest since May 3rd. US 10yr has risen above 2.4% again, having been as low as 2.35% last week. Firmer US yields and the safe haven appeal of the USD in the current trade war situation is keeping the dollar supported.

Yesterday’s emerging three inside up formation on the GBPUSD daily chart fizzled out, with the pound under the cosh still and threatening now to break below 1.27. The 1.2710 region is acting as support for now but the downwards pressure could eventually tell. 

RBA set to cut

The post-election bounce in the Australian dollar proved short-lived as anticipated. AUDUSD was back trading on the 0.68 handle as the RBA gave us a very clear signal it’s ready to cut rates. In fact, this was about as dovish Philip Lowe could be without actually saying ‘I will cut rates in June’.

The June 4th meeting will likely see the central bank move to cut the cash rate to 1.25% from the current 1.5%. The RBA is really tying its policy outlook to the labour market. Unemployment rose to 5.2% in April and the risk is that exposure to China and trade will act as a drag in the coming months. Low inflation currently gives it ample scope to cut rates.

Morning note: Equities pressured on tough talk on China trade, RBA holds

US equity markets pared losses yesterday, with the S&P 500 declining by around half a percent to 2,932.47, having been close to the 2900 handle again. 

Rhetoric from the US side has shifted markedly in the last two days. Having seen progress and a good direction to productive discussions, relations have soured. 

Tweets from Donald Trump over the weekend saying he would raise tariffs on $200bn in imports from China as early as Friday did the main damage to risk sentiment, sparking a selloff in equities. Following this the Robert Lighthizer and Steve Mnuchin said China had reneged on its commitments and painted a very downbeat picture of the talks. This hit trade sensitive stocks after-market and will keep the downwards pressure on equities. 

Quite where this leaves us is hard to say. There is a sense that the US is working extremely hard to extract last-minute concessions from China ahead of a planned visit by vice-premier Liu He. That visit has been confirmed – he is to visit the US May 9th-10th. Equity futures in Europe rose on the news of the Chinese visit still being a go, but risks remain skewed to the downside today it would seem. 

Just talking tough?

Will that be enough to avert the tariffs being raised on Friday is unclear, but at least it means the two sides are continuing to talk and a deal is still possible. However, we don’t know if this is a last-ditch rescue mission to save talks or something that moves talks on in a more substantive way. The optics suggest the former, but one cannot but sense that Mr Trump is playing us a little. He may well be making a deal seem further away in order to make the achievement seem all the more impressive when it comes.

The market has been juiced by expectations the US and China would do a deal, combined with a much more dovish sounding Fed. Those two key planks are what the ATHs rest upon – remove one and we should expect more downside.

RBA holds rates before Australian elections

Elsewhere, in the FX space, the RBA chose not to cut rates, leaving the benchmark at 1.5% again. It was about 50/50 whether the central bank would cut or stick, and it seems that for now, with enough evidence that the slowdown can be blamed on transitory factors, the RBA is prepared to wait and see before easing. Also, with the election looming, the RBA probably felt it wise to wait. 

We’ve seen global central banks pivot from their tightening stance, but markets have just been a tad quick in calling the new easing cycle – the Fed last week and the RBA today confirm that it’s a done deal.  AUDUSD spiked to regain the 70 handle – it may well now keep in a range between 0.7030 and 0.7060, the narrow band it was in for the last week of April.  

GBPUSD remains supported above 1.31 but remains susceptible to Brexit news flow again. Despite all the jawboning, there is little evidence that Labour and the Tories can do a deal. Whether this gaping chasm between the major parties forces the UK towards a second referendum, General Election or a hard exit is still unknown.  

Finally, a word on Bitcoin – the crypto market remains bullish and Bitcoin futures are moving rapidly towards the $6,000 level. This could attract some technical interest as it would mark the clear move out of the bottom formation, whilst momentum traders may start to pile in on the back of it.

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