Silver as an investment

With All Eyes On The ECB, Catatonic Global Markets Remain In State Of Near Paralysis

As the market’s comatose trading range continues with no notable moves for nearly 40 consecutive days, there is some hope volatility may return after today’s main event, the ECB’s announcement due in just two hours, when Mario Draghi may surprise the market in either direction. As of today, the S&P500 has held in a band of 1.5% for 39 days, the narrowest ever for that length of time. A 50-day volatility measure for the MSCI All Country World Index of shares has more than halved since the start of this month.

Ahead of the ECB, European stocks advanced and Spanish 10-year bond yields fell to a record low, of 0.909% while Italy’s yield dropped one basis point to 1.07%, on speculation Draghi will extend the European Central Bank’s stimulus measures beyond its March 2007 deadline, as well as increase the universe of monetizable bonds while potentially cutting the deposit rate floor. A full preview of the ECB’s decision can be found here.

Banks led European shares toward the highest since January on hopes Draghi will purchase more securities in a dovish move, or that bond curves may steepen if the ECB moves modestly hawkish. As Bloomberg reports, the ECB may help revive markets following a slump in volatility as traders focus on potential tweaks to quantitative easing and economists predict Draghi will prolong bond buying even if policy makers don’t cut rates. In the U.S., investors will be looking at data on jobless claims after prospects for an interest-rate increase in September faded amid data showing slowdowns in hiring and business activity. The EUR jumped in advance of Draghi’s announcement, with the EURUSD fast approaching 1.13 as the US Dollar fell to a three week low.

“Rather than waiting for concrete measures from Draghi, this time we’re all looking for any signals regarding what more could be done if needed,” said Alan Higgins, chief investment officer at Coutts & Co. in London. “That means whether the ECB could extend the period of QE, any word about buying more government bonds in the periphery and whether they can include bank bonds in the program. It’s all about clues today.” 

To some, however, it is time for more than merely clues: “The market is losing momentum,” Bernard Aw, a strategist at IG Asia Pte in Singapore, told Bloomberg. “Investors are probably looking for fresh catalysts that may come in the form of additional stimulus from the European Central Bank or Bank of Japan”

Ahead of the ECB, the Stoxx Europe 600 Index gained 0.1% while futures on S&P 500 added 0.1% after the U.S. measure barely moved in the last session.

Italian banks gained, with Banca Monte dei Paschi di Siena SpA rising 2.9 percent after Il Messaggero reported that its planned capital increase could be postponed until next year. Micro Focus International Plc soared 20 percent after Hewlett Packard Enterprise Co. said it’s spinning off and merging some non-core software assets in a deal with the U.K. company valued at about $8.8 billion.  Rocket Internet SE declined 5 percent after the German startup incubator slashed the value of one of its key portfolio companies by more than 50 percent in a new financing round. ASML Holding NV lost 2 percent as terms of a transaction obtained by Bloomberg News showed that Samsung Electronics Co. is selling about half of its stake in the chip-equipment supplier.

Ireland auctioned 10-year bonds at a record-low yield, as investors brushed off the controversy over Apple Inc.’s tax arrangements in the country. The nation’s debt office sold 1 billion euros ($1.1 billion) of 2026 bonds at a yield of 0.33 percent on Thursday in Dublin, as the European Central Bank’s quantitative-easing program continued to drive down financing costs

U.S. 10Y Treasuries were steady at 1.53%. The probability of the Fed boosting benchmark interest rates at its meeting this month has dropped 10 percentage points this week to 22 percent, futures prices indicate.

Asian stocks were little changed; Japanese shares slid as investors assessed the chances of government stimulus after revised data showed the economy grew more than estimated. The Shanghai composite (+0.1%) and Hang Seng (+0.8%) recovered from early commodity-related weakness, as the latest Chinese trade figures continued to point to a rebound in growth, with exports and imports beating expectations, although trade balance slightly missed.  China’s August Trade Balance printed at 52.10BN vs. Exp. 58.35BN , and down modestly from July’s 52.31BN.

  • Exports (USD)(Aug) Y/Y -2.8% vs. Exp. -4.0% (Prey. -4.4%); 5th consecutive decline, but narrowest drop in 4 months.
  • Imports (USD)(Aug) Y/Y 1.5% vs. Exp. -4.9% (Prey. -12.5%); 1st increase since October 2014.

China also reported that August auto retail sales soared 24.5% Y/Y, driven by a surge in car loan issuance.

Meanwhile, the western cataonia has spread to china, where daily moves in the Shanghai gauge have been less than 1 percent for 17 days in a row, a phenomenon that last occurred in 2001.

Yuan borrowing costs surged to the highest since February amid speculation China is taking steps to deter bets on depreciation (more on this shortly).

10yr JGBs saw subdued trade as better GDP figures and its likely implications on BoJ policy dampened demand, while today’s 5yr bond auction also failed to spur a bid-tone with the the b/c declining from last month.  Japanese revised Q2 GDP grew annualised 0.7% vs. Exp. 0.2%, and up from the last print of 0.2%.

West Texas Intermediate crude climbed 2 percent to $46.38 a barrel, spurring gains in currencies of commodity-producing countries. Crude has risen more than 7% in the past week amid optimism OPEC producers will agree measures to support prices. U.S. crude inventories fell by 12.1 million barrels last week, according to the industry-funded American Petroleum Institute. A similar drop in official data due Thursday, which is forecast to show an expansion, would be the largest since 1999.

The Bloomberg Dollar Spot Index fell 0.3 percent, nearing a two-week low. Australia’s dollar led gains among 16 major currencies with a 0.7 percent advance and the Taiwan dollar was the worst performer with a 0.3 percent loss. The euro rose 0.3 percent to $1.1274.

Market Snapshot

  • S&P 500 futures up 0.1% to 2188
  • Stoxx 600 up 0.1% to 351
  • FTSE 100 up 0.5% to 6882
  • DAX down 0.1% to 10739
  • German 10Yr yield up less than 1bp to -0.11%
  • Italian 10Yr yield down less than 1bp to 1.08%
  • Spanish 10Yr yield down less than 1bp to 0.92%
  • S&P GSCI Index up 1.3% to 356.6
  • MSCI Asia Pacific up less than 0.1% to 142
  • Nikkei 225 down 0.3% to 16959
  • Hang Seng up 0.7% to 23919
  • Shanghai Composite up 0.1% to 3096
  • S&P/ASX 200 down 0.7% to 5386
  • US 10-yr yield down less than 1bp to 1.53%
  • Dollar Index down 0.23% to 94.74
  • WTI Crude futures up 1.9% to $46.36
  • Brent Futures up 1.7% to $48.80
  • Gold spot up 0.2% to $1,349
  • Silver spot up 0.6% to $19.92

Top Global Headlines

  • HPE to Merge Software With Micro Focus in $8.8b Deal: HPE shareholders will own 50.1% stake in combined co.; Hewlett Packard Enterprise gets $2.5b cash in deal
  • Liberty Media Agrees to Acquire Formula One for $4.4 Billion: former Fox executive Chase Carey to be racing group’s chairman; U.K. private-equity firm CVC seen getting windfall from sale
  • ECB expected to keep interest rates unchanged, may extend end-date of asset purchases; Draghi to hold press conference; Draghi Has Decision on QE Program Coming, If Not Now Then Soon
  • TPG to Buy Intel’s McAfee Security Unit in $4.2b Deal: Intel selling business as it focuses on data centers
  • Fiat Chrysler’s Rising Star in U.S. Swept Up in Criminal Probe: alleged gaming of car sales draws attention to Reid Bigland
  • Nintendo Soars With Super Mario Game Debut for the IPhone: Pokemon Go’s popularity probably fueled Super Mario efforts
  • Amazon Cuts Delivery Times in Threat to Alibaba, EBay, Wish.com: small items commonly shipped from China now Prime eligible
  • Lloyd’s Wins Right to Fight in N.Y. Over Oklahoma Quake Coverage: judge refuses driller’s effort to resolve dispute in Oklahoma
  • Medivation Stockholder Objects to Pfizer Merger in Lawsuit: investor says $81.50/share price isn’t fair value in class- action complaint
  • Wells Fargo Faces Enforcement Action on Sales Tactics, WSJ Says: co. facing regulatory enforcement action relating to cross-selling of products and aggressive sales tactics
  • Blue-Chip U.S. Company Bond Sales Top $1 Trillion at Record Pace: global ‘influx of capital’ is going to corporate bonds; investors are looking to ‘get a little bit of yield’

* * *

Looking at regional markets, we begin in Asia where stock markets traded mixed following a lacklustre lead from the US while the region digested key tier-1 data. ASX 200 (-0.7%) underperformed after iron ore prices declined for the third consecutive day to its lowest level in six weeks. Nikkei 225 (-0.3%) traded in the red, despite better than expected upward revisions to Q2 GDP, as the improvement in the data dampened urgency for the BoJ to act this month. Shanghai Comp (+0.1%) and Hang Seng (+0.8%) recovered from early commodity-related weakness, as the latest Chinese trade figures were mostly encouraging with exports and imports beating expectations, although trade balance slightly missed. 10yr JGBs saw subdued trade as better GDP figures and its likely implications on BoJ policy dampened demand, while today’s 5yr bond auction also failed to spur a bid-tone with the the b/c declining from last month.

Japanese GDP (Q2 F) Q/Q 0.2% vs. Exp. 0.0% (Prey. 0.0%); GDP Annualised (Q2 F) Y/Y 0.7% vs. Exp. 0.2% (Prey. 0.2%)

Chinese Trade Balance (CNY)(Aug) M/M 346b1n vs. Exp. 371.7bIn (Prey. 342.8bIn). (Newswires)

  • Exports (CNY)(Aug) Y/Y 5.9% vs. Exp. 2.7% (Prey. 2.9%)
  • Imports (CNY)(Aug) Y/Y 10.8% vs. Exp. 1.0% (Prey. -5.7%)

Chinese Trade Balance (USD)(Aug) M/M 52.10bIn vs. Exp. 58.35b1n (Prey. 52.31 bin) (Newswires)

  • Exports (USD)(Aug) Y/Y -2.8% vs. Exp. -4.0% (Prey. -4.4%); 5th consecutive decline, but narrowest drop in 4 months.
  • Imports (USD)(Aug) Y/Y 1.5% vs. Exp. -4.9% (Prey. -12.5%); 1st increase since October 2014.

Top Asian News

  • Yuan Intervention Signs Intensify as Offshore Loan Rates Surge: PBOC may be trying to crack down on bearish wagers, Mizuho says
  • Yuan Overnight Hibor Surges to 5.45%, Highest Since February: Yuan borrowing costs in Hong Kong’s offshore interbank market
  • Hedge Fund Makes 2,100% From the World’s Most Extreme Mania: Chinese manager rides booms and busts in commodities futures
  • Dealers at Ground Zero of Japan’s Bond Rout Say It’s Time to Buy: Primary dealers see 10-year yield at -0.15% by year-end
  • Hong Kong Land Prices Baffle Tycoon With 50 Years Experience: Lui’s development arm outbid in 16 land tenders this year
  • Doosan Bobcat IPO to Raise Up to 2.45t Won in S. Korea Listing: total ~49m shares will be offered at price range of 41,000-50,000 won apiece

In Europe, the ECB rate decision remains at the forefront of everybody’s minds so far this morning, with newsflow extremely light elsewhere. European equities reside in modest positive territory, following on from the strength seen yesterday. On a sector breakdown, IT names are among the worst performers, with ASML lower after a stake sale by Samsung, while Dialog are suffering the fallout from Apple’s latest product announcement. Also of note, the FTSE outperforms this morning, with mainland European indices striking a more tentative tone ahead of the ECB. Finally, fixed income markets have been particularly quiet today, with many commentators suggesting that if the ECB do act today it will impact fixed income markets to a greater extent than FX or equities and could largely be a technical adjustment to the bond buying program.

Top European News

  • Rocket Internet Falls in Frankfurt After Slashing Home24 Value: furniture retailer’s worth declines 57% to EU420m
  • Eni’s Troubles Off Norway Risk Fueling Fight Against Arctic Oil: Barents Sea’s Goliat field idle again after series of mishaps
  • Mediaset Said to File Complaint Against Vivendi Over TV Deal: urges French regulator to demand Vivendi correct statements; cos. at odds after Vivendi pulls out of deal to buy unit
  • U.K. Housing Market ‘Settling Down’ After Brexit-Vote Shock: RICS says August house-price index rises from 3 1/4-year low; London home values continue to fall and stagnation predicted

In FX, the Bloomberg Dollar Spot Index fell 0.3 percent, nearing a two-week low. Australia’s dollar led gains among 16 major currencies with a 0.7 percent advance and the Taiwan dollar was the worst performer with a 0.3 percent loss. The euro rose 0.3 percent to $1.1274. The Philippine peso sank to a four-week low after foreigners pulled $153 million from the nation’s stocks since the end of August, on track for the heaviest monthly net sales since November. China’s yuan weakened less than 0.1 percent in the onshore market, declining for the first time this week, and was little changed in offshore trading.

In commodities, West Texas Intermediate crude climbed 2 percent to $46.38 a barrel. It’s risen more than 7 percent in the past week amid optimism major producers will agree measures to support prices. U.S. crude inventories fell by 12.1 million barrels last week, the industry-funded American Petroleum Institute was said to have reported. A similar drop in official data due Thursday, which is forecast to show an expansion, would be the largest since 1999. “The size of inventories around the world are a headwind for oil prices,” said Ric Spooner, a chief market analyst at CMC Markets in Sydney. “If government data backs up the API figures, and we saw a decline in inventories instead of a build, then that would be a positive development.” Gold rose 0.2 percent, approaching a three-week high, and tin retreated in London from its best close since January 2015.

* * *

Bulletin Headline Summary From RanSquawk and Bloomberg

  • FX markets have seen some pre-emptive buying seen in EUR/USD, EUR/GBP and EUR/CHF ahead of ECB
  • European equities reside in modest positive territory, following on from the strength seen yesterday with newsflow otherwise light
  • Looking ahead, highlights include ECB rate decision, DoE crude oil inventory report and ECB President Draghi press conference
  • Treasuries little changed in overnight trading, global equities mixed and oil, precious metals rally; euro rises against the USD before ECB announcement at 7:45am ET as traders wait to see whether the central bank will expand its quantitative-easing program.
  • ECB president Mario Draghi will hold a press conference after his Governing Council sets monetary policy; if no definitive action is taken immediately, he is likely to be quizzed on what he’ll do — and when — to keep growth on track
  • “Rates are driving everything,” Mark Connors, Credit Suisse global head of risk advisory, said. “At a minimum you have to be aware of the influence of central banks. Fundamental analysis doesn’t explain the movement higher from here”
  • The largest oil traders are anticipating little relief to what has become the worst market slump in a generation. All but one of 15 senior oil traders and executives interviewed expect crude to remain between $40-$60/barrel over the next 12 months
  • Family offices, which manage the money of wealthy clans, are growing wary of hedge funds and have reduced their exposure to them by 10% in the 12 months ending in May as hedge funds have mostly underperformed stock markets since the financial crisis
  • China’s sprawling and inefficient state-owned enterprises are dragging down growth, with their return on assets in 2015 estimated to be at 2.8% versus 10.6% for private sector-firms
  • The cost of borrowing yuan in Hong Kong surged to a seven- month high amid speculation China’s central bank is intervening to discourage bearish bets on the currency
  • As the latest season of the Greek drama premiers this week, investors are steering clear of the country’s bonds and stocks. Greek government bonds have delivered the worst returns of all European sovereigns over the past three months
  • The bond market is getting so hot that it’s fueling a surge in so-called payment-in-kind toggle notes that let companies pay coupons with more debt

* * *

Economic Event Calendar

  • 7:45am: ECB decision
  • 8:30am: Draghi speaks
  • 8:30am: Initial Jobless Claims, Sept. 3, est. 265k (prior 263k)
  • 9:45am: Bloomberg Consumer Comfort: Sept. 4, (prior 43.4)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas storage change

DB’s Jim Reid concludes the overnight wrap

Today’s main event is the ECB policy meeting outcome this afternoon at 12.45pm BST. As a reminder, DB’s Mark Wall and his team had previously thought that the ECB would err on the side of caution and ease policy again at today’s meeting, specifically by extending QE by 9-12 months. While they still think that it’s a close call, recent events have caused them to change this view and they now believe the ECB will wait until December before announcing the QE extension. In justifying this they highlight that Brexit has not been much of a shock yet. Fed hawkishness could be just what the ECB wanted (although that perhaps is now put into question post recent data). Moreover, the credit impulse is holding up and the latest Bank Lending Survey showed no deterioration. At the same time they highlight that the ECB is increasingly aware of the vulnerability of market perceptions of bank profitability and how this might impair the transmission mechanism.

Our colleagues’ view appears to be broadly in line with the wider market. The consensus is for no change to any policy rates today although a Bloomberg survey of economists (conducted between August 30th and September 1st) showed that 41 of 50 participants expect a QE extension announcement at some stage, with around 50% of the respondents expecting this to be announced today.

Staying with the ECB theme, yesterday we published a Credit Bites piece attempting to answer a question which has gained more focus in recent weeks, that being the possibility of the ECB buying senior unsecured bank bonds by year-end as a further extension of its QE scope. Our conclusion is that this is highly unlikely for several reasons including; the inconsistency between the ECB requiring collateral from banks in its liquidity operations and buying the same credit risk outright, regulatory fragmentation issues, potential conflicts of interest and the availability of TRLTRO II.

In terms of what’s going on in markets at the moment, there’s one consistent theme which has emanated through the week so far. Credit primary issuance is booming with yesterday in the US being another record high for the year in terms of issuers (19) according to Bloomberg, and the fifth highest day by volume (at $24.9bn). Three corporates also came to market in Europe while we also saw the second bumper PIK deal launched this week, this one suggested to be the largest deal of its kind in Europe.

So while primary markets were in gung-ho mode again yesterday, markets elsewhere were a little bit more subdued and instead generally consolidated the post ISM Fed re-pricing that we got the day prior. Indeed the S&P 500 (-0.01%) finished virtually unchanged yesterday with a +0.61% gain for Apple following that latest new product launch. US 10y Treasury yields (+0.5bps) were also little moved and continue to hover in this extraordinarily tight 1.50-1.60% range that they’ve generally been in since the start of August, while the USD (+0.14%) did nudge a little bit higher, albeit modestly so.
Once again we heard some upbeat Fedspeak yesterday although markets again largely shrugged it off as the implied September Fed hike odds dipped to 22% from 24%). Following on from Williams’ comments, the non-voting and hawkish Lacker said that employment and GDP ‘still seem to be on track’ and that ‘at this point it looks like the case for a rate increase is going to be strong in September’. The Fed’s George also added – in what is a fairly commonly shared view amongst board members – that the labour market is ‘at or near full employment’.

Switching attention to the overnight session now where much of the focus has been on some important data released this morning. In Japan real Q2 GDP growth was revised up to a seasonally adjusted +0.2% qoq from the first preliminary estimate of 0.0%. That was above the consensus and roughly in line with the view of our Japan economists. The annualized rate was revised up from +0.2% to +0.7% as a result. The Yen was initially weaker following the release but is back to unchanged now around 101.70, while the Nikkei (-0.24%) and Topix (-0.23%) are both slightly weaker. Meanwhile, the latest trade data in China was supportive. In USD terms exports increased to -2.8% yoy (vs. -4.0% expected) from -4.4%. It was a similar story in RMB terms with exports rising to +5.9% yoy from +2.9%. Imports were also boosted. In USD terms they rose +1.5% yoy (vs. -5.4% expected) having been down double digits previously. It was in fact the first increase since 2014 while the increase in RMB terms was even greater (+10.8% yoy vs. +0.7% expected; -5.7% previously). Despite that there’s not been much of a reaction in markets with the Shanghai Comp (-0.10%) and CSI 300 (-0.17%) a shade lower. Elsewhere markets are mixed. The Hang Seng (+0.36%) has gained while the Kospi (-0.26%) and ASX (-0.93%) are in the red.

With regards to the data yesterday, in the US the BLS reported a decent jump in job openings in July to 5.87m (vs. 5.63m expected) from 5.64m previously, which in the process marked a new cyclical high. The quits rate did hold steady at 2.1% and there wasn’t much of a reaction in markets. Meanwhile in Europe we saw an eye watering and unexpected drop in Germany industrial production in July (-1.5% mom vs. +0.1% expected) which puts the Q3 starting base for IP on the back foot. In the UK the data was a bit more mixed. Industrial production (+0.1% mom vs. -0.2% expected) was a bit better than expected in July, however manufacturing production (-0.9% mom vs. -0.3% expected) saw a sharper decline than the market had expected.

The other big focus here in the UK was BoE Governor Carney’s comments during a parliamentary hearing. Carney presented a confident view of the Bank’s post-Brexit actions and attributed this to the strong August business and consumer surveys. Carney also said that although recent data suggested that the UK is a bit stronger than the Bank had forecasted in August, growth was likely to be ‘about half as much as it was prior to the referendum’. UK PM Theresa May also made comments to UK lawmakers and adamantly pushed back on making any hasty decisions, saying that ‘we will not take decisions until we are ready’ and ‘we will not show our hand prematurely’.

Before we look at the day ahead, a quick mention that this morning our European equity strategy team have published a new report. They note that global macro surprises have turned negative this week, after hitting a two-year high in mid-August. The rebound in global growth momentum has led cyclicals to outperform defensives by 13%, the sharpest rally in cyclicals since 2010. With growth momentum now rolling over again, they think cyclicals are vulnerable and our colleagues re-iterate their underweight, with a particular focus on autos and capital goods. Email Sebastian.Raedler@db.com for the report.

Looking at today’s calendar, first thing this morning we’ve got data out in France in the form of the latest payrolls numbers and business sentiment reading. That’s before we turn over to today’s main event at 12.45pm BST where we have the aforementioned ECB policy meeting outcome. At 1.30pm BST Draghi will then hold his post-meeting press conference. There’s not too much of note in the US this afternoon. The latest weekly initial jobless claims numbers are expected to show little change while later on we get the July consumer credit reading.