Silver as an investment

Global Stocks Slide As Bond Curves Steepen On Central Bank Concerns; Oil Falls

Yesterday we asked if the stealthy Japanese intention to steepen the JGB yield curve will crash global markets. While a crash, if any, has yet to emerge, overnight we have observed another bond selloffs, particularly at the long end of the curve, which has spilled over into stocks around the world on what Bloomberg dubbed were “signs central banks are starting to question the benefits of further monetary easing.” Oil pared a weekly gain, leading commodities lower.

As predicted yesterday, today longer-maturity bonds bore the brunt of the losses after the European Central Bank on Thursday downplayed the need for more stimulus, sending 30-year German bund yields to the highest since June, while Reuters added that “The Bank of Japan is studying several options to steepen the bond yield curve, say sources familiar with its thinking, as authorities desperately seek out policy tools to revive an economy that has failed to emerge from stagnation despite years of massive stimulus.”

As shown in the chart below, both Japan and German long-term yields are almost back to positive…


… while those invested in Japanese 40-year bond have already suffered a 15% loss.

The “initial reaction could be that there will be less activity from the ECB and central banks in general,” Frederic Pretet, a strategist at Scotiabank Europe told Bloomberg. “It was a bit unexpected to see no actions from the ECB yesterday at a time when they revised down their growth and inflation forecast. The lack of further activity is surprising and a bit worrying.”

As further expected, the bond selling is spilling over into stocks, with the MSCI All-Country World falling the most in more than a week. The euro rose to a two-week high and the yen strengthened, although it has since tumbled on a rumor from Japan’s Kyodo that the BOJ is “mulling” cutting negative rates further for easing, which as explained yesterday, is the BOJ’s most likely next step: cutting short-rates, while engaging in a “reverse twist” to steepen the yield curve.

As a result, Draghi’s reticence accelerated a selloff in bonds that extended from Europe to the U.S. and Japan, with longer-dated securities, which have been outperforming in recent months, being the hardest hit. While yields are still low compared with historical averages, they are quickly rising from records reached earlier this year, recalling the bond rout of 2015, which saw German 10-year yields climb more than a percentage point in less than two months. The yield on German 30-year bonds climbed six basis points to 0.57 percent at 10:40 a.m. in London, adding to a nine-basis-point jump the previous day, while that on similar-maturity U.S. securities has increased nine basis points since Thursday. Chances of the Fed raising rates at the September meeting climbed to 28 percent, up six percentage points from Wednesday, according to fed funds futures. Odds for a December increase are about 52 percent.

Oil surged almost 6 percent this week following a surprise plunge in U.S. stockpiles, however overnight WTI has pared gains as the market sees the largest inventory draw since 1999 as isolated occurrence that’s likely to be corrected in next week’s data. WTI trades near $47, Brent above $49. “It’s market participants realizing it was very likely a one-off factor and imports will rebound sharply next week,” says UBS commodity analyst Giovanni Staunovo. “That headline number was really huge but the tankers will not disappear.” Staunovo added that “The other story of today is probably this meeting in Paris, although I don’t expect anything specific besides some headlines.”

South Korean assets dropped following a nuclear weapons test in North Korea. As reported last night, North Korea conducted a nuclear test which resulted to a magnitude 5.3 seismic activity near its nuclear test site, which would suggest North Korea’s largest test. North Korea stated that it is now able to make a miniaturised nuclear arms and will continue with its weapons program. This was condemned by South Korean and Japanese officials with South Korean President Park stating they will increase pressure on North Korea with all possible means.

Hong Kong’s Hang Seng Index rose to a one-year high and a gauge of Chinese shares listed in the city rallied for a seventh day on prospects for more inflows from the mainland. Chinese insurers can buy Hong Kong shares through an exchange trading link with Shanghai, the industry regulator announced late Thursday. Hong Kong Exchanges & Clearing Ltd. jumped as much as 7.4 percent, its biggest intraday gain of the year.

The MSCI AC World Index fell 0.3 percent. The Stoxx Europe 600 Index also slipped 0.3 percent, taking its weekly drop to 0.5 percent. A Bank of America Corp. report showed fund managers withdrew money from Europe’s equity funds for a 31st straight week. UniCredit SpA fell 1.1% after a report that it’s considering raising as much as 10 billion euros ($11 billion) in capital. Burberry Group Plc slid 1.9 percent after a report that it cut prices in Hong Kong and China. Deutsche Bank AG rose 3.1% as Manager Magazin reported that the U.S. Department of Justice will next week begin settlement talks regarding the long-running investigation into the German lender’s mortgage-backed securities business.

S&P 500 Index futures slipped 0.1 percent. Equities failed to post gains for a second day on Thursday, as Apple Inc. led a slide in technology shares.

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Market Snapshot

  • S&P 500 futures down 0.1% to 2168
  • Stoxx 600 down 0.2% to 349
  • FTSE 100 down 0.2% to 6847
  • DAX down less than 0.1% to 10667
  • German 10Yr yield up 3bps to -0.04%
  • Italian 10Yr yield up 1bp to 1.17%
  • Spanish 10Yr yield up 1bp to 1%
  • S&P GSCI Index down 0.7% to 359.3
  • MSCI Asia Pacific down 0.8% to 141
  • Nikkei 225 up less than 0.1% to 16966
  • Hang Seng up 0.8% to 24100
  • Shanghai Composite down 0.6% to 3079
  • S&P/ASX 200 down 0.9% to 5339
  • US 10-yr yield up 1bp to 1.61%
  • Dollar Index down 0.09% to 94.94
  • WTI Crude futures down 1.4% to $46.95
  • Brent Futures down 1.5% to $49.26
  • Gold spot down 0.2% to $1,336
  • Silver spot down 0.5% to $19.51

Global Headline News

  • Enterprise Says It Has Withdrawn Interest in Williams Merger: Enterprise says Williams showed a “lack of engagement;” Williams says Enterprise didn’t give board chance to review
  • North Korea Says Tested Nuclear Bomb, Can Miniaturize Arms: Blast was as big as 10 kilotons, South Korea ministry says
  • EU Suspends Deadline for Dow/DuPont Transaction: EC says it stopped the clock on its review of Dow/DuPont deal because cos. haven’t provided an “important” piece of information
  • Amazon Said to Seek Sports Streaming Rights From Tennis to Rugby: Prime Video service could offer live tennis, rugby matches
  • Gundlach Says It’s Time to Get Defensive as Rates May Rise: DoubleLine CIO says rates bottomed in July and are turning up
  • Wal-Mart’s U.K. Job Cuts Show How Asda Fell Behind Grocery Pack: Asda’s retail staff fell by 5% in 2015 despite store openings
  • Gilead Hires Former Roche Executive to Build China Business: co. preparing for potential launch of its blockbuster hepatitis drugs in that market over the next few years
  • Fed Urges U.S. Ban on Wall Street Buying Stakes in Companies: Goldman could be most impacted by merchant banking limit; Fed among agencies issuing long-overdue report required by law
  • Apple Tax Case Prompted by U.S. Senate ‘Tip:’ EU’s Vestager; the EU’s Apple tax probe was inspired by the U.S. Senate’s examination of Apple, EU Competition Commissioner Vestager says
  • Elon Musk Calls SpaceX Explosion Most Vexing Failure in 14 Years
  • DoJ to Start RMBS Settlement Talks W/ Deutsche Bank Next Week: Manager Magazin
  • Samsung to Sell Printer Business to HP for About 2t Won: Aju; Samsung Electronics, HP may announce deal as early as Sept. 12
  • PE Firms Team Up to Bid for CenturyLink Data Centers: Reuters
  • Canada Pension Plan Aims to Raise China Investment: Bus. Herald

Looking at regional markets, we start in Asia, where equity markets traded mixed following a lacklustre lead from the US in the wake of the ECB, while the region also digested reports of a North Korean nuclear test. Nikkei 225 (flat) traded choppy alongside JPY fluctuations and after of a seismic event near North Korea’s nuclear test site which measured a magnitude 5.3. This also weighed heavy on  the KOSPI (-1.3%), while ASX 200 (-0.9%) was led lower by gold miners. Shanghai Comp (-0.6%) was lower while the Hang Seng (+0.8%) outperformed after reports the CIRC is to allow insurers to invest in  Hong Kong through the stock connect. 10yr JGBs traded higher as a cautious tone supported demand for safety, while the BoJ were also in the market for a total of JPY 890b1n of short-to-medium term debt. BoJ Governor Kuroda said that no special instructions were received from PM Abe and they did not discuss foreign bond purchases during a lunch meeting today.  Chinese reported that August CPI rose only 1.3% Y/Y, below exp. 1.7%, and missing the lowest estimate, also lower than the July 1.8% print; PPI declined by -0.8% Y/Y vs. exp. -0.9%, if higher than the July -1.7% print.

Top Asian News

  • China Sovereign Fund Eyes Asian Hedge Funds to Boost Returns: Asia hedge funds set to outperform U.S., Europe, CIC says
  • PBOC Adviser Says Yuan Should Weaken as Dollar Set to Strengthen: Capital opening-up should continue despite outflows, Fan says
  • China’s Factory Deflation Improves as CPI Muted in Profit Boost: PPI improves for an eighth month, CPI lowest since Oct.
  • SoftBank Gets $4.6 Billion in Its Biggest Yen Bond Offering Ever: Offering follows SoftBank’s completion of ARM acquisition
  • Bank of Korea Holds Key Rate Steady as Household Debt Rises: Governor Lee Ju Yeol says Friday’s decision was unanimous

In Europe, the ECB decision, or lack thereof, remain on focus amid quiet Friday morning newsflow and as such both equities and fixed income opened in the red. That being said, equities have been paring much of their opening losses since the open to trade flat by mid-morning (Euro Stoxx 50: 0%). Financials outperform on a sector breakdown, amid relief that the ECB did not put further pressure on the sector through greater easing. Deutsche Bank have seen particular strength and are among the best performers, benefitting from the aforementioned ECB news, combined with the reports that the Co. are set to settle with the US DoJ for EUR 2.4b1n, with their current legal reserves at EUR 5.4bIn. As mentioned above, fixed income markets have seen one of their busiest sessions of the summer and trade lower by almost 50 ticks and below the 164.50 level after some were left disappointed with the inaction by the ECB. Also of note, Gilts yields have now retraced the entirety of their post August BoE move

Top European News

  • Paschi Ousts CEO as Bank Revamp Is Mired by Investor Doubt: Italian Treasury says bank’s situation is under control; Viola’s replacement as CEO seen named within next few days
  • Bayer Said to Explore Sale of $1.1 Billion Dermatology Business: co. working with JPMorgan on potential disposal; Bayer considering sale as it pursues Monsanto acquisition
  • Commerzbank Weighs Split of Mittelstandsbank: Handelsblatt; split is likeliest scenario among several options, paper says
  • BASF’s Wintershall to Decide on Iran Oil Investments This Year: CEO Mehren says co. is assessing four onshore oil fields

In FX, the yen gained against all of its 16 major peers, climbing 0.3 percent to 102, although in recent trading had dipped back to 102.35 per dollar.

The yuan was down 0.2 percent in Shanghai, set for a third weekly loss.
China will allow a gradual depreciation of its currency and policy
makers should keep opening up the nation’s capital account despite fund
outflows, said Fan Gang, head of the National Institute of Economic
Research and an adviser to the nation’s central bank. The Korean won fell 0.5 percent, paring this week’s advance to 1.7 percent. The Bank of Korea kept its benchmark interest rate at a record-low 1.25 percent on Friday and said it’s prepared to intervene to curb volatility in the currency market if herd behavior is evident. The euro gained 0.1 percent to $1.1273, headed for a weekly gain of about 1 percent. The ECB refrained from adding to its unprecedented stimulus at a policy review on Thursday and Draghi said an extension of its quantitative-easing program wasn’t even discussed. About half of respondents to a Bloomberg survey conducted last week foresaw easing, with almost all the others predicting changes in October or December.

In commodities, oil fell after the biggest U.S. stockpile slump in 17 years was seen as a one-off caused by a tropical storm that disrupted imports and offshore production. West Texas Intermediate fell 1.3 percent to $47.01 a barrel, paring the weekly increase to 5.8 percent. Brent dropped 1.3 percent to $49.32. U.S. crude inventories fell 14.5 million barrels last week, the biggest decline since January 1999, according to Energy Information Administration data Thursday. Imports tumbled 21 percent as Tropical Storm Hermine moved into the Gulf of Mexico on Aug. 28, disrupting shipping and output. The energy ministers of Saudi Arabia and Algeria will meet with OPEC’s top official in Paris on Friday as major oil producers continue to lay the ground for a potential deal to bolster crude prices in Algiers later this month. Gold fell for a third day percent, dropping 0.2 percent to $1,336.25 an ounce. Copper slid 0.6 percent and aluminum declined 0.3 percent, along with most other industrial metals, amid persistent concerns about the strength of demand in China, the world’s top metals buyer.

On today’s calendar, it’s quiet in the US this afternoon with the final estimate of wholesale inventories for July the only data of note. Away from the data we do get some more Fedspeak, with Rosengren due to speak at an event in Boston and Kaplan scheduled to take part in a Q&A session at a conference in Austin. Today EU finance chiefs and central bankers also gather for a two-day meeting in Bratislava so it’ll be worth seeing if anything interesting comes from that.

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Bulletin Headline Summary from RanSquawk and Bloomberg

  • European equities enter the North American crossover relatively flat in what has been a session void of pertinent macro newsflow
  • Asian equities traded tentatively amid reports of further North Korean nuclear missile tests
  • Looking ahead, highlights include Canadian employment data and comments from Fed’s Rosengren
  • Treasuries slightly lower on the long-end while world equity markets, oil and precious metals drop as central banks’ question the benefits of further monetary easing.
  • Japan’s sovereign debt is suffering its worst rout in 13 years, handing investors bigger losses over the past two months than any other government bonds amid speculation the Bank of Japan plans to change its asset-purchase strategy
  • DoubleLine Capital CIO Jeffrey Gundlach said it’s time for fixed-income investors to prepare for rising interest rates and higher inflation
  • Investors scooping up the riskiest emerging-nation corporate bonds in an indiscriminate rush for yield are facing a growing clamor of warnings
  • China’s $814 billion sovereign wealth fund may increase investments in hedge funds in Asia, betting they can beat rivals trading in developed markets
  • China’s factory-gate deflation eased to the least in four years while consumer prices remain muted, giving policy makers fresh evidence that the price outlook is stabilizing along with demand
  • Euro-area finance ministers signaled that the European Union would become more unified as it looks for fresh ways forward in the wake of a planned U.K. exit from the bloc
  • As he tries to jump start the economies of today, European Central Bank President Mario Draghi is punching holes in the retirements of tomorrow
  • Sales of bonds from companies other than financial firms worldwide have exceeded $75 billion this week, the most since May
  • North Korea conducted its fifth nuclear test on Friday, the anniversary of the reclusive nation’s founding, and said it was now able to produce miniaturized nuclear arms

US Event Calendar

  • 7:45am: Fed’s Rosengren speaks in Boston
  • 9:30am: Fed’s Kaplan speaks in Austin, Texas
  • 10:00am: Wholesale Inventories, July, est. 0.1% (prior 0%); Wholesale Sales, July, est. 0.2% (prior 1.9%)

* * *

DB’s Jim Reid concludes the overnight wrap

There weren’t many winners in markets yesterday as the ECB and Draghi came and went and in the process disappointed slightly. As widely expected policy was held steady but more significantly there was no announcement of a QE extension which had divided opinions in the market. In fact Draghi went as far as to say that the ECB didn’t have any discussion as to an extension of the asset-purchase plan and instead chose to focus much of his press conference on ensuring that the current programme continues to be implemented and operated smoothly. That said he did also say that the ECB committee have a full mandate to redesign QE and that they are forming working groups to evaluate easing options. As DB’s Mark Wall noted perhaps the most significant news from the press conference was Draghi’s recognition of the bond shortage problem for the first time, which he has previously dismissed as a concern. Mark notes that tasking the committees is not a commitment to extending QE, but extending QE would require some complementary policy moves to ensure sufficient eligible assets, and so fits in with his view that the ECB will announce a 9-12 month extension of QE in December and accompany this with moves on eligible assets. In terms of staff forecasts, growth was lowered in 2017 and 2018 to 1.6% (from 1.7%) while growth this year was raised one-tenth to 1.7%. Inflation continues to be pegged for 0.2% this year while the 2017 forecast was lowered one-tenth to 1.2%.

Staying with central banks, despite market pricing being at 28% for a Fed hike this month it was interesting to read last night that DB’s Peter Hooper thinks it’s much closer to 50/50 than the market believes. Peter thinks a very recently added speech for this coming Monday – the day before the FOMC blackout – from the dovish Brainard may have been set up as a way to raise market expectations. There are other Fed speakers scheduled ahead of the blackout but Peter thinks hawkish comments from the normally dovish Brainard could set the scene for more aggressive hike pricing. So one to watch at the very least.
Before we recap yesterday’s price action, a quick summary of events this morning where there’s been some fairly mixed inflation data released in China. August CPI in China has printed at +0.1% mom and +1.3% yoy which is a fair bit down from +1.8% yoy in July and also well below expectations of +1.7% yoy. In fact it is the lowest reading this year and the lowest since last October with a big decline in food prices to blame. There was however much better news to come from the PPI print which increased to -0.8% yoy (vs. -0.9 expected) from -1.7% last month. That’s actually the highest reading since April 2012 and continues the trend of putting the worst of the factory gate deflation in the past.

Bourses in China appear to be a bit unsure as to how to react. The Shanghai Comp initially rose, then swung to a loss, and is now back to flat. Elsewhere the big mover this morning is the Kospi (-1.62%) which tumbled on reports of seismic activity in North Korea, which has since been speculated by South Korea’s state news agency as a possible nuclear test. Meanwhile the Nikkei (-0.19%) and ASX (-0.78%) are also lower, while the Hang Seng (+0.67%) is up. Over in the rates market this morning yields have marched higher reflecting the post-ECB selloff yesterday.

Indeed it was sovereign bond markets which bore the brunt of the ECB disappointment yesterday. 10y yields in Germany (+5.5bps), France (+6.5bps), Netherlands (+5.8bps), Italy (+7.4bps), Spain (+5.7bps) and Portugal (+9.0bps) were sharply higher. Gilt (+7.9bps) and Treasury (+6.0bps) yields were also dragged up, while the initial reaction for the Euro was to strengthen +0.78%. The single currency did however pare most of those gains into the close however to finish with a much more modest +0.19% gain by the close.

Meanwhile European equities had been treading water leading into the ECB, but the headlines saw indices spike lower with the Stoxx 600 in particular down as much as -1.17%. A bounceback for financials and energy names however – the former supported by the leg up in yields and the latter by a big rally for oil – helped the index finish -0.33% while peripherals actually recovered to finish with reasonable gains (IBEX +0.95% and FTSE MIB +0.48%). Across the pond it was a similar story with the S&P 500 ending -0.22%. That continues this remarkable streak for the S&P which has seen it fail to close up or down more than 1% for 43 consecutive sessions now.

Oil was the other big story yesterday. Indeed WTI rallied +4.66% to close at $47.62/bbl and the highest level in nearly two weeks. That came following the latest US crude inventory data with the EIA reporting that inventories fell a remarkable 14.5m barrels last week in what is the biggest drop since January 1999 and the second biggest with records going back to 1982. A WSJ survey showed analysts had expected a 500k increase. There does appear to be some scepticism over the data however with much of the chatter attributing it to the tropical storm and hurricane which swept through the Gulf of Mexico at the end of August. So we’ll have to see what the next reading shows.

Just wrapping up the small amount of data yesterday. In France there was no change in the August business sentiment reading of 98 which also matched expectations. Meanwhile in the US we learned that initial jobless claims declined 4k last week to 259k which happens to be the lowest level in seven weeks. The four-week average is now running at 261k. Finally consumer credit printed at $17.7bn in July (vs. $16bn expected) which puts it at a +5.8% annual rate.

Looking at today’s calendar, this morning in Europe we kick off with Germany where the July trade numbers are due to be released. Shortly after this we swing over to France for the July industrial and manufacturing reports before here in the UK we get the latest trade numbers. It’s quiet in the US this afternoon with the final estimate of wholesale inventories for July the only data of note. Away from the data we do get some more Fedspeak. At 1.15pm BST Rosengren is due to speak at an event in Boston and at 2.30pm BST Kaplan is scheduled to take part in a Q&A session at a conference in Austin. Today EU finance chiefs and central bankers also gather for a two-day meeting in Bratislava so it’ll be worth seeing if anything interesting comes from that.