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Futures Flat As Gasoline Soars On Harvey Devastation, Rising Euro Sends European Stocks Lower

Courtesy of ZeroHedge. View original post here.

With billions in economic losses and unknown supply chain shocks to come following devastating and historic flooding in Texas, S&P futures are virtually unchanged (down less than 0.1% at time of writing) while European and Asian shares are modestly lower as oil was little changed. As reported yesterday, gasoline futures surged as the greater impact of the storm that shut more than 10% of U.S. fuel-making capacity was becoming more evident. The Bloomberg Dollar Spot Index fell to its lowest since January 2015 after Janet Yellen and Mario Draghi refrained from discussing monetary policies at Jackson Hole on Friday.

The US dollar continued to slip against the euro after central bankers’ comments at Jackson Hole provided little reason for a change in this year’s trend. U.S. Treasury futures were steady ahead of a combined $60 BN worth of two- and five-year debt auctions and Friday's payroll numbers. USDJPY hovered above 109.00 handle, with initial main support at 108.60, the low on Aug. 18. EURUSD little changed after rallying initially, but failed to break above 1.20 handle. European bond markets were waiting for impetus as a bank holiday in the U.K. weighed on trading volumes.

Unlike the US, European stocks started the week on the back foot, with every sector retreating following Friday’s euro surge. the European Stoxx 600 index declined following a surge in the euro towards $1.20 after Draghi did not express concern about the currency’s recent rally at Jackson Hole as some analysts had expected. The Euro Stoxx 50 falls 0.7%, while the exporters-heavy DAX drops 0.7% and France’s CAC falls 0.7%; U.K. markets are closed for public holiday. Germany’s DAX Index fell 0.5 percent to the lowest in a week.

“The strong euro is weighing on European stock markets,” said London Capital Group analyst Ipek Ozkardeskaya. “Tapering talks could further demoralise stock traders in the run-up to the ECB verdict (next month). IT stocks are again on the chopping block.”

Media shares were among the big losers in the Stoxx Europe 600 Index. European outperformers include Bolsas y Mercados Espanoles +0.9%, Novo Nordisk +0.8%, Steinhoff International Holdin +0.8%, Swiss Prime Site AG +0.7%, Michelin +0.7%, Aryzta AG +0.7%. Underperformers include: EMS-Chemie -1.9%, Vivendi -1.5%, Stora Enso -1.5%, SAP -1.4%, UPM-Kymmene OYJ -1.4%, Infineon -1.2%, SCA -1.1%, Dialog Semiconductor PLC -1.1. German 10yr yields are little changed at 0.38%, while the Italian benchmark yield is little changed at 2.1%. The currency trends from Friday continue with the Euro spot up another 0.06% at 1.1931, as the dollar index declines another 0.31% to 92.454.

UK PM May has pencilled in August 30th 2019 as the date she will quit as PM, giving her two years to see the UK through Brexit.

In Asia, South Korea’s won led gains among emerging Asian currencies as broad dollar weakness more than offset the impact of more missile tests from Pyongyang on Saturday morning. The MSCI EM Asia Index of shares rose for a sixth day, up 0.1% while government bonds were mixed.  The yen led gains among major currencies even as Bank of Japan Governor Haruhiko Kuroda vowed to maintain an accommodative monetary policy. “We can expect the upside momentum in Asian currencies to continue, at least in the near term,” said Peter Chia, an FX strategist at United Overseas Bank Ltd. in Singapore. “However, we still maintain our view of slightly weaker Asian currencies from now till end-year. The upcoming announcement on U.S. balance-sheet reduction in September should trigger a meaningful rebound in the dollar."

As noted on Friday, the latest tapering by the BOJ, when it cut purchases in the 5-to-10 year bucket has not had an adverse impact on JGB yields, with 10Y yields sliding again to 4 month lows, down to 0.1% and on the verge of turning negative once again.

Among the more notable Asian events, the onshore yuan rose, while 10-year bonds fell as the Shanghai Composite Index continued its recent advance above 3,300, rising 0.9% to a 20 month high of 3,362.65 after a series of strong earnings. On Monday, the PBOC set the strongest yuan fixing in a year. The onshore yuan extended last week’s gain above 6.65 per dollar after the central bank set the reference rate at the strongest level in a year and the greenback tumbled in late trade Friday. At the same time, the CNY advanced 0.31% to 6.6277 per dollar, set for strongest close since August 2016. reported that in its latest crackdown on bitcoin and other virtual currencies, China may regulate offerings of new crypto-currencies. Early data show China manufacturing and smaller businesses strengthened while picture is slightly dimmer for sales managers and steel sector. Over the weekend, Chinese Industrial Profits rose Y/Y 16.5%, down from 19.1% previously; the slowest growth in 3 months.

As Bloomberg recaps the recent action, with the much-anticipated – and disappointing – Jackson Hole meeting now behind them, investors this week will be eager for signs of constructive progress in U.S. politics after comments on Friday from Gary Cohn, director of the National Economic Council, cut through much of the gloom that had been generated by recent White House scuffles. Cohn said in an interview he expects tax reform to pass this year and that he didn’t intend to resign over the president’s reaction to riots in Virginia.

Over the weekend, North Korea conducted another missile test in which it launched short-range projectiles into the sea which travelled around 250km. Separately, there were some reports on social media that suggested that South Korea had said that North Korea has completed preparations for a nuclear test.

Treasury traders face a week headlined by Tuesday’s auction of bills that mature Sept. 29. They will then look forward to inflation and payrolls data that will be key for determining the Fed’s next moves. Federal Reserve Bank of Cleveland President Loretta Mester urged her colleagues to look past recent weak inflation data and to stick to their gradual pace of lifting interest rates.

In currencies, the Bloomberg Dollar Spot Index dipped less than 0.05 percent to the lowest in more than two years. The euro increased 0.1 percent to $1.1935, the strongest in more than two years. The British pound rose 0.1 percent to $1.2899, the strongest in a week.

In rates,  the yield on 10-year Treasuries increased less than one basis point to 2.17 percent. Germany’s 10-year yield gained one basis point to 0.39 percent.

In commodities, gasoline futures soared as much as 6.8 percent as the storm, which came ashore on Friday, continued to batter the state. They were last up 4.5 percent. The impacted region is home to a quarter of U.S. crude oil refining capacity and some areas are expected to receive a year’s worth of rainfall in a week. At least two people have died so far. Harvey has knocked out a quarter of oil production from the Gulf of Mexico, prompting fears it could overturn years of excess U.S. oil capacity and low prices.

“Although the full impact of the storm’s damage is yet to be determined, the markets expect the impact will be felt globally and affect energy markets for many weeks,” an analyst at FxPro said in a note.

U.S. economic growth more than halved in the quarter after Hurricane Katrina mauled Louisiana in August 2005, but bounced back by early 2006 as reconstruction began and gasoline prices moderated. After surging on Friday, oil prices were mixed on Monday as markets tried to gauge Harvey’s impact on oil production and refinery demand.

the biggest move was the surge in gasoline while oil was unchanged as flooding from Tropical Storm Harvey inundated refining centers along the Texas coast, shutting more than 10% of U.S. fuel-making capacity. West Texas Intermediate crude dipped 1.2 percent to $47.28 a barrel, the lowest in more than a week. Gold rose 0.4 percent to $1,296.73 an ounce.

Economic data include wholesale inventories and Dallas Fed manufacturing activity. Catalent, Parexel and Prospect Capital are among companies reporting earnings.

Market Snapshot

  • S&P 500 futures down 0.1% to 2,441.50
  • VIX up 4.70% to 11.75
  • STOXX Europe 600 down 0.3% to 372.96
  • MSCI Asia up 0.1% to 160.62
  • MSCI Asia ex Japan up 0.01% to 531.65
  • Nikkei down 0.01% to 19,449.90
  • Topix up 0.2% to 1,600.12
  • Hang Seng Index up 0.05% to 27,863.29
  • Shanghai Composite up 0.9% to 3,362.65
  • Sensex up 0.4% to 31,736.56
  • Australia S&P/ASX 200 down 0.6% to 5,709.89
  • Kospi down 0.4% to 2,370.30
  • German 10Y yield rose 0.9 bps to 0.389%
  • Euro up 0.09% to $1.1935
  • US 10Y yield up 0.1% to 2.17%
  • Italian 10Y yield fell 1.0 bps to 1.809%
  • Spanish 10Y yield unchanged at 1.609%
  • Brent futures down 0.02% to $52.42/bbl
  • Gold spot up 0.4% to $1,296.72
  • U.S. Dollar Index down 0.3% to 92.42

Top Overnight News

  • WTI crude reverses Friday’s increase; floodwaters overwhelmed swathes of Houston as Tropical Storm Harvey continued to inundate southeastern Texas, pounding America’s fourth-largest city with unprecedented levels of rainfall and crippling the core of the U.S. energy industry.
  • President Donald Trump is planning to kick off one of the most important sales pitches of his presidency this week — getting Americans fired up about rewriting the U.S. tax code. But there’s no plan to sell.
  • Floodwaters overwhelmed swathes of Houston as Tropical Storm Harvey continued to inundate southeastern Texas, pounding America’s fourth-largest city with unprecedented levels of rainfall and crippling the core of the U.S. energy industry
  • Gasoline surged to the highest in two years and oil declined as flooding from Tropical Storm Harvey inundated refining centers along the Texas coast, shutting more than 10 percent of U.S. fuel-making capacity
  • Uber Technologies Inc. will appoint Expedia Inc.’s Dara Khosrowshahi to run the global ride-hailing leviathan, two people familiar with the matter said. He’ll succeed co-founder Travis Kalanick, who led the firm to $20 billion in annual bookings before scandals forced him out
  • Under pressure from its banks, Toshiba Corp. is racing to resolve several final disagreements with Western Digital Corp. before it can complete a deal to sell its chips business to the U.S. company and other investors by the end of August, according to people familiar with the matter
  • Athene Holding Ltd., untested at running pension funds, wants to compete with the industry’s oldest and biggest firms
    More investors are joining the cast of Wall Street veterans from Jeff Gundlach to Ray Dalio in warning that risky assets are overvalued
  • Samsung to Invest $7 Billion in China Flash-Memory Production
  • China Allows Merger to Create World’s Largest Power Company
  • Traders Ditch Risk as Dalio to Gundlach Warn on Emerging Markets
  • Cohn or Yellen? Bond Managers of $1 Trillion Say Same Difference
  • CBS Squeezes Out Murdoch to Snap Up Ailing Australia Network
  • Altice to Buy Back Up to $1.2 Billion in Stock, Will Eye M&A
  • DLF Founders Sell Stake in Rental Assets to GIC for $1.4 Billion
  • Toshiba Is Said in Talks on Last Hurdles in Western Digital Deal
  • Trump’s Pivot to Taxes Is Fraught With ’Pitfalls Everywhere’
  • Trump’s Afghan Plan Poised to Fail, Pakistan Premier Says
  • White House Sanctions May Scare Off Venezuela Vulture Investors

Asia stocks traded mixed with most bourses dampened after a lack of fireworks at last week's Jackson Hole symposium, while participants also digested North Korean concerns and the devastation from tropical storm Harvey. ASX 200 (-0.6%) and Nikkei 225 (unch) traded subdued with the former underperforming amid weakness in its largest-weighted financials sector, as CBA shares declined on reports the APRA is to undertake an inquiry into the governance at the bank. KOSPI (-0.2%) was also cautious on further provocation by North Korea. Chinese markets bucked the trend as the Shanghai Comp. (+0.9%) advanced and Hang Seng (+0.1%) briefly broke above 28,000 for the 1st time since 2015, amid earnings including Sinopec which reported an over 40% increase in H1 net. 10yr JGBs initially gained amid the cautious risk tone in the region and with the BoJ also present in the market for JPY 710bln of government debt concentrated in the short-end, although prices then failed to sustain the upside and gradually returned flat.

Chinese Industrial Profits (Jul) Y/Y 16.5% (Prey. 19.1%); slowest growth in 3 months.

Top Asian News

  • Kuroda Sees Yield-Curve Control Allowing BOJ to Buy Fewer JGBs
  • Kuroda Cautions That Japan Can’t Maintain Current Growth Rate
  • India, China End Months-Long Military Face-Off in Himalayas
  • Wanda Drops on Reports of Chairman Wang Stopped at Airport
  • Nomura Hires Citigroup’s Rob Webb as Head of Equity Products
  • Singapore Says Sept. 23 Elections If Presidential Post Contested
  • World’s Second-Largest Stock Market Is Getting Interesting Again

European equity markets are lower with all the sectors trading in negative territory. Reinsurers in Europe are lower after Hurricane Harvey battered Houston and other cities in Texas, although Hannover Re have said they do not expect damage from the Hurricane to be as large as that seen from Katrina. European bonds have opened the week with little fanfare, as the German benchmark lOy yield is mostly unchanged at 0.38%. French yields are higher by over a basis point as Macron's popularity continues to decline, according to recent polls. Italian yields are lower by over a basis point as Italian economic confidence hits its highest level since the financial crisis.

Top European News

  • May Under Pressure From Labour and EU as Brexit Talks Resume
  • Macron Dreams of Start-Up Nation But First He Must Face the Past

In currencies,  the USD remains under pressure although as EUR/USD reached its highest level since January 2015 after the Jackson Hole Symposium. Draghi's comments were light on details but markets have viewed his refusal to comment on the strength of the EUR as an opportunity to push the pair higher. Cable also gapped higher at the open, although this has been due to general USD weakness rather than any UK specific news, given the public holiday in the UK today. USD/JPY has also drifted lower but has so far found support ahead of 109.00 where there are said to be strong domestic bids.

In commodities, Hurricane Harvey caused a spike in gasoline futures, up as much as 6% at the open of electronic trade, as refining capacity along the east coast was shut down. Platts estimates that 2.2mln bpd of capacity is shut or in the process of being shut because of the flooding. The WTI/Brent spread also continues to widen with supply disruptions in Libya continuing to support Brent as the Sharara and El Feel oil fields remain shut.

US Event Calendar

  • 8:30am: Wholesale Inventories MoM, est. 0.3%, prior 0.7%
  • 8:30am: Advance Goods Trade Balance, est. $64.5b deficit, prior $63.9b deficit, revised $64.0b deficit
  • 8:30am: Retail Inventories MoM, prior 0.6%, revised 0.6%
  • 10:30am: Dallas Fed Manf. Activity, est. 16.8, prior 16.8

DB's Jim Reid and his team concludes the overnight wrap

No update from Jim yet but I know that he will be over the moon that the likely last game Liverpool have played before the twins are due was a 4-0 hammering versus my beloved Arsenal side. A gritted teeth congratulations knowing that he is reading this with a big grin. The bad news though is that the twins have probably missed the peak for Liverpool this season. Although maybe that is a good thing.

A bit like Arsenal yesterday, Friday’s Jackson Hole speeches from Yellen and Draghi ended up being something of an anticlimax too. In fact the most interesting aspect of President Draghi’s speech was that he voiced no concern about the recent appreciation in the Euro at all. That gave the green light for the single currency to surge again on Friday evening and it closed up +1.06% at 1.1924 versus the Greenback for its highest close since 5th January 2015. It has now also finished firmer in six of the last seven weeks. This morning the Euro initially opened another +0.33% higher but has since pared those gains as we go to print. On Friday there was some mention from the ECB President of still not seeing evidence of a self-sustained convergence of inflation towards the ECB’s objective but in reality that was nothing new either.

So markets now have a bit of breathing room until the ECB’s governing council meeting on September 7th. With regards to Fed Chair Yellen, her speech was equally dull in all honesty. M uch of the focus was on her comments around warnings about dismantling some of the post-crisis financial regulation but really there wasn’t much in it for markets. There had been some chatter in the market leading into the speech that Yellen could choose to address the recent easing in financial conditions but this didn’t end up being the case.

In the end then there was no Sintra repeat although at least both Draghi and Yellen remained co-ordinated, only this time it was a co-ordinated silence. Looking ahead, with the Jackson Hole now out of the way, it feels like a lot of the focus is already turning to the debt ceiling debate which will surely only ramp up in the next couple of weeks. In case you were away last week, we had President Trump warn that he was prepared to shut down the government should Congress not commit to paying for the Mexico border wall. The President also attacked two senior members of his own party – House Speaker Ryan and Senate  majority leader McConnell – over the topic while Fitch warned about a possible sovereign rating implication. So expect this saga to rumble on particularly as political negotiations have a habit of going to the wire.

On a related note an interesting test this week for the bond market might be Tuesday’s 4-week bill offering given that the maturity lines up nicely with the September 29th date that Treasury Secretary Mnuchin called critical for raising the ceiling. Mnuchin also said on Friday that he is 100% certain that the ceiling will be lifted so this should be an interesting test given that last week we saw a bit of selling pressure in that part of the curve.

We’ve also got some interesting data to come towards the back end of the week as you’ll see in the week ahead at the end. Of most significance for the Fed will be the PCE inflation data on Thursday, while on Friday we’ll then get the August employment report. It’s worth noting that those releases will also be out just before the US heads into a 3-day weekend next week. So it could be a busy week. Closer to home the next round of Brexit negotiations are due to kick off today. The news over the weekend is that the Labour Party have voiced their backing for the UK remaining in the single market for a transition period after leaving the EU. There is some talk now of a potential parliamentary vote when MPs return in early September and with PM May suffering from a divided cabinet it is one to keep an eye on.

In terms of other weekend news, the Cleveland Fed President Mester reiterated her thoughts on the US economy. On inflation, she views the current softness as largely one-off and noted “I would be worried if the low inflation were telling us that aggregate demand was really falling off…I don’t see that in the data..” and “I do expect inflation to remain below 2% over the next couple of months… and then eventually rise up to our 2% goal”. On the balance sheet unwind, she expects it to begin “soon” and doesn’t anticipate any disruption in the financial markets. Overall Mester also signalled that she favours a “gradual” pace of hikes by the Fed.

Overnight in Asia markets are a bit mixed with newsflow relatively thin. The Nikkei (-0.08%), ASX (-0.66%) and Kospi (-0.40%) are weaker (the latter not being helped by the news of more missile launches in North Korea), but the Hang Seng is up +0.56% following solid corporate results and Chinese bourses are up 0.9%-1.4% as we type. The big mover in commodity markets has been Gasoline which is up over +5% reflecting the impact of Tropical Storm Harvey over the weekend in Texas.

Recapping markets on Friday quickly. US equities closed slightly higher following the two speeches and Trump’s top advisor Gary Cohn noting that tax reforms are likely to be done by the end of the year and that he has no intention to resign. The S&P closed +0.17% higher and the Dow nudged up +0.14%. European markets were broadly softer, with the Stoxx 600 closing -0.12%, although these moves preceded Draghi’s speech at NY. Elsewhere bond yields fell modestly in the US (UST 10y -3bp) but were little changed in Europe. In commodities WTI oil was up +0.9% on Friday, following concerns about the impact of the  aforementioned storm on the refining hubs at Texas (accounts for c.10% of US refining capacity). Gasoline was little changed.

In terms of the macro data on Friday, in the US, the core durable goods orders (ex-transportation items) for July was slightly higher than expected at 0.5% (vs. 0.4% expected), while the capital goods new orders (ex-aircraft) were in line at 0.4%. Over in Germany, the final readings for 2Q GDP were confirmed at 0.6% qoq and 2.1% yoy, supported by a solid contribution from domestic demand (+2.8% yoy). The August IFO expectation index were higher than expected at 107.9 (vs. 106.8), which is the best reading since January 2014 and one that suggests that stronger GDP growth lies ahead, while the business climate index was also slightly higher at 115.9 (vs. 115.5 expected). In France, the August consumer confidence indictor was in line at 103, with the index now 5pts below its post-election peak, but still 4pts higher than where it ended 2016.

To the week ahead now. Today kicks off with the Eurozone’s M3 money supply stats for July. Then Italy’s August confidence indicators for consumer, manufacturing and the broader economy are due. Over in the US, there is the Dallas Fed manufacturing activity index for August and July wholesale and retail inventories data. Onto Tuesday, Japan’s July jobless rate and UK’s August Nationwide house price index will be out in early morning followed by Germany’s consumer confidence index. Then France’s preliminary 2Q GDP stats and consumer spending for July are due. In the US, there is the Conference Board consumer confidence index for August and the June Case-Shiller house price indices. Turning to Wednesday, Japan’s July retail sales will be due in the early morning. Then we have Germany’s inflation readings for August and Italy’s July PPI data. In the UK, the July mortgage approvals and data on money supply as well as net credit lending are due. Elsewhere, the Eurozone’s August confidence indicators for business, consumer and the economy  are also due. Across the pond, US’s ADP employment change for August and second readings for 2Q GDP and core PCE are due. For Thursday, China’s August manufacturing PMI and Japan’s July industrial production, vehicle production, housing starts and construction orders will be due in early morning, along with UK’s consumer confidence data and Germany’s July retail sales. Then we have the July unemployment rate for the Eurozone and Italy, along with the August unemployment change stats for Germany. The inflation data for the Eurozone, Italy and France are also due. Over in the US, the July PCE, personal income /  spending data, initial jobless claims, continuing claims, pending home sales and Chicago business barometer are all due. Finally on Friday, China’s caixin manufacturing PMI for August and Japan’s capital spending for 2Q and final reading for Nikkei manufacturing PMI will be due in early morning. Then we have the final markit PMIs for Germany, Eurozone, UK, France and Italy. In the US, there is the August ISM manufacturing stats, unemployment rate and of the course the employment report for August, along with the July construction spending and University of Michigan confidence indicators.

Away from the data, on Monday, the next round of Brexit talks is set to start. Turning to Wednesday, the Fed’s Powell will speak. Then onto Thursday, the China President will host the 9th BRICS summit. Finally, on Friday, ECB governing council member Nowotny joins a panel discussion and ECB VP Constancio will speak. Elsewhere, the second round of NAFTA negotiations begins in Mexico City.

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