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All Eyes On Draghi: Futures Flat, Euro Surges, Dollar Slides; Yuan Breaches 6.50

Courtesy of ZeroHedge. View original post here.

S&P futures are flat, still spooked by the WSJ's report that Gary Cohn will not be the next Fed chair, while both European stocks and Asian shares gain in a overnight session on edge in which everyone is looking forward to today's main risk event: the ECB meeting and Draghi press conference due in under two hours. The dollar continued to weaken against most G-10 peers as tensions over North Korea, concerns over Stan Fischer's resignation and the increasingly cloudy Fed outlook outweighed positive sentiment from the US debt ceiling extension.

Summarizing the traders' plight, as one big bank puts it this morning, "markets don’t know where to look" – between unexpected announcements from the Fed, surprise hikes, US political developments and yet more last minute ECB sources, "there’s a sense of manic markets", guaranteeing continued choppiness and headline trading.

Sentiment yesterday was defined by President Donald Trump’s surprising deal with Democrats in Congress to raise the U.S. debt limit and provide government funding until Dec. 15, embracing his political adversaries and blindsiding fellow Republicans in a rare bipartisan accord. There was some disappointment the deal had been so short term. “The deadline on the debt ceiling has been extended just by three months so it will come back to haunt markets again later this year. Still, markets liked it as we don’t have to worry about it for now,” said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui Asset Management. Traders also remain alert to a potential escalation of North Korea risks amid concerns Pyongyang may fire a ballistic missile. Trump said that military action against the country wasn’t his first choice as South Korea moved to bolster its missile shield. Meanwhile, Fischer’s early departure, effective next month, adds to uncertainty about Fed leadership, given that Janet Yellen’s term as chair expires early next year.

The Stoxx Europe 600 Index rose 0.3% as a fifth day of gains in auto stocks helped German shares outperform a sluggish open for European equities with banks under pressure before the much-awaited ECB meeting, while miners declined as the rally in industrial metals stalled. Europe is on edge ahead of ECB President Mario Draghi who is expected to lay the groundwork to wind back its asset purchase program, though few investors expect to see a clear framework just yet. According to a report on Wednesday, the Governing Council has been presented with documents outlining multiple scenarios for adjusting quantitative easing, according to euro-area officials familiar with the matter. Ahead of the ECB meeting, Euro 2-week vol spiked to the highest since April.

Despite uncertainty about what Draghi will say, the EUR/USD pushes through yesterday’s high, trading at 1.1978 last. The euro’s dramatic rise this year is causing discomfort in part of the euro zone: a fourth day of gains took the common currency back above $1.1950 against the dollar while a broad tick higher in European bond yields pushed 10-year German debt up 2 basis point to 0.36 percent and Spanish and Italian paper to 1.45 and 2 percent respectively.

“Most people are on the same page that the ECB will do something to reduce their accommodation (soon),” said JP Morgan Asset Management Strategist Nandini Ramakrishnan, although nobody is willing to say when.  “We don’t expect them to announce the start of tapering this meeting, but we do expect them to give us an idea they will start in January. The details are more likely to come at the October meeting,” she added.

All the economic activity signals suggest it should take its foot off the gas, but the 13 percent surge of the euro already this year is playing havoc with its sub-target inflation outlook and it will want to step lightly for fear of compounding the problem with another exchange rate jump.

Meanwhile, in Asia, the Topix index rose 0.4 percent at the close in Tokyo, while South Korea's KOSPIwhich has been burdened by tensions over North Korea, jumped 1.2 percent too, on course to mark its biggest gain in four months amid signs that major powers were talking intensively on the situation. Australia’s S&P/ASX 200 Index was flat. Hong Kong’s Hang Seng Index fell 0.3 percent as Chinese indexes fluctuated. The MSCI Asia Pacific Index climbed 0.4 percent.  Speaking in Russia, South Korean President Moon Jae-in said he was having discussions with the leaders of Russia, Japan and the United States and that there would be no war on the peninsula.

As the dollar pounding continued overnight, Canada’s dollar held its gains, after a surprise interest rate rise on Wednesday reminded everyone that G7 monetary settings will not remain super-easy forever. It also showed the very clear implication of policy tightening right now – the Canadian dollar surged more than 2 percent at one point to its highest levels in two years.

Overnight, China’s central bank strengthens its daily reference rate for onshore yuan for a ninth day, the longest run of increases since January 2011. The PBOC raised the yuan reference rate by 0.06% to 6.5269 per dollar, extending the strengthening streak since Aug. 28 to 2%.

Meanwhile, the offshore yuan surged, sending the USDCNH below 6.50 for the first time since May 3, 2016, declining as much as 0.55% to 6.4908 per dollar Thursday, and outpacing a 0.3 percent drop in the Bloomberg Dollar Spot Index; the offshore rate climbed 0.59%. Some speculate that the PBOC may seek to slow yuan’s rally after the currency surged past 6.5 per dollar for the first time since May 2016, according to analysts.

Overnight the PBOC announced that its FX reserves increased for the 7th month in August, rising $10.8bn from end-Jul to $3.0915 trillion, however missing expectations of $3.095tn, 2.9% below Aug 2016.

S&P 500 Index futures dropped after the resignation of Federal Reserve Vice Chairman Stanley Fischer and a Canadian interest-rate increase surprised U.S. markets late Wednesday. Traders are also watching Hurricane Irma, which is headed for Florida. West Texas Intermediate crude fluctuated.

The news of the debt limit extension lifted yields on U.S. Treasuries, with the 10-year yield holding back to 2.1 percent US10YT=RR from its 10-month low of 2.054 percent touched on Wednesday. Germany’s 10-year yield increased one basis point to 0.36 percent. Britain’s 10-year yield rose two basis points to 1.024 percent.

In Commodities, oil prices maintained much of this week’s strong gains as the reopening of U.S. Gulf Coast refineries improved the outlook after sharp falls caused by Hurricane Harvey. WTI futures were at $49.07 per barrel, down 0.2 percent from late U.S. levels after having gained 3.0 percent in the previous three sessions. Brent traded at $54.11 a barrel, down 0.2 percent but still not far from its 3-1/2-month high of $54.31 touched on Wednesday. Traders are now shifting their focus to Hurricane Irma, ranked as one of the five most powerful Atlantic hurricanes in the last 80 years, which was passing over the northernmost Virgin Islands on Wednesday afternoon and expected to reach Florida at the weekend.

Traders are now shifting their focus to Hurricane Irma, ranked as one of the five most powerful Atlantic hurricanes in the last 80 years, which was passing over the northernmost Virgin Islands on Wednesday afternoon and expected to reach Florida at the weekend. Economic data on Thursday includes initial jobless claims. Dell, Barnes & Noble are due to release results.

Bulletin Headline Summary from RanSquawk

  • European equities trade higher ahead of today’s ECB policy announcement with slight underperformance in financial names
  • EUR is also seen firmer while SEK lags after the Riksbank failed to provide a hawkish tilt to their release
  • Looking ahead, highlights include ECB rate decision & press conference, US weekly jobs and DoEs

Market Snapshot

  • S&P 500 futures down 0.2% to 2,461.50
  • STOXX Europe 600 up 0.28% to 374.98
  • MSCI Asia up 0.3% to 160.58
  • MSCI Asia ex Japan up 0.4% to 530.99
  • Nikkei up 0.2% to 19,396.52
  • Topix up 0.4% to 1,598.24
  • Hang Seng Index down 0.3% to 27,522.92
  • Shanghai Composite down 0.6% to 3,365.50
  • Sensex up 0.1% to 31,707.62
  • Australia S&P/ASX 200 unchanged at 5,689.88
  • Kospi up 1.1% to 2,346.19
  • German 10Y yield rose 1.4 bps to 0.361%
  • Euro up 0.4% to $1.1961
  • Brent Futures up 0.6% to $54.52/bbl
  • Italian 10Y yield rose 2.8 bps to 1.736%
  • Spanish 10Y yield rose 0.4 bps to 1.571%
  • Gold spot up 0.3% to $1,338.10
  • U.S. Dollar Index down 0.3% to 91.99

Top Overnight News

  • Hurricane Irma is threatening to wreak havoc on Florida farmlands, menacing $1.2 billion worth of production in the top U.S. grower of fresh tomatoes, oranges, green beans, cucumbers, squash and sugarcane
  • Russian President Vladimir Putin and his South Korean counterpart Moon Jae-in said Thursday they saw the Trump administration as willing to solve the North Korean crisis through diplomacy
  • Prime Minister Theresa May’s flagship piece of Brexit legislation will be debated for the first time Thursday, giving opponents an opportunity to lay out their objections in Parliament
  • Trump is unlikely to nominate Gary Cohn as Fed chairman: WSJ
  • German industrial production stagnated in July as momentum slowed after a stellar performance in the first half of the year
  • Sweden’s Riksbank left its repo rate at -0.5% and kept the rate path intact saying that monetary policy needs to remain expansionary for inflation to continue to be close to 2%
  • U.K. house prices rise 1.1% in August, annual rate rises first time in 2017
  • N.Z. Labour Party extends lead over ruling National Party in Colmar poll
  • Trump’s Surprise Deal With Democrats Sets Up Christmas Showdown
  • U.S. Is Said to Seek a Ban at UN on Crude Oil to North Korea
  • Draghi Kicks Off QE Exit Debate He Has Long Sought to Avoid
  • Amazon Opens Largest Indian Fulfillment Center in Hyderabad
  • IBM to Invest $240 Million to Develop AI Research Lab With MIT
  • Citi Starts First Facebook Messenger Banking Chatbot Service
  • Apple, LG Said to Discuss OLED Deal For Supplies Starting 2019
  • Facebook Found Election Ad Spending Likely Linked to Russia
  • Apple-Aligned 3D-Sensing Stocks Well Placed, Deutsche Bank Says
  • P&G Told It Must Modernize, Digitize as Peltz Escalates Fight
  • SpaceX to Launch Secret Spy Craft Mission, If Weather Cooperates
  • Chevron Phillips Chemical Assessing Flood Damage at Cedar Bayou
  • ABB to Expand Industrial Robot Factory in Michigan, Reuters Says
  • Hurricane Irma Menaces Florida After Wrecking Caribbean Islands

Asia stock markets were mixed as the region somewhat failed to maintain the positive momentum from Wall St. where stocks gained after US President Trump agreed with congress leaders to pass the Harvey aid and raise the debt ceiling. This inspired early upside in the ASX 200 (flat) and Nikkei 225 (+0.2%), in which energy names coat-tailed on oil gains and telecoms outperformed as investors bought the Telstra dip. In addition, Rio Tinto was another notable gainer as shares in the mining giant printed its highest in over 6-months after the Co. boosted its ore reserve estimates by about 50% at its Kestrel coal mine, although optimism in the ASX 200 later waned and so did the gains. Hang Seng (-0.3%) and Shanghai Comp. (-0.6%) were indecisive after the PBoC refrained from its regular open market operations but then later provided funds through a 1yr medium-term lending facility. Finally, 10yr JGBs were relatively flat with demand sapped by the positive risk sentiment in Japan, and after the 30yr JGB auction showed weaker demand as the MOF sold less than planned and the b/c declined from prior. PBoC skipped open markets operations, but announced CNY 298bln via 1yr Medium-Term Lending Facility. PBoC set CNY mid-point at 6.5269 (Prev. 6.5311)

Top Asian News

  • China Foreign Reserves Rise a Seventh Month Amid Yuan Strength;China End-Aug. Forex Reserves at $3.0915T; Est. $3.0950T
  • Malaysia Holds Interest Rate at 3% as Economic Outlook Improves
  • China Cities Face Surging Funding Costs on Default Concerns
  • Hong Kong Dollar Surges Most in a Month Against Greenback
  • Japan Stocks to Watch: Japan Tobacco, Panasonic, Sekisui House
  • Onshore Yuan Rises Past 6.5 Per Dollar First Time Since May 2016
  • Ford China Aug. Sales Fall 1% Y/y to 97,863 Units

European equity markets were mostly higher in early European trade as markets look ahead to the ECB’s interest rate decision. Financials were slightly underperforming while utilities outperformed, supported by RWE and Innogy after reports in Spanish press that Iberdrola are looking at a large-scale acquisition in Europe. Bunds opened lower but have traded sideways throughout the European morning ahead of the ECB decision. The lower open came as US yields rose following the temporary extension of the debt ceiling. Peripheral spreads were steady while the Spanish Tesoro sold four lines in a relatively well-received auction while the French 10yr slipped around 10 ticks after the market absorbed the latest supply from France.

Top European News

  • French May Be Souring on Macron, But He’s All They’ve Got
  • U.K. House Prices Climb Most This Year, Bucking Recent Trend
  • German Industry Output Stagnates as Manufacturing Momentum Slows
  • Woodford Says We’ve had a Tough Couple of Months; Blames China
  • Norwegian Jumps After CFO Says Could Sell Leasing Unit, Jets
  • Euro Extends Gains as Dollar Pressured; Riskies Edge Higher
  • May’s Key Brexit Bill Set for First Debate in Parliament

In FX, the EUR strengthened across the board ahead of the ECB rate decision, although news flow and data from the Eurozone was relatively light. Some reports circulated that the ECB decision would be released after the usual time of 1345CST which led to speculation that policy change was coming, however, this was a mistake and the ECB have said the decision will be released at the usual time. The SEK weakened after the Riksbank’s rate decision where they kept interest rates and the QE programme unchanged and stated they are prepared to implement more easing if necessary. Elsewhere, CAD remains in close proximity to yesterday’s BoC-inspired gains vs. the USD, while the USD is broadly weaker across the board as USD/JPY trades circa 40 pips lower despite the risk sentiment seen in equity markets.

In commodities, WTI and Brent crude futures had been lower in early European trade as Libyan oil production has resumed from certain oilfields, including the Sharara field, which is the country’s largest. However, the impact from the recent hurricanes is still having an impact on the market. As oil refineries continue to come back online in Texas demand for crude is expected to pick up. 3.8mln bpd of refining  capacity was still shut-in on Wednesday although a number of refineries are in the process of restarting. US API weekly crude stocks (01 Sep, w/e) 2790K (Prev. -5780K).

Looking at the day ahead, there is initial jobless claims, continuing claims and final readings for Q2 nonfarm productivity due. Away from the data, in the UK, Brexit Secretary David Davis faces questions in the House of Commons about the state of Brexit talks. In the US, Cleveland Fed President Mester and NY Fed  President Dudley are schedule to speak. Elsewhere, the IMF Managing Director Lagarde, BOJ Deputy Governor and BOK Governor will meet for a two-day conference on growth in Seoul.

US Event Calendar

  • 8:30am: Initial Jobless Claims, est. 245,000, prior 236,000; Continuing Claims, est. 1.95m, prior 1.94m
  • 8:30am: Nonfarm Productivity, est. 1.3%, prior 0.9%; Unit Labor Costs, est. 0.3%, prior 0.6%
  • 9:45am: Bloomberg Consumer Comfort, prior 53.3
  • 12:15pm: Fed’s Mester Speaks on Economic Outlook and Monetary Policy
  • 7pm: Fed’s Dudley Speaks on U.S. Economic Outlook, Monetary Policy
  • 8:15pm: Fed’s George Speaks on the Economic Outlook

DB's Jim Reid concludes the overnight wrap

It’s amazing what a difference a day makes. US politics returned to be the dominant driver in markets again yesterday following the news that President Trump had reached an agreement with the Democrats to kick the debt limit can firmly into the month of December

Before we jump into that in more detail though, looking ahead today is all about the ECB with the policy meeting outcome scheduled for 12.45pm BST and Draghi’s press conference due about 45 minutes later. As we noted on Monday we aren’t expecting any policy announcements. It’s well known that a QE exit step is expected in the next few months so any hints on that will be closely watched. Our economists expect the exit signal to be weak today (their expectation is a dovish October announcement) given concern about market overshooting. Indeed they expect the ECB to leave the current rhetorical framework “confidence, patience, persistence and prudence” largely intact today while adding a mild verbal warning that the Euro exchange rate is “important to growth and inflation”. Indeed the extent to which Draghi jawbones the  currency today is likely to be the most important driver for the ECB outlook and he won’t need to be reminded that the Euro is up +3.6% since the last policy meeting and up +13.4% YTD.

Interestingly, just as Europe was heading for the doors last night, a Bloomberg article hit the screens suggesting that policy makers have already been given a first look at various QE scenarios for 2018. The crux of the article was that the governing council have been presented with multiple scenarios without going into further detail aside from suggesting that different combinations for the size and duration of purchases were made. The article also suggested that a decision doesn’t look likely before the October 26th meeting which isn’t a great surprise. The article did also suggest that officials “may talk about altering their  forward guidance on interest rates” and that ECB staff “slightly lowered their inflation forecasts for 2018 and 2019”. Without knowing just how much these forecasts are tweaked it’s probably too early to read into those factors, although if the use of the word “slight” is a clue then maybe this shows that the ECB isn’t hugely concerned about the currency. We should know in about 6 to 7 hours.

Back to the big news across the pond now where just after that ECB article hit, the White House announced that President Trump had agreed to a deal initially proposed by the Democrats that will see a three-month government spending and debt limit extension added to a hurricane relief bill. So in other words this now means that the debt limit can has been kicked back to December 15th. Prior to that news House Speaker Ryan had said in the morning that the Democratic proposal for a three-month extension was “unworkable” and “ridiculous”. It has since emerged that Trump also went against the will of Treasury Secretary Steven Mnuchin and Senate Majority leader Mitch McConnell who both wanted a longer extension. Unsurprisingly T-Bills maturing on October 5th and October 12th had a field day, rallying -16.5bps and -13.4bps respectively, however December T-Bills were as much as +8.7bps higher in yield intraday. Longer dated bonds were only modestly weaker with 10y Treasury yields finishing +4.5bp higher at 2.105%. Risk assets took the news well with the S&P 500 bouncing back to a +0.31% gain. Gold closed -0.41% lower.

So while this clears the runway for a few months and removes a potential near term risk for markets it was fairly amazing to see Trump outright defy Republican leaders in Congress. It also begs the question of whether we could see Trump do the same in future deals. It’s worth keeping in mind too that the December Fed meeting is scheduled for the 12th and 13th, so two days prior to the deadline. A lot can change between now and then but this certainly ups the uncertainty factor to that meeting.

On a related note, the big news over at the Fed yesterday was the announcement that Vice-Chair Stanley Fischer had resigned, taking effect next month. Fischer was already scheduled to step down in June next year however the acceleration of his resignation means that the Fed will now be competing with the loss of another senior hawkish member (or at least the hawkish side of centre). Notably, this means that the Fed is left with four vacant seats on the board which surely adds another cloud to the outlook. How quickly Fischer is replaced will be determined by President Trump. With question marks still around Janet Yellen when her term as Chair expires in February, there appears to be more questions than answers right now.

Wrapping up the remaining central bank news from yesterday, there was a reasonable surprise hike from the Bank of Canada which raised the benchmark rate by 25bps to 1%. Canadian 2y bond yields surged 10.1bps by the close while the CAD rallied +1.20% for its strongest day in nearly two months. Only 6 of 26 economists had expected the move this month. However, the BoC’s action was mainly a surprise for its timing rather than substance as most commentators, including DB’s Brett Ryan, had expected the BoC to take this step next month. The BoC justified the move by noting that stronger than expected data had  supported the Bank’s view that domestic growth is becoming more broadly-based  and self-sustaining. Looking ahead, the BoC noted that “future monetary policy decisions are not predetermined and will be guided by incoming economic data and financial market developments as they inform the outlook for inflation”. We note the Bloomberg calculator currently suggest a 65% chance of a further rate hike in December

This morning in Asia, markets have largely followed the lead from the US in trading firmer, with Nikkei (+0.37%), Kospi (+1.07%), ASX 200 (+0.27%) and Hang Seng (+0.23%) all up. Bourses in China are little changed. The 10y Treasuries are slightly stronger this morning (-1.2bp). Elsewhere, four more US THAAD missile launchers have arrived in South Korea today, partly boosting security in anticipation for more missile tests by North Korea, potentially as soon as this weekend.

In terms of other markets yesterday, in Europe the Stoxx 600 edged up +0.06%, but the DAX rose +0.75%, led by gains from the auto secto r (+2.23%). European bond yields increased modestly, with 10y Bunds (+0.9bp), Gilts (+0.5bp) and French OATs (+1.5bp) all higher. Elsewhere, WTI Oil rose 1% as more Texan oil refineries resume operations. Both the US Dollar index and the Euro were little changed.

Moving on and to the latest on Brexit. Yesterday we learned that the office representing PM Theresa May had distributed a letter to FTSE 100 listed UK companies, asking senior executives to sign and publicly support her government’s Brexit strategy. According to Sky News, the leaked letter expressed confidence in the future of a global Britain and says the government’s repeal bill will “make Britain ready for life outside the EU”. In response, some executives expressed incredulity and are unlikely to sign the letters. May’s Brexit legislation bill will be debated for the first time in parliament today.

Turning to other data releases from yesterday. In the US, the August ISM nonmanufacturing composite index rose mom but was a tad lower than expected at 55.3 (vs. 55.6 expected). In the detail, the employment index rose 2.6pts to 56.2 (1.7pts above the YTD average), the new orders index rose 1.6pts to 57.1 (1.9pts below the YTD average) and the prices paid index rose to 57.9  (highest reading since February). Elsewhere, the final reading for the Markit services and composite PMIs were also slightly weaker, with services at 56.0 (vs. 56.9 expected) and the composite at 55.3 (vs. 56.0 previously). The July trade balance figures were slightly above market at -$43.7bn (vs. -$44.7bn expected).

Meanwhile the latest Beige Book was reasonably positive with all twelve Federal Reserve Districts reporting that economic activity had expanded at “a modest to moderate pace”. Employment growth was said to have “slowed some” on balance, and labour markets said to be “widely characterized as tight”. However, the majority of Districts reported only “modest to moderate” wage growth. In Germany, the July factory orders fell more than expected at -0.7% mom (vs. 0.2% expected) driven by weaker domestic orders, but annual growth was still up +5.0% yoy (vs. +5.8% expected).

Looking at the day ahead, Germany’s industrial production for July (+0.5% mom expected) is due along with France’s trade balance and current account balance stats this morning. Elsewhere, house price data in the UK and Q2 GDP (final revision) for the Eurozone is due. This is all before the ECB meeting around midday. Over in the US, there is initial jobless claims, continuing claims and final readings for Q2 nonfarm productivity due. Away from the data, in the UK, Brexit Secretary David Davis faces questions in the House of Commons about the state of Brexit talks. In the US, Cleveland Fed President Mester and NY Fed  President Dudley are schedule to speak. Elsewhere, the IMF Managing Director Lagarde, BOJ Deputy Governor and BOK Governor will meet for a two-day conference on growth in Seoul.

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