Markets: Mr. Wolf

The markets rallied after FOMC Chair Powell comments Friday and the bulls continue to run today in equities. There is an LSD feel to today – Last Summer Day – as it’s the UK August Bank Holiday and many trading desks are slowly repopulating. The review of the summer will come later but for now we have to remember the time. This gets us to the Childhood game of “What’s the time Mr. Wolf?” played by English colonies the world over – and in the US the wolf is replaced by a fox. Perhaps this is the right angle for understanding today and its limited impact on the bigger stories ahead – there is a tag-you-are-the-wolf quality to markets now.

The tag in FX is TRY as it returns from holiday off 3% to 6.20 its safety breakout zone while the winner so far is KRW up 0.5% with the break of the neckline USD support at 1115 opening 1110 targets. Mexico will be the real focus ahead with NAFTA deal hopes high and the MXN already up 0.6% to 18.79 ahead of the US open. For equities, its Italy as the MIB there falls 0.3% amidst the drama of the EU budget with Deputy PM Di Maio threatening a veto. For Asia, the focus was on China and its adding back of the counter-cyclical factor for fixing the CNY which led to its early gains, helping the markets there, but not sustaining into Europe. Iron Ore is the focus for commodities – dropping 2% and reflecting the growth doubts about China. When you mix this altogether the cycle of where global growth is looks murky and the extension of the “Goldilocks” rally that returned Friday with Powell seems more fairytale than reality.

The risk for today is in the ability for Turkey to hold the line on the TRY without going to capital controls. The shock of that would lead to another round of bank jitters and EM contagion plays. Watching for a dip back to 6 to prove the point with risk that 4-5-6 lead to 7 next.

Question for the Day: What time is it for Germany? The Germany IFO has a cycle clock attached to its report. The cycle of business remains more art than science but measuring current conditions against future expectations usually gets the vector right. The latest report is robust and suggest Germany is extending its boom after a slowing 1H. The news should be taken seriously given the upcoming ECB meeting and the Jackson Hole Powell Fed mantra of gradualism. The ECB maybe setting up the EUR for a larger rally if only the pesky politics of the UK, Italy and Germany itself could be contained. 

The focus on today isn’t likely to be on the EUR or GBP or JPY but just the USD and the hangovers from Jackson Hole. The lesson there may be lost about cycles and time but the Powell FED is guiding itself by “stars” and less the instant snapshots of anyone report. So the risks for overshooting the USD correction seem significant, just like the EUR resistance from 1.1950-1.2100.

What Happened?

• China January-July industrial profits rose 17.1% y/y to CNY3.90trn. This is down from Jan-June 17.2% y/y but still second highest of the year. On a monthly basis profits rose 16.2% y/y to CNY515.12 slowing form 20% y/y in June. 

• German August IFO Business Climate 103.8 from 101.7 – better than 102 expected. The current conditions rose to 16.4 from 105.4 – also better than 105.5 expected – while the Expectations rose to 101.2 from 98.5 – much stronger than 98.5 expected. The companies were once again more satisfied with their current business situation. Business expectations were revised noticeably upwards. In addition to a robust domestic economic situation, the truce in the trade conflict with the US contributed to improved business confidence. The German economy is performing robustly. Current figures point to economic growth of 0.5 percent in the third quarter. 

Market Recap:

Equities: US S&P500 futures are up 0.25% after a 0.62% gain Friday. The Stoxx Europe 600 is up 0.2% with Italy dragging. The MSCI Asia Pacific rose 0.7% with Hong Kong leading.

• Japan Nikkei up 0.88% to 22,799.64
• Korea Kospi up 0.27% to 2,299.30
• Hong Kong Hang Seng up 2.17% to 28,271.27
• China Shanghai Composite up 1.89% to 2,780.90
• Australia ASX up 0.36% to 6,381.10
• India NSE50 up 1.17% to 11,691.95
• UK FTSE on holiday
• German DAX so far up 0.55 to 12,458 
• French CAC40 so far UP 0.40% to 5,454
• Italian FTSE so far off 0.7% to 20,598

Fixed Income: Give back Monday as global bond markets par gains from Friday with German IFO adding to EU selling. Italy again a focus with Deputy PM Di Maio suggesting a veto of the EU budget. UK Holiday keeps liquidity light. German 10-year bond yields are up 1bps to 0.35%, French OATs up 1bps to 0.69% while periphery is mixed with Greece flat at 4.125%, Spain up 0.5bps to 1.395%, Portugal up 0.5bps to 1.815% and Italy up 1bps to 3.14%.

• US Bonds give back a bit of Powell gains – 2Y up 0.5bps to 2.625%, 5Y up 0.7bps to 2.72%, 10Y up 1bps to 2.82%, 30Y up 0.7bps to 2.965%. 
• Japan JGBs see curve flattening with 2Y sale next key – 2Y up 0.6bps to -0.123%, 5Y flat at -0.085%, 10Y off 0.2bps to 0.087% and 30Y off 0.7bps to 0.818%. 
• Australian bonds see modest bear curve flattening after good 10Y sale – 3Y up 1.5bps to 2.02%, 10Y up 0.5bps to 2.535%.AOFM sold A$500mn of 10Y 2.25% May 2028 TB149 at 2.5482% with 5.14 cover – previously 2.7436% with 4.725 cover. 
• China PBOC skips open market operations, net drains CNY120bn on the day.  Money market rates rose with O/N up 5bps to 2.42% and 7-day up 6bps to 2.637%. The 10Y bond yields were steady at 3.63%. 

Foreign Exchange: The US dollar index flat at 95.19 with Asia losses reversed in Europe.  In EM FX, USD mixed – ASIA: KRW up 0.45% to 1113.90, TWD up 0.1% to 30.748, INR off 0.2% to 70.03; EMEA: TRY off 3.25% to 6.20, ZAR off 1.1% to 14.30, RUB off 0.45% to 67.35.

• EUR: 1.1615 flat. Range 1.1595-1.1653 – Need to trade back under 1.1580 to get bearish again with 1.1680-1.1720 next. 
• JPY: 111.15 off 0.1%. Range 110.94-111.37 with EUR/JPY 129.10 off 0.15%. JPY gains on US rates wobble but 110.80-111.80 consolidation most likely. 
• GBP: 1.2840 flat. Range 1.2829-1.2865 with EUR/GBP .9045 flat. UK holiday – so its about Telegraph and Brexit story. 
• AUD: .7310 off 0.25%. Range .7307-.7346 and NZD .6670 off 0.2% with .6640 pivot. A$ holding in bear consolidation with .72-.74 keys. 
• CAD: 1.3030 flat. Range 1.3007-1.3035. Hopes for NAFTA this week open up 1.2880 risks but oil and US rates still key. BOC Poloz comments Friday didn’t matter – BOC hikes not likely to match Fed. 
• CHF: .9830 flat. Range .9814-.9846 with EUR/CHF 1.1420 flat. Stuck watching EUR with Italy still risk for 1.1250 on cross. 
• CNY: 6.8508 fixed 0.30% stronger from 6.8710, trades mixed – 6.8210 off 0.2% into London with 6.8028-6.8293 range and up from 6.8171 official close. 

Commodities: Oil off, Gold off, Copper off 0.7% to 2.7360.

• Oil: $68.45 off 0.4%. Range $68.34-$68.79 with Brent $75.56 off 0.35% - focus is on USD and Iran and US inventories still with $68-$70 WTI key. 
• Gold: $1204 off 0.1%. Range $1203-$1208 with USD weakness opening $1215 tests next but $1201.60 needs to hold.  Silver off 0.3% to $14.77 with $15.06 and $15.554 Aug 3 highs key resistance for bulls while $14.48 Aug 23 lows is the base to watch.Platinum off 0.3% to $789 while Palladium off 0.1% to $936. 

Economic Calendar:

• 0830 am US July Chicago Fed National Activity 0.43p 0.13e
• 1030 am US Aug Dallas Fed Manufacturing Index 32.3p 36.9e
• 0100 pm US sells 2Y notes\