Markets: Words

The focus on currency and trade wars shifted to words as the Iranian and US leaders shared threats over the weekend.The latest tweet from US President Trump was clear: "To Iranian President Rouhani: Never, ever threaten the United States again or you will suffer consequences the likes of which few throughout history have ever suffered before.

We are no longer a country that will stand for your demented words of violence & death. Be cautious! "His was a response to Iran’s threat of the “mother of all wars.” Sticks and stones beat words today. This overshadowed the Argentina G20 FinMin meetings where all countries signed the communique, an improvement from the G-7 communique in June when the U.S. withdrew its signature over an ongoing trade conflict with Canada, but it was noted that rising trade tensions posed a risk to global growth. U.S. Treasury Secretary Mnuchin tried over the weekend to tamp down concern that a currency war may be starting, reaffirming the US commitment to a strong dollar.

All of the push by the US for changing the status quo starts with words and threatens actions. Today's reality is connected with tariffs and many are waiting and watching if the USD intervention risks are next in line. Words matter little today, just ask anyone that is trading rather than sitting on the beach, but the problem of volatility and the higher noise-to-signal ratio makes many obvious trends less powerful – with the JPY move today a classic example.We start with risk-off due to global trade, Iran/US threats, BOJ policy uncertainty and with USD uncertainty – all make the fundamental drop in the USD from 113 to 111 logical. But will 110.50 hold today becomes emotional and perhaps technical making the present chart more difficult to judge. Don’t catch a falling knife, but does that contradict the lessons from the last few years that we are supposed to buy every dip and ignore all words?

Question for the Day: Are rates too high? Markets are trading globally with a steepening bias. Some of the aftermath of last week reflects in today’s price action where the US break of protocol on the USD and Fed lead to some doubts about Fed independence and the USD risks rise. A lower USD means a higher US bond yield or so that is the usual equation for emerging markets – with Turkey as the example. There are other signals at play in markets for rates and three stand out today where there literally was no economic data to consider but plenty of geopolitical headlines. This first chart of the copper/gold ratio and the 10-year US yield is worth considering – this captures the FOMC and market reaction function to turmoil globally – particularly China.

The second one is a warning shot for understanding the ECB meeting risk this week. As the QE and FOMC word count comparison suggests the more central bankers play in the deep-end of the pool, the higher the risks for confusion and the need for more communication. This is a blackout period for the FOMC and given the Trump comments it’s going to mean more volatility.Similarly, the ECB could be quiet – its July after-all – and with no new guidance on their taper, the market could take this as a dovish signal.

Finally, the role of oil/rate policy and the USD risks/Trump policy mix together in the 5Y/5Y forwards in the US. They are indeed sharply higher and merit some attention – at least to the FOMC next week – but perhaps we have a week to unwind further with 2.20% looking very important.

Market Recap:

Equities: The US S&P500 futures are up 0.04% after a 0.09% drop Friday. The Stoxx Europe 600 opened down 0.3% and remain there with focus on earnings – Ryanair and Fiat/Chrysler headlines – while the MSCI Asia Pacific fell 0.2% with Japan leading losses on BOJ talk against China bouncing on easing hopes, oversold conditions.

Japan Nikkei off 1.33% to 22,396.99
Korea Kospi off 0.87%to 2,269.31
Hong Kong Hang Seng up 0.11% to 28,256.12
China Shanghai Composite up 1.07% to 2,859.52
Australia ASX off 0.90% to 6,320.10
India NSE50 up 0.73% to 11,090.20
UK FTSE so far off 0.35% to 7,651
German DAX so far off 0.10% to 12,548
French CAC40 so far off 0.45% to 5,375
Italian FTSE so far off 0.6% to 21,662

Fixed Income: Lack of new news, but plenty of supply and a bit of risk-off mood wrapped around geopolitical trade and FX policy leaves bonds slightly bid in Europe. Core bonds are lower – German 10Y Bund yields off 1bps to 0.378% while French OATs off 1.5bps to 0.69% and UK Gilts flat at 1.23% but the periphery are bid into the ECB hopes with Italy off 2bps to 2.565%, Spain off 1bps to 1.36%, Portugal off 2bps to 1.74% and Greece off 1.5bps to 3.81%.

Belgium sold E3.6bn of bonds – at the high end of expectations – with lower rates and good demand – E0.705bn of 6Y 0.5% Oct 2024 OLO at 0.167% with 2.9 cover – previously 0.37% with 2.4 cover – E1.112bn of 10Y 0.8% June 2028 OLO at 0.691% with 2.7 cover – previously 0.73% with 1.6 cover – E1.171bn of 20Y 1.45% Jun 2037 OLO at 1.339% with 1.25 cover – previously 1.37% with 2.1 cover – and 0.618bn of 50Y 2.15% June 2066 OLO at 1.896% with 1.2 cover – previously 1.88% with 1.5 cover.
Germany sold E1.874bn of 3M Oct 2018 Bubills at -0.6024% with 1.2 cover – previously -0.6158% with 1.5 cover.
US Bonds are bid with bull steepening despite supply this week – 2Y off 0.6bps to 2.587%, 5Y off bps to 2.754%, 10Y off 0.9bps to 2.884% and 30Y off 0.1bps to 3.025%.
Japan JGBs sell-off floored by BOJ – BOJ fixed 0.11% operation to buy unlimited 10-year bonds calmed market post the Jiji press redo report from Friday – today they traded to 0.09% yield early on but close up with 10Y yields up 4bps to 0.075% on the day.
Australian bonds sold in global bear steepening move – 3Y up 3bps to 2.12%, 10Y up 5bps to 2.67% - focus is on CPI next.
China PBOC injects CNY502bn via 1-year MLF loans at 3.3% unchanged. This week CNY370bn in reverse repos mature.

Foreign Exchange: The US dollar index up 0.1% to 94.56 watching 94.18 and 93.72 for support against 95.65 Thursday highs. In Asia EM FX the USD is offered, KRW 1131 up 0.2% - touched 1127, TWD up 0.25% to 30.645, INR up 0.35% to 68.755. In EMEA USD also lower, RUB up 0.2% to 63.464, ZAR up 1.1% to 13.389 and TRY up 0.2% to 4.7915.

EUR: 1.1710 off 0.1%. Range 1.1687-1.1750 with 1.1740-50 resistance key for 1.1610 and with ECB focus this week.
JPY: 111.15 off 0.3%. Range 110.75-111.51 with EUR/JPY off 0.4% to 130.60 – focus is on BOJ and equity mood against 110.50 support.
GBP: 1.3130 up 0.3% Range 1.3091-1.3158 with EUR/GBP .8915 off 0.2% - Brexit focus still with BOE Broadbent next driver
AUD: .7410 flat. Range .7399-.7438 with NZD .6810 flat. Market watching China/metals with .7480 cap holding for .73 retest.
CAD: 1.3140 flat. Range 1.3115-1.3157 with focus on trade, oil, BOC and consolidation 1.3050-1.3300
CHF: .9930 flat. Range .9901-.9988 with EUR/CHF 1.1630 flat. Going nowhere fast with .9880 and 1.0020 consolidation.
CNY: 6.7593 fixed 0.12% stronger from 6.7671,opens bid at 6.7570 up 0.1% but reverses in Europe now off 0.2% to 6.7885. CNH off 0.2% to 6.7995. The CFETS RMB weekly index fell 1.06% to 93.78 back to Aug 2017 lows.

Commodities: Oil up, Gold up, Copper up 0.2% to $2.7815

Oil: $69.02 up 1.1%. Range $67.96-$69.05. WTI watching $66.21 – 100-day m.a.and $67.50 as base against $68.91 Friday highs and $70.60 July 13 highs. Brent $74.37 up 1.7%, watching 55-day at $75.77 for upside with $73.82 Thursday highs against $71.90 Thursday lows and $71.30 July 18 lows.
Gold: $1230.50 up 0.1%. Range $1229-$1231, watching the July 19 $1211.40 lows then $1204.80 July 10 2017 lows as base for bounces to $1238 and $1246. Silver off 0.1% to $15.497, Platinum up 0.4% to $832 and Palladium off 0.2% to $892.75.

Conclusions: Does liquidity matter? The functioning of a market in bad times is always a focus, but in good times its assumed. There are many examples when markets dry up and die, mostly due to technology or irrelevance to the present world.Perhaps that is the case for bond markets today as central bankers become the dominant players and squeeze out other interests. Or perhaps this is yet another signal of future trouble as bonds remain a key part of offsetting other risks in a portfolio of investments. The risk-free asset class remains critical in most models and that won’t go away. So the chart of the day from the WSJ is worth considering as we go into almost $250bn in US bond sales and wait for bigger news with the FOMC and BOJ and ECB meetings in the next 2 weeks.