Sunrise Headlines

  • US Equities rebounded yesterday in another session devoid of economic data, after falling more than 1% on Tuesday. The Dow/S&P rose by 0.45% / 0.64% led by financials. This morning, most Asian shares gain, but Chinese stocks fall as some cities are preparing fresh property tightening steps.

  • The US economy has shown widespread signs of slowing over recent weeks, the Federal Reserve said in its Beige Book, with modest growth the most common characterization of economic activity in most Fed districts.

  • The Bank of Canada raised its benchmark interest rate for a third consecutive time on Wednesday and sounded surprisingly hawkish even as it forecasts a more gradual economic recovery than expected. The Canadian dollar jumped to a session high against the US dollar.

  • US President Barack Obama said yesterday the United States could not afford to extend Bush-era tax cuts for the rich and accused Republicans of being fiscally irresponsible.

  • The Federal Reserve’s recent decision to buy more Treasury bonds does not signal the US central bank is on the verge of another round of easing, Dallas Fed President Fisher said, and added that only a financial system shock or some unforeseen, circumstance should put the Fed into doing more.

  • South Korea’s central bank held interest rates steady this morning, defying market expectations for a quarter point rise in the face of mounting concerns that the global economic recovery is slowing down.

  • There is still a 40% chance of a double-dip recession in the United States, and the slide back into recession could come within 12 months, US economist Nouriel Roubini said yesterday.

  • Ireland’s government outlined a compromise solution for winding down troubled Anglo Irish Bank, but failed to put either a price or a timeline on its plan.

  • German inflation slowed less than initially expected in August as higher fuel prices countered a drop in gas costs. The inflation rate fell from 1.2% Y/Y to 1.0% Y/Y, less than the initial estimate.

  • Today, the eco calendar contains the US weekly claims and UK and US trade balance. The Bank of England will decide on rates and the ECB publishes its monthly report.


Markets

The “risk on - risk off” -trade continues to dominate all financial markets. After the risk aversion of Tuesday, it was the return of risk appetite that was the theme on Wednesday. Just like the underlying news behind the risk aversion trade was very light on Tuesday, so was the news behind the risk appetite sentiment yesterday. Concerns eased about the European peripheral bond markets after a good Portuguese bond auction and the news that Anglo Irish bank would be wind down, but we wouldn’t emphasize their intrinsically importance for the global markets. So, across markets, US and German bonds were sold, but peripheral bonds fared better following an initial selling wave, equities ended with good gains, largely reversing Tuesday’s losses, commodities went moderately up with the CRB index up for a fifth consecutive session. In the FX market, the euro gained on the dollar, but the yen didn’t weaken noticeably. Overall the movements in the FX markets were very modest and inferior to what could have been expected during a risk-on trading session.

Looking at the global bond markets, the Bund (and Treasuries) during the European morning session tried to build out Tuesday’s juicy gains. However, later on the Bund came under pressure. The Schatz auction went well, but was plain vanilla, while the shorter end underperformed and should never erase it fully, leaving the curve a tad flatter on the day. Technically, the Bund tried to recapture the neckline of a double top formation which might have incited technical selling. In the mean time, the media ran some articles about the success of the Portuguese bond auction. Combining with stronger equities and US traders preparing for the 10-year Note auction, these items kept the pressure on the German and US bonds during much of the US session. The 10-year Note auction went very well, but could only temporarily push Treasuries higher. In the US, the curve re-steepened, as yields rose between 3.2 and 6.8 basis points, while in Germany, the yield curve bear flattened with yields up between 5.6 and 2.7 basis points. Concluding, recent price action shows that following last week’s correction and in the absence of key eco releases or Central Bank developments, bond market trading is volatile with the market testing various directions. This may continue this week, as the calendar remains quite uneventful.

In the intra-EMU bond market, an initial spread widening was reversed. The relatively good Portuguese auction and later in the session, the Irish decision to wind down Anglo Irish and a correction in the global key bond markets were behind the turnaround. There was also talk about (small) purchases by the ECB in the peripherals. Also Belgian, Spanish and Italian yields spreads came in, but the daily changes were limited (1-to-6 basis points). Peripherals open slightly weaker this morning.

In the FX markets, the various main crosses are stuck into a sideways range waiting on new developments. Within this trading climate, the performance of EUR/USD and USD/JPY was disappointing. Whereas EUR/USD had corrected sharply down on Tuesday, as risk aversion dominated, the cross gained barely ground on Tuesday when in our markets risk appetite behaviour reigned. The euro tried several times to develop a move higher, but it closed only 38 pips higher at 1.2720 and trades actually around 1.27, little changed of Tuesday’s close. However, the steepness of the correction on Tuesday was largely due to the deception that key resistance at 1.2922 couldn’t be taken out (see graph). So, in this respect the absence of a euro rally yesterday shouldn’t be considered as a main negative. The cross stays well into the 1.2922 to 1.2589 trading range.

More interesting, the return of risk appetite couldn’t bolster the USD/JPY either. During the Asian session yesterday, a new multi-year low was set, but the momentum was weak, as markets fear interventions of Japanese authorities. This keeps the dollar still underpinned and prevents a serious break down in the cross. The dollar bear sentiment is however strong and few investors have the stomach to go against this sentiment, which prevents USD/JPY to make some decent rebound. It is a bit of the whole world against the BOJ. So, the reaction higher after setting a new low was tepid and left the cross little changed at the close and near the 83.35 multi-year low. We cannot but understand FX investors and stay sidelined.

The downside is protected by the BOJ and dollar short positions may be risky to (vocal) interventions, while the technical picture is dollar bearish, making dollar long positions risky. The Japanese eco data, weaker-than-expected consumer confidence and improving business sentiment had no impact on trading. BOJ’s Shirakawa said that neither FX nor monetary policy were discussed at a meeting with the government, but understandably also this statement failed to impact the market. EUR/GBP corrected yesterday for the second session in a row. The down-move was caused early in the session when Vodafone announced the sale of its stake in China Mobile, which would involve the purchase of sterling. Afterwards nothing occurred anymore. EUR/GBP looks to be in a sideways trading mode too with the key support at 0.8142. The UK MPC meets, but no changes in rates or in QE target are expected. So, it shouldn’t affect trading.

The US 10-year T-Note auction went very well. The auction stopped at 2.67%, well below the WI bid of 2.686% at the moment of the stop. The bid/cover of 3.21 was well above average and above recent performance. The Indirect bid was the largest since April and aggressive, resulting in a very high indirect takedown. While the direct bid was light, the buy-side demand should be considered strong. So, the conclusion should be that demand for Treasuries remains strong and this bodes well for today’s $13B 30-year T-Bond offering (re-opening of the 3.875% August 2040). The size of the auction is unchanged and it will raise all new cash upon settlement.

The Beige Book, a preparatory document for the September 21 FOMC meeting that describes the economic situation via anecdotal evidence collected by the various regional Reserve Banks didn’t reveal new developments. Growth was described modest. Some districts saw it moderately slower and some moderately faster. “Reports from the 12 Federal Reserve Districts suggested continued growth in national economic activity during the reporting period, but with widespread signs of deceleration compared with preceding periods.” However, compared to the December 2007 to around June 2009 recession, the overall tone remains quite positive for economic activity. The concerns were centred on slowing consumer spending and manufacturing output. Overall, the Book paints a picture of the economy which is in line with published reports and thus contains no news for markets.

Regarding trading today, once more there isn’t a distinct feature popping up on the agenda, which contains the US weekly claims and trade balance, not the strongest market movers. Attention might also go out to the Bank of England monetary policy meeting (but no changes are expected), speeches of ECB’s Mersch, Liikanen and Ordonez. The ECB will publish its September Monthly Report, but usually it faithfully repeats the message of its president at last week’s press conference. However, some special features may draw some attention. The US Treasury will hold a 30-year Bond Auction and corporate supply is abundant, which will generate a lot of ratelock activity in the Treasury market.

In the second quarter, the US trade deficit widened significantly which had a negative impact on the GDP data. For July however, a narrowing in the deficit (from $49.9B to $47.0B) is expected due to a decline in imports while exports are forecasted to have stayed broadly unchanged. We have no reasons to distance ourselves from the consensus. If confirmed, it would suggest that contrary to Q2, net exports won’t be a (serious) drag on Q3 GDP. The weekly claims are expected to extend their (slow) downtrend. In the week ended September the 4th, initial claims are expected have dropped by 2 000 to a total number of 470 000. Also continuing claims are forecasted to show a slight decline from 4 456 000 to 4 450 000.

Asian equities are giving no clear signals for trading in Europe. The Bund opened positively and the EUR/USD and USD/JPY cross rates are modestly lower. So the market seems to continue their see-saw pattern of late with sentiment to risk the dominant factor. Regarding the bond market, we would think the upside is limited, today also because of US supply and maybe because of a smaller trade deficit indicating stronger growth. For the Bund we still think that sustained trading above 131.82/85 (neckline double top/MTMA flat) will be difficult. For technical indications on EUR/USD and USD/JPY: see higher.