While the entire nation was transfixed on last night’s latest, and most scandalous yet “debate”, in which there was little actual debating and a lot of talking points and character assassination attempts, index futures were little changed throughout Sunday’s 90 minutes event, suggesting that no clear winner had emerged on either side.
While the two candidates focused on each other’s personal failings for much of the early part of the debate, investors said there was not enough in terms of policy substance in Sunday’s debate to change the market’s perception of the direction of the race according to Reuters. “I don’t think it changed people’s opinions in the investing community that Clinton is more likely to win, as she was before the debate, certainly after Friday,” said Rick Meckler, president of investment firm LibertyView Capital Management in Jersey City, New Jersey.
“The market declared tonight’s debate a draw and has no more clue after debate than before, at least not in watching the S&P futures. Once again the debate was great theater, but did not give the market any insight,” said JJ Kinahan, chief market strategist at TD Ameritrade. “Despite the night’s civil ending, it was hard to glean much information, as a good part of the debate was simply a name-calling fest.”
Steven Englander, global head of G10 currency strategy at CitiFX in New York, said: “Both Trump and Clinton supporters expected that emerging market currencies and U.S. equities would go down and the VIX would go up if Trump were to win and vice versa if Clinton wins,” he added. And indeed, as noted last night, the kneejerk reaction of the most accurate, real-time proxy of debate performance, the Mexian Peso, showed that once the debate started, the mood shifted mostly in Trump’s favor, leading to modest losses after this weekend’s Trump Tape fiasco.
However, that changed after surprisingly a CNN/ORC snap poll of debate watchers found that 57% thought Clinton won the encounter, versus 34% for Trump, despite various focus groups indicating that Trump had been the winner.
— CNN Politics (@CNNPolitics) October 10, 2016
Exiting the debate, and headed into the European open, U.S. stocks index futures were up about 0.3 percent. U.S. stock markets are open on Monday, though the bond market is closed for the Columbus Day holiday, as is CME pit trade for FX products.
Earlier, Asian shares eked out minor gains. MSCI’s broadest index of Asia-Pacific shares outside Japan was up 0.1 percent. Japanese markets were closed for a holiday.
Chinese shares racked up their biggest gains in two months as investors returned from a week-long holiday and caught up with gains on global markets, however, property stocks tumbled following various property transaction curbs implemented by some 10 cities in China over the past holiday week, seeking to ease the bubble in China’s property sector.
More notable, China’s yuan hit a six-year low against the dollar before recovering as China’s markets reopened after a week-long break. The People’s Bank of China set the weakest fix for currency since September 2010 and in the spot market fell as low as 6.7051, also its lowest since September 2010. The currency fell as much as 0.46 percent in Shanghai to 6.7051 a dollar, the weakest since September 2010. The offshore exchange rate declined by a similar magnitude during the mainland holidays, while a gauge of the greenback’s strength rallied 1 percent. Until today, China’s central bank was speculated to be keeping the currency stronger than the 6.7 level as it sought to limit capital outflows.
“This sends the signal that the yuan’s future path may be more event-driven, meaning China will allow it to drift lower when there is a big event on the dollar as we saw last week,” said Tommy Xie, an economist at Oversea-Chinese Banking Corp. in Singapore. “Today’s spot will be very important and the market will closely watch whether the yuan will close beyond 6.7 or not.”
The Yuan last traded at 6.7025, down 0.03 percent on the day.
Oil prices fell, with investors sceptical an agreement among members of the Organization of the Petroleum Exporting Countries (OPEC) to cut output would have a major impact. Brent crude, the international benchmark, was down 18 cents at $51.73 a barrel. “A meeting between OPEC and non-OPEC producers (namely Russia) will add to oil headlines this week. Don’t expect a firm agreement from Russia, but headlines about cooperation are likely,” Morgan Stanley said. However, this morning we did see the Saudi Oil minister prop up prices by saying he is optimistic on an output deal with Russia, and added that it wasn’t “unthinkable” that crude prices could rise another 20% this year to $60 a barrel.
Global Headline News
Looking at regional markets, we start in Asia where stocks shrugged off last Friday’s Wall Street losses and traded mostly higher as the region digested the miss in US NFP and latest developments in US politics. ASX 200 (+0.2%) opened higher alongside mild gains in US equity futures after the Trump campaign was rocked by leaked tapes, which brought to light inappropriate comments made by the Republican candidate regarding women. Shanghai Comp. (+1.5%) outperformed on return from Golden Week as it took the first opportunity to react to last month’s strong official PMI data and reports that China injected USD 41 bIn through its mid-term lending facility in September. As a reminder, markets in Japan, Taiwan and Hong Kong are all shut due to public holidays.
Top Asian News
In Europe, financial concerns are back on the table with Deutsche Bank (-3.1%) yet again in focus after weekend reports confirmed that CEO Cryan failed to reach an agreement with the DoJ. As such, equities were on the back foot to start the week, however they have since rebounded after an FT report that the ECB had allowed Deutsche Bank to cheat in latest stress test, suggesting the central bank was eager to help out DB. Elsewhere, the FTSE 100 modestly underperforms (flat) as the softer GBP and upside in mining names helps support the index. In credit markets, last week’s theme continues for 10yr Gilts, with the spread widening significantly against their German counterpart amid the ongoing Brexit fears, which some suggest could see the BoE hold back on further loosening monetary policy as the GBP depreciation may see them overshoot on their 2% inflation target, alongside looser fiscal policy from the UK government. Elsewhere, Portuguese bonds have rallied this morning after some reassuring words from the finance minister ahead of the DBRS rating on scheduled on 21st October.
Top European News
In FX, sterling stole the limelight for all the wrong reasons, despite the key US payrolls release which does not seem to have done any major damage to the USD other than taking some of the bid tone away. Cable has been relatively well contained as a result, with the first line of support coming in around 1.2200, buyers have stepped in on the early dip into the mid 1.2300’s as some look to fade weakness from current levels. Not too much to discern in terms of sentiment from EUR/GBP price action, but we have a long way to go before the EU negotiations start in earnest, so perhaps some relief is due here near term. USD/JPY is back on a 103.00 handle after dipping below to fill the gap from early Asia. The European bourses are largely flat on the morning, so little to direct trade in all JPY pairs, with range bound trade alluding to consolidation all round. AUD/USD is finding some near term demand below .7600, but USD/CAD is still eyeing 1.3300+, but we are seeing some strong resistance here after the strong Canadian jobs report from Friday. EUR/USD gains have stalled at 1.1200, the better than expected German trade data and EU Sentix sentiment putting a bid under any dips here into the mid 1.1100’s. Norwegian inflation (both core and headline) came in at a lower than expected +0.3%; yearly inflation rate in from 4% to 3.6% but to limited effect on the NOK.
In commodities, Brent and WTI are both marginally down so far after both Iran and Iraq stated that they will not be involved in discussions in Turkey. However, this morning we did see the Saudi Oil minister prop up prices by saying he is optimistic on an output deal with Russia. Gold is trading higher by 0.55% as risk sentiment is slightly off and China came back to market after a public holiday. Silver has also benefited from risk off sentiment up USD 0.23/oz so far. In Shanghai, December copper and tin are down around 0.3%, while the rest of the base metals contracts are up an average of 1.7%.
Iranian NISOC current crude oil output almost 3mln bpd and are now targeting 500k bpd hike in production according to the Co.’s Managing Director. Saudi Energy Minister states he will meet Russian counterpart in next 2 days and Saudi-Russia Oil Committee are set to meet within couple of weeks. Saudi Energy Minister Falih says he is optimistic of getting non OPEC participation in OPEC output freeze by November 30 meeting.
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US Event Calendar
Bulletin Headline Summary From RanSquawk and Bloomberg
DB’s Jim Reid concludes the overnight wrap
Well that was an interesting week, especially if the majority of your assets are denominated in the British Pound. Thanks goodness I was asleep for the flash crash. I’m off to Paris today where I’ll be sure to keep my wallet firmly in my pocket. More on Sterling later but no other place to start today other than the second US presidential debate which has been a lively affair!
Indeed much like the first debate the early exchanges kicked off in a similar fiery fashion, with personal attacks being the dominant theme. As the exchange eventually took some form of structure however, Clinton again demonstrated a similar well prepared approach while Trump remained on the attack throughout with a number of news reports since suggesting that he had generally improved on some of the key policy issues compared to the first time round. That said it was clear that both chose to focus, somewhat unsurprisingly, on the topics which have dominated the tabloids in recent days and which will likely be the talking point today. The latest CNN/ORC poll has just been released a short time ago and it shows that 57% thought Clinton won the debate compared to 34% for Trump. It’s worth reminding readers that the CNN/ORC poll after the first debate (which favoured Clinton at 62% to 27%) had a split between respondents which was more weighted towards Democrats over Republicans.
In terms of FX markets this morning the Mexican Peso, which is seen as a bit of a bellwether for the debate, initially rallied as much as +2% before the debate reflecting some of the negative newsflow around Trump from the weekend however the currency pared those gains as the debate wore on and is now back to being +1.36% stronger. It’s been a similar trend for the Canadian Dollar while US equity index futures are up ever so slightly but have pared back a bit too. In Asia with Japan and Hong Kong on holidays it’s fairly quiet although China has reopened with the Shanghai Comp (+0.99%) and CSI 300 (+0.82%) on the front foot, helped by a weaker CNY this morning. The Kospi (-0.11%) and ASX (+0.16%) are both little moved this morning.
After all this excitement, the American public probably need a lie down and luckily for them today is Columbus Day. Equity markets are open but bond markets are shut. I would expect activity to be light. Things will get more exciting from tomorrow as US earnings season kicks off with Alcoa with three big banks reporting on Friday which will be an interesting focal point for markets. We’ll preview the rest of the week ahead at the end but let’s move onto to the UK.
Sterling fell -4.15% last week (-8.78% at the flash crash lows) against the dollar and is now -15.78% in 2016 and -27.71% from the post crisis highs ($1.717 in July 2014) based on spot returns. It’s currently down -0.27% in the early going this morning at $1.241. For a bit of a global context, of the 148 currencies that we can analyse on Bloomberg, Sterling is actually the joint 142nd weakest currency on a year to date basis. It’s by far and away the weakest of the G10 and only the following nations have weaker currencies so far this year; Angola, Sierra Leone, Nigeria, Venezuela, Mozambique and Suriname. The Suriname Dollar has actually fallen nearly 48% so far in 2016 so Sterling still has some way to go to catch that. A year ago we mentioned the DB Sterling house view of $1.15 in the EMR and received a lot of interest. The official low was $1.1841 on Friday morning but Bloomberg reported that one electronic platform had a print of $1.1378. I’m looking forward to seeing what these moves have done to the UK’s level of expensiveness in the Mapping the World’s Prices document we took over this year when we update in early 2017. Will London slip out of the top 5 of expensive global cities.
Also of interest next year will be to watch UK inflation and Gilts. The problem with shorting Gilts is that you are battling BoE bond buying. Last week the Conservative party discussed their unease with QE which helped unsettle Gilts, however without it they may have to put up with unease of a different variety down the line. So a delicate balance. Overall the real yield graph shows that financial repression is alive and well and highlights our point from the long-term study last month that negative real returns from government bonds are an almost certainty across the developed market now over virtually any short, medium or long term horizon.
It was always going to take a big surprise one way or another from payrolls on Friday to really take the focus away from those incredible moves in Sterling. In the end the 156k print for September came in slightly below the consensus of 172k and also included a net downward revision of 7k over the previous two months. Private payrolls (167k vs. 170k expected) were slightly better than the headline as government employment (-11k) finally softened following four consecutive months of relatively sturdy gains. A positive for aggregate income growth was the tick-up in the average workweek to 34.4hrs from 34.3hrs. Elsewhere average hourly earnings rose +0.2% mom last month (vs. +0.3% expected) which lifted the annual rate by two-tenths to +2.6%. Lastly the unemployment rate rose one-tenth to 5.0% largely as a result of a lift in the participation rate to 62.9% from 62.8%. The Atlanta Fed revised down their Q3 GDP forecast marginally following Friday’s data to 2.1% from 2.2%.
Overall then that data was probably enough to silence the November hike hawks, but keep a December move firmly on table (with the market implied probability unchanged at 64%) depending obviously on what happens now with hard data between now and then. Markets didn’t do too much in the aftermath of the data. The S&P 500 (-0.33%) edged lower not helped by a difficult session for energy and commodity related sectors following a pullback in Oil prices. More on that shortly. In Europe the Stoxx 600 closed -0.93% while the FTSE 100 (+0.63%) was the standout reflecting that leg lower for Sterling. Over the five days the S&P 500 and Stoxx 600 were -0.67% and -0.96% while the FTSE 100 rallied to the tune of +2.10%. In rates markets 10y Treasury yields edged 2bps lower to 1.719% although continue to hover around four month highs. It had been a different mood in European bond markets though. 10y Gilts (+9.9bps) were spooked by the Sterling moves and in the process rose to a new post-Brexit high in yield (0.969%). That dragged up the rest of European bond yields with 10y Bund yields (+3.8bps) back into positive territory at 0.017% for the first time in two and a bit weeks.
In terms of Oil, WTI retreated -1.25% and is down another -1.08% this morning following a near two week rally which saw it rise over $5/bbl. The leg lower has come ahead of a non-OPEC producers meeting in Istanbul this week, where prior to it, Russia’s energy minister dampened hopes that an agreement of sorts on production cuts would be struck and instead said that meetings would just be consultations. Elsewhere in the commodity complex, Gold (+0.22%) finally broke its run of 8 consecutive daily losses in which it has lost over 6% and given up the vast amount of post-Brexit gains.
Recapping the remainder of the data on Friday, August industrial production reports for both Germany (+2.5% mom vs. +1.0% expected) and France (+2.1% mom vs. +0.6% expected) were a fair bit better than expected although the same couldn’t be said for the UK where the data disappointed (-0.4% mom vs. +0.1% expected). Manufacturing production for the UK also printed slightly below expectations (+0.2% mom vs. +0.4% expected). In the US the other data release was the August consumer credit print ($25.9bn vs. $16.5bn expected) where household borrowing jumped at the fastest pace in almost a year.
There was also a bunch of Fedspeak to highlight on Friday. The Cleveland Fed’s Mester re-iterated her largely upbeat view on the US economy, saying that the jobs report was solid and recent data is consistent with the Fed raising rates as soon as next month. Uber-hawk Esther George said that the job’s number was encouraging and suggests that momentum is continuing and that growth is on track for 2%. Finally over the weekend the Fed’s Vice-Chair Fischer said that ‘since monetary policy in only modestly accommodative, there appears little risk of falling behind the curve in the near future, and gradual increases in the federal funds rate will likely be sufficient to get monetary policy to a neutral stance over the next few years’.
Before we look at this week’s calendar, this morning we have published our latest HY strategy monthly where we take a look at the relationship between senior secured and senior unsecured bonds within the capital structures of European HY companies. We look at the relationships at a company level assessing the spread ratio as well as the spread-per-turn of leverage (SPT) ratio of the two bonds through the year. We also look at the cross-sectional relationship to try and assess whether there are any potential relative value opportunities. In addition we have also highlighted how the strength in supply in September may have negatively impacted what have so far this year been overwhelmingly positive technical’s for European HY.
Onto the week ahead now. It’s a quiet start to the week today with just Germany trade data, France business sentiment and the Euro area Sentix investor confidence reading due this morning. There’s no data due in the US with it being Columbus Day. US equity markets are open but bond markets are shut. Tuesday kicks off in Germany where the October ZEW survey will be released. In the US the NFIB small business optimism reading and labour market conditions index are due out. We kick off in Japan on Wednesday with the latest machine orders data. Over in Europe we’ll get the final revised September inflation report in France along with the August industrial production print for the Euro area. Over in the US the JOLTS report for August is the sole data release while the September FOMC minutes will then be released in the evening. Thursday kicks off with the September trade data for China. In Europe we’ll then get the final September inflation report in Germany, while in the US session we’ll get initial jobless claims and the import price index. It’s a busier end to the week on Friday. In China the CPI and PPI prints for September will be closely watched. In Europe we’ll then get UK construction output and Euro area trade data, while the BoE will also release its latest credit conditions and bank liabilities surveys. Over in the US it’s all eyes on the September retail sales data, while PPI, business inventories and finally the first estimate of the University of Michigan consumer sentiment survey for October will be out.
Away from the data, the Fedspeakers during the week include Evans and Kashkari on Tuesday, Dudley and George on Wednesday, Harker on Thursday and Kashkari, Rosengren and Fed Chair Yellen on Friday. The latter is due to speak in Boston on the topic of ‘macroeconomic research after the crisis’. Over at the ECB we’ll hear from ECB officials including Visco, Mersch and Coeure this week. Of course the other big focus is on the unofficial commencement of earnings season in the US. Alcoa report prior to the open tomorrow while JP Morgan, Citigroup and Wells Fargo headline the banks reporting on Friday.