Capital Markets Takes A Breather

This week’s price action in capital markets would suggest that many investors are beginning to lose faith that G7 central bank action will help boost growth. For some, it’s the lack of clarity from the Fed on rate normalization that is causing various degrees of capitulation amongst the asset classes.

Up until now, central banks easy-money policies and its unprecedented bond-buying program have been pushing investors into risky assets while guiding various asset prices higher. The potential threat from central bankers to turn off that easy money tap is always going to be tough on investors. Are we seeing the beginning of what's to become?

At present, the market seems to feel a tad more comfortable in applying or paring back some of their risk positions that they have been accumulating up to now in this low-yielding environment – book your profits or mitigate your losses and wait for direction.

1. Equities mixed results

In Australasia, indices were broadly mixed overnight on weakness in U.S. equities and continued worries by investors that global central banks will soon reverse their easing schemes – the SNB and BoE are on tap tomorrow, while the pivotal BoJ and FOMC meetings take place next week.

Japan’s Nikkei Stock Average was down -0.4%, taking its week-to-date loss to -1.8%. The Shanghai Composite Index was -0.6% lower, but the Hang Seng Index was up +0.1%.

Elsewhere, European bourses are trading mixed across the board with market participants staying cautious ahead of tomorrows BoE monetary policy decision. Currently, banking stocks are trading notably lower in the Eurostoxx, while commodity and mining stocks are adding support to the FTSE 100 as a result of higher energy prices.

U.S futures prices are set to open in the black.

Indices: Stoxx50 -0.1% at 2,972, FTSE +0.1% at 6,675, DAX +0.1% at 10,397, CAC-40 flat at 4,387, IBEX-35 -0.3% at 8,700, FTSE MIB -0.2% at 16,517, SMI +0.1% at 8,180, S&P 500 Futures +0.04%

2. Crude oil stabilizes

In early trading, crude prices have found some temporary relief after yesterday’s -3% slide on the back of the surprising IEA report that suggested that a overhang of supply will dominate the remainder of this year.

With a percentage of the market somewhat skeptical of the report, a reversal of the IEA’s position a month ago, is providing some price support. While yesterdays smaller than expected build in U.S. crude stocks is also lending a supporting hand – API ‘s crude build of +1.4m barrels was smaller than the +3.8m barrel rise expected.

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Later this morning, the EIA will issue its official inventory report (10:30 EDT).

Brent crude futures (Nov) are trading at +$47.39 per barrel, up +29c, while West Texas Intermediate futures (Oct) are up +38c at $45.28 a barrel.

Gold is trading a tad higher this morning, recovering from the yesterdays session’s losses, as the dollar loses some support on expectations that the Fed is unlikely to raise rates as soon as next week.

Spot gold is trading up +0.2% at $1,321 an ounce.

3. Bonds continue to decline as central bank inaction weigh

Both sovereign and corporate bond markets continue to see the bulk of the market action with yields backing up and shifting aggressively as dealers reprice central bank expectations and in the U.S’s case, make room for this week’s supply (yesterday’s U.S 30-year auction came at a high yield).
U.S 10’s is trading at +1.72% (highest yield-post Brexit), following yesterday’s +6bps rally, while the German bund note has declined -1.5bps to +0.055%.

Fed fund futures are trading somewhat consistent, dealers believe there is a +15% chance of a rise in interest rates in September, but the probability of an increase in December has risen to +56.5%.

The big mover overnight is the Japanese yield curve. It continues to steepen amid speculation the BoJ will concentrate its bond-buying program more heavily on short-term securities. The five-year yield decreased -3bps to minus -0.205%, while the 30-year rate jumped as much as +10bps to +0.605%, the highest since March.

4. Easy come; easy go for the “big” dollar

Forex moves continue to be a by-product of what’s happening in other asset classes, whether it’s the commodity sector or rate differentials.

Ahead of the open stateside, the dollar is little changed against most G10 currency pairs with the exception of the yen (¥102.85).

The pound has found some support after this morning’s U.K. jobs data showed unemployment in the three months to July fell -39k, with the unemployment rate at +4.9%. Nevertheless, the pounds moves remain somewhat limited ahead of tomorrow’s Bank of England (BoE) rate announcement.

Commodity sensitive currencies are also getting a break in euro trading as the commodity slide takes a breather – AUD and MXN have advanced +0.2% outright after falling -1.5% yesterday.

5. Yuan Hibor surges to a seven-month high

In Asia, dealers continue to focus on borrowing costs, in particular the yuan’s.

The Hong Kong Hibor has shot up aggressively overnight to trade at +8.16% versus only +2.84% on Tuesday. The 1-week was set at +10.15%.

Why so aggressive? Market liquidity remains relative tight ahead of China’s two-day holidays this week. The Hong Kong or offshore market is also closed this Friday for their mid-autumn festival.

However, its not just about liquidity, dealers continue to speculate that the PBoC wants to “squeeze” the speculative shorts out of a perceived one directional trade and authorities can do this by raising the cost of borrowing.

Written By: MarketPulse