Appetite for U.S Dollar Surges, EUR Pounded

Thursday August 31: Five things the markets are talking about

Capital markets have temporarily rediscovered an appetite for the ‘big’ dollar and commodities overnight as upbeat Chinese and U.S economic news has increased the demand for riskier assets globally, despite anxieties over North Korea bubbling in the background.

Data Thursday showed that China’s manufacturing PMI (51.7 vs. 51.3) further strengthened this month, defying the markets forecasts for a decline. That came after a report yesterday showing U.S Q2 GDP growth reached its fastest pace in two-years on stronger household spending and gains in business investment.

Also stateside, Wednesday’s ADP private payrolls indicated robust hiring in August, ahead of tomorrow’s U.S non-farm payroll (NFP) report, which could give the market a clue or two on the timing of the Fed’s next rate move.

This morning, the U.S releases a key personal consumption expenditure report that the Fed looks at (08:30 am EDT) ahead of tomorrow’s granddaddy of economic indicators – U.S non-farm payrolls (NFP – 08:30 am EDT).

1. Stocks get the green light

In Japan, the ‘big’ dollars strength has taken some of the pressure off the yen (¥110.51) sending Japan equities higher. Overnight, the Nikkei share average (+0.7%) rallied to two-week highs as a weaker yen lifted cyclical stocks such as automakers and financial companies. For the month, the index has slipped -1.4%. The broader Topix gained +0.6%.

Note: Globally, investors remain nervous about the prospect of a U.S government shutdown, and a potential debt default if lawmakers don’t raise the U.S debt ceiling by the end of next month, and then there is North Korea.

Down-under, Australia’s S&P/ASX 500 Index added +0.8%, while South Korea’s Kospi retreated -0.4%.

In Hong Kong, stocks eased overnight, but posted an eighth consecutive month of gains as China’s economic recovery and continuous money inflows from the mainland sustained the bullish momentum. The Hang Seng index fell -0.4%, while the China Enterprises Index lost -0.7%. But for the month, the Hang Seng gained +2.4%.

In China, Shanghai stocks ease, but capped their third month of gains on solid earnings. The blue-chip CSI300 index fell -0.3%, while the Shanghai Composite Index shed -0.1%. For the month, CSI300 rose +2.3%, while the SSEC advanced +2.7%.

In Europe, indices continue to recover, trading modestly higher across the board, with grains ranging from +0.4% to +0.7%. Mining and construction stocks lead the decliners on the FTSE, while on the CAC, the retail sector weighs.

U.S stocks are set to open in the black (+0.3%).

Indices: Stoxx600 +0.5% at 373, FTSE +0.6% at 7412, DAX +0.5% at 12061, CAC-40 +0.5% at 5081, IBEX-35 +0.7% at 10315, FTSE MIB +0.6% at 21630, SMI +0.5% at 8897, S&P 500 Futures +0.3%

2. U.S gas hits $2 a gallon as Harvey impedes refiners, crude and gold weak

U.S gas prices have hit +$2 a gallon for the first time in two years this morning as flooding from storm Harvey knocked out almost a quarter of U.S refineries, while crude prices remain weak as demand has dropped following the outages.

Note: Due to Harvey, at least +4.4m bpd of refining capacity remains offline. The closure of so many U.S refineries has resulted in a slump in demand for crude oil for the petroleum industry.

The temporary closure of refineries is a major dent to U.S crude demand and is weighing on both Brent and WTI prices. Brent crude is trading at +$50.74 a barrel, down -12c from Wednesday, when the contract fell by more than -2%. U.S West Texas Intermediate (WTI) crude futures are trading at +$46 per barrel, slightly above yesterday’s close, when prices fell by -0.8% intraday.

Ahead of the U.S open, gold has slipped a tad as the dollar finds some traction on positive economic data from China and the U.S over the last 24-hours, but continues to hold above the key psychological +$1,300-an-ounce level as safe haven demand due to North Korean tensions cap losses. Spot gold is down -0.4% at +$1,303.11 per ounce and remains on track for a near +3% monthly gain.

3. Sovereign yields fall on the month due to geopolitical concerns

European and U.S bond markets have been caught this week between a stronger tone to economic data globally, putting upward pressure on yields, and concern about rising tensions with North Korea which have boosted demand for safe-haven debt.

The flows back into safe-haven eurozone debt product this month came after a sharp selloff in July on concerns about a scaling back of ECB monetary stimulus.

German Bunds yields are down about -17 bps in August – the biggest fall since February. Currently, 10-year Bund yield is up just +1 bps at +0.37%, edging away from two-month lows hit earlier this week at +0.32%.

In Japan, the Bank of Japan (BoJ) plans to purchase ¥300-500B JGB’s this month which mature in 5-10 years. That’s -¥50B less than August’s stated range.

The announcement could be seen as the BoJ tapering by stealth amid concerns it may soon hit the limit of JGB’s it can buy from the market.

Elsewhere, the Bank of Korea (BoK) left its Repo Rate unchanged at +1.25% overnight (as expected), for its 14th straight pause in the current easing cycle. S. Korean policy makers reiterated to maintain the current stance of policy accommodation.

Ahead of the U.S open, the yield on U.S 10-year Treasuries have backed up +2 bps to +2.15%.

4. Dollar finds support

The USD continues its recent recovery with many attributing the need to pass a disaster relief package for Hurricane Harvey might make it easier for Congress to raise the debt ceiling next month and stronger data in the last two sessions is supporting the greenback.

The EUR/USD (€1.1885) is trading under pressure and has backed off two-big figures from its 2 ½ high (€1.2069). The rapid rise is certainly a concern for the ECB, as it would impede the improvement on EU inflation front.

Note: The ECB meeting is coming up next week and there are rising risks of verbal intervention from Draghi on the EUR’s appreciation. Already, France Finance Minister Le Mairea did some verbal intervention noting that a stronger EUR was a “concern for their domestic economy.”

USD/JPY (¥110.63) is back at its two-week high as geopolitical worries over the Korean Peninsula situation have eased a tad. The US/South Korean military drills are nearing its scheduled end.

GBP (£1.2876) is lower and has ignored commentary by BoE ‘hawk’ Saunders that the U.K could handle raising interest rates and warned of getting “behind the curve.”

5. Euro Zone Aug CPI edges higher but still distant from ECB target

Data this morning showed that inflation in the eurozone picked up markedly this month and that the jobless rate remained at its lowest level for over eight years, supporting expectations that the ECB will soon announce a gradual withdrawal from its massive stimulus programs.

The E.U’s statistics agency said the region’s annual inflation rate rose to +1.5% from +1.3% in July, propelled by energy prices.

Note: Despite the outcome being higher than the +1.4% expected, eurozone inflation continues to undershoot the ECB’s target of “below, but close to” 2%.

The ECB has come under pressure to wind down its stimulus programs from Germany and the market is preparing itself for next week’s ECB monetary policy meeting where Draghi could potentially announce something re tapering (Sept. 7).

Other data showed that the eurozone’s unemployment rate was stable at +9.1% in July, which marks the lowest level since February 2009.

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