Global equities have appear to have stabilized after yesterday’s bloodbath as North American equity futures make their way into positive territory, although the overnight Asian session was unable to avoid the spillover effects from the lacklustre close on Wall Street. Japanese stocks were hammered lower by over 4% as the negative market sentiment and skepticism around the vague nature of the recently announced “Abenomics 2.0″ to prop up the economy sent investors heading for the exits. The turmoil did not stop in Japan, with China also watching high-yield asset classes crumble under the weight of sour market sentiment which caused the Shanghai Composite shed over 2% by the time the session was finished.
The carnage experienced in equities yesterday was curious given how insulated currency markets were from similar moves; for the most part, currencies remained with recently prescribed ranges, and the liquidation in equities and commodities did little to shake currencies from those previously defined ranges. What was most likely attributable to the relative calm in currency markets could be chalked up to participant’s confusion as a result of the latest round of Fed-speak, as Dudley and Evans were both on the speaking circuit yesterday. NY Fed President Dudley essentially echoed the comments heard last week from Yellen in that a rate hike in 2015 in the most likely course of action for the Fed, though if monetary policy conditions tighten too much after the first hike then the Fed has the ability to slow the trajectory of future interest rate increases. Things got a little more confusing when the usually dovish Evans said later in the day that he may be convinced to advocate for a rate hike this year if the economy warranted, but said the uncertainty around the inflation picture had him forecasting the first interest rate increase coming in 2016. Fed funds futures for December raised slightly after the dust settled on yesterday’s Fed-speak, with the contract suggesting the chances of an interest rate hike at the December meeting were roughly just over 50% priced in (using conventional wisdom that after a rate hike the average Fed funds rate will be the midpoint of the range); however, given the recent commentary from who are considered the Troika of the Fed (Yellen, Dudley, and Fischer), we would put the odds of a December rate hike somewhere closer to 75%.
European bourses have steadied themselves midway through their session, with the euro under modest pressure against the big dollar but essentially unchanged from yesterday’s close. Earlier in the day we got inflation readings from Spain as well as initial reports from many of the German states, none which are particularly conducive to generating optimism around pricing pressures in the European economy. The harmonized CPI measure in Spain for the month of September fell by 1.2% on expectations for a drop of only 0.6%, while the German states also saw price declines that suggest risk to the downside when the national figures are reported later this morning. Given there is a strong feeling in financial markets that the ECB is close to either extending or expanding their current asset purchase program, the continued softness in realized and expected inflation will likely begin to swing the pendulum closer to further accommodation, as investors become more sensitive to data points that are influential in the ECB’s decision making framework.
As we get set for the North American open, commodities have stabilized somewhat after yesterday’s slide that exacerbated Glencore’s potential solvency issues and acted as a weight on the entire equity market. Yesterday Glencore’s stock tumbled close to 30% and their 5-year Credit Default Swaps blew out wider by over 200bps as worries around a downgrade in their investment grade rating could trigger a collateral crunch and push the cash-strapped commodity-giant into bankruptcy. Things appear to have stabilized for the time being, with front month crude firming close to the $45 mark, while copper is finding some buying interest. The loonie tested fresh 11-year lows earlier this morning as the cascading “risk-off” atmosphere dominated Asian trade, though both Producer and Raw Material Prices for the Canadian economy are set to drop on the economic docket later this morning. Canadian GDP figures for the month of July will be releasedtomorrow and will be a focal point for loonie traders ahead of Non-Farm Payrolls on Friday. The rather optimistic Bank of Canada Governor Poloz at a speaking engagement last week would suggest the decent GDP figures from June are set to continue with another positive print for July, though we would suggest if that was to materialize the USD still remains a buy on dips.
Further reading:
Dollar could Turn Bullish on EURO and JPY – Elliott Wave Analysis
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