After yesterday’s closing bell where US equities finished at new all-time highs, the biggest municipal bankruptcy in US history was announced, as the city of Detroit filed Chapter 9. Initial reports are that the city owes approximately $18bn to $20bn, dwarfing the previous record holder of Jefferson Country, which racked up $4bn in debt before snubbing their creditors. Because municipal bankruptcies are pretty rare, the road-map from here is murky, although it most likely will lead to further cuts for city workers and retirees, along with decreased services for residents.
Despite a strong lead-in from Wall Street, the overnight Asian session saw equities bleed profusely near the open, with chatter that long positions were being pared by a large macro fund ahead of the upcoming elections over the weekend. The overnight session was in a broad ‘risk-off’ mode as a report from Reuters cited concerns from Japanese firms that a sweeping win from Prime Minister Abe’s LDP party would allow the PM to prioritise nationalist policies at the expense of economic reforms. The Nikkei was able to steady itself after the initial drop, but still finished down 1.48% on the day. The weakness in the equity sector translated to a strong performance for the yen, with USDJPY testing in the low 100s before finding initial support.
Turning our attention to Europe, major bourses are slightly in the red as North America gets set to open. Producer prices in Germany for the month of June came in flat on a m/o/m basis while Industrial Orders in Italy increased by 3.2% from April to May, up from the 0.8% registered in April. The second-tier economic data has done little to drive market action, with equities content to trade off broader market themes, thereby echoing the offer tone from stocks in Asia. Last night in Portugal the country’s centre-right coalition government managed to survive a non-confidence vote, and while political stability is still fragile, Portuguese 10-year yields are finding some relief, edging below 6.8%. The EUR is slightly higher against the big dollar at the time of writing, bolstered by softness experienced by the DXY during the overnight session which helped the EURUSD pair maintain the 1.31 handle.
As we head into the North American open, equity futures are consolidating and pivoting around unchanged before the opening bell. WTI has been on a tear as of late, with positive infrastructure developments and geopolitical concerns in Egypt driving Texas Tea to its highest level in 17 months. The meteoric rise of the light-sweet crude benchmark, with its heavy-oil international counterpart Brent remaining relatively stable over the same period, has caused the WTI-Brent spread to collapse to lows (and turn negative this morning) not seen since QE2 was first announced at Jackson Hole in 2010. The jump in the value of WTI is causing concern that should these price increases flow through to refined product and push gas prices at the pump higher, the increased burden faced by the American consumer will weigh on the domestic recovery. The Loonie usually trades with a pretty tight correlation to WTI prices, however since the black gold has put in work above the $100/barrel level, 30-day rolling correlation between the CAD and WTI has broken down, as growth concerns and other exogenous factors keep the CAD from gaining too much strength on higher oil prices. WTI is back on the rise again this morning, surpassing Brent, with the front month contract garnering bids just north of $109/barrel level.
The Loonie is pivoting close to unchanged against the big dollar this morning, not exhibiting much volatility after the reading on inflation in the month of June came in pretty much as expected. Both headline and core CPI increased by 1.2% and 1.3% respectively over the last 12 months as economists had expected, but still up from the depressed levels of May which saw headline and core come in at 0.7% and 1.1% respectively. With consumer prices continuing to hover along the lower end of the Bank of Canada’s target band, there is nothing to suggest the BoC will have to act prematurely to combat price pressures, allowing it to keep its accommodative stance towards monetary stimulus until some of the slack is removed from the economy. USDCAD traded within a tight range overnight, and continues to put in work just south of the 1.0400 handle.
Other than the G20 meetings in Moscow today, that is about it for economic data this week. The elections for the upper chamber of parliament in Japan over the weekend could bring with it some market volatility like we’ve seen today, although it is widely expected that the coalition government will secure a majority. The potential worry is that too large of a majority would see Abe shift his agenda towards constitutional changes in order to strengthen Japan’s military; however, at this point it seems unlikely for the coalition to secure a 2/3 majority. Provided there is no significant surprises, a simple majority for the LDP should be supportive for Japanese stocks and weigh on the yen.
Further reading: Shot in the Abenomics Arm
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