Thursday, September 27, 2018

Capital Markets: "Greenback Firms" (incl. a note on the U.S. Strategic Petroleum Reserve)

From Marc to Market:
Overview: The US dollar is firmer against all the major currencies and most emerging market currencies, extending the recovery seen after the Federal Reserve's rate hike. Despite the poor finish for US equities yesterday and declines in Japanese and Chinese shares today, the MSCI Asia Pacific Index eked out a small gain. European bourses were on the defensive, the Dow Jones Stoxx 600 off almost 0.5% in late morning turnover. Core bond yields are softer after, though budget uncertainty in Italy is weighing on the country's assets, and pushing peripheral yields higher.

Central Banks: Following the Fed's hike, Hong Kong as widely expected matched suit with a 25 bp increase. A couple of large banks in Hong Kong lifted their prime rates by 12.5 bp. The PBOC, which on occasion this year has followed Fed hikes with a small token move, refrained from action today. The Reserve Bank of New Zealand kept policy steady, as had been anticipated. The Philippines central bank and Taiwan held monetary policy, while Indonesia delivered a 25 bp rate hike (seven-day reverse repo rate to 5.75%. The rate hike did not prevent the rupiah from edging lower.

Euro: The single currency had poked through $1.18 at the end of last week and earlier this week. However, no follow-through buying materialized and except for a week ago (September 20), the euro has been unable to close above $1.1750. The inability to rally left late longs vulnerable and some were washed out on the move to $1.1685 today, a five day low. There are a 1.2 bln euro $1.1700 option and a 1.7 bln euro $1.1750 option that is expiring today.

Italy: The Italian budget is turning into a cliffhanger and investors do not like it. The outcome may not be known until well into the US afternoon. Italy's two-year note yield is up 12 bp today, and the 10-year yield is up eight. Italian stocks are underperforming and the 1.5% loss near midday is the largest in a month. Bank shares are 3% lower, The issue comes down to this: the Five-Star Movement and the League made campaign promises for a new transfer program for the poor and elderly and lower flatter tax, but centrists, like the president, prime minister, and finance minister want to avoid antagonizing investors, like seen in May--and submit a budget deficit of 2% or less of GDP. Separately, Italy raised 5.25 bln euro in debt instruments today, and the bid-cover looked solid. Over the remainder of the year, it reportedly needs to raise another 34 bln euros while nearly 55 bln euros in debt is maturing, providing positive dynamics unless there is a dramatic loss of investor confidence.

Germany: German states reported September CPI figures, and the firm readings warn of upside risks to the median forecast (Bloomberg) of the national figures that will be reported late in the local session. The median forecast was for a 0.1% increase in the harmonized measure for a 1.9% year-over-year pace. Instead, a reading of 2.0%-2.1% seems likely. Moreover, it does not look like it is only energy prices, as Saxony reported a small acceleration of the core rate as well.

Eurozone Money Supply: The ECB reported a more dramatic slowing in money supply (M3) growth to 3.5% from 4.0%. It is the weakest pace of M3 growth since November 2014. However, the ECB officials will likely find comfort in the fact that the lending to non-financial businesses rose (4.2% from 4.0%) and households (3.1% from 3.0%). Separately, economic, industrial, and service sentiment softened....
...Strategic Oil Reserves: There had been speculation that OPEC's decision not to boost oil output more than it had previously agreed despite US demands would encourage the Trump Administration to tap into the strategic reserves. Energy Secretary Perry said this was not going to happen shortly after the North American oil trading had ended for the session, but immediately WTI jump. It is trading 1% higher today, while Brent is 0.6% stronger. WTI had recorded session lows around the time of the Fed's announcement after the EIA showed an unexpected rise in oil inventories (1.85 mln barrels). It is the first increase since early August. On the continuation futures contract, the key level is near $76.55, which is the 61.8% retracement of the decline from the 2014 high. The high for the year was set in July near $75.25. ...

But see also: