Futures Coiled Near All Time High As Dollar Tumbles To Fresh Two Year Low Tyler Durden Tue, 09/01/2020 – 08:12 Stocks started September on a positive note on Tuesday, with S&P futures flat after fading earlier gains alongside shares in Europe as global indexes close to all-time highs as data in China and Europe showed manufacturing demand rebounding from coronavirus-induced lows. The dollar tumbled to a two-year low and the Yuan jumped after Chinese manufacturing data indicated that exports are underpinning a recovery. The MSCI world equity index, which tracks shares in 49 countries, was close to recent highs, while the pan-European Stoxx 600 rose 0.3% in early trading with technology and basic resources climbing the most among sectors. France’s Cac 40 was up 0.2% and Germany’s Dax was up 0.7%. Britain’s FTSE 100 lagged, down 1.4%, hurt by a rising pound. Euro zone manufacturing activity grew last month, though factory managers remained wary about investing and hiring more workers. The French Mfg PMI beat expectations coming at 49.8, above the 49.0 consensus if down from 52.4, while Germany output grew at its fastest pace since February 2018, while in France it contracted. European stocks had opened even higher but pared gains after Germany cut its GDP forecast for 2021. Both shares and the euro, which rose to a two-year high of $1.19975 overnight in New York, were little changed after data showed annual euro zone inflation fell well below expectations in August, turning negative for the first time since May 2016, and a far cry from the European Central Bank’s inflation target of just under 2% (some have mused if the ECB will follow the Fed in announcing AIT as well). “These numbers are clearly inconsistent with the ECB’s target,” said George Buckley, chief European economist at Nomura, who said the low reading will raise questions about whether the ECB should, like the Fed, adopt average inflation targeting. There were however credibility issues with such an approach, if the bank was unable to raise inflation to balance out the periods of lower inflation. In Asia, China’s yuan touched the highest since 2019 and equities benchmarks in Hong Kong, Shanghai, Taipei and Seoul climbed. The Caixin PMI survey of China’s factory activity rose at the fastest pace in August since January 2011, helped by improving exports and continued domestic recovery, and boosted market sentiment overnight and into the European market open. In rates, 10Y yields rose to 0.72% , up 2bps on the day with treasuries trading heavy led by the long end as month-end bid unwound. Yields were cheaper by up to 3bp at long end of the curve, steepening 2s10s, 5s30s by 1.6bp and 2.7bp; 10-year yields around 0.725%, cheaper by 1.8bp vs Monday’s close while gilts lag by ~1.5bp across the sector. Gilts underperformed, weighing on Treasuries along with a sharp selloff in Aussie bonds during Asia session. Core euro zone bond yields were up around 1 to 2 basis points, with the benchmark German 10-year yield at -0.387%. In FX, the dollar continued to drop to a fresh two-year low and was down 0.4% at 91.826, dropping below 92 for the first time since May 2018 after a purchasing managers index for China beat estimates to raise optimism over Asia’s economic recovery. “The weakness in the dollar is likely to continue and I suspect it will be substantially weaker from where it is against the euro by the end of the year,” said Savvas Savouri, chief economist at Toscafund Asset Management. “We’ve got the Fed chairman clearly telling us he wants inflation to ratchet upwards, and the only reliable way to achieve this is through the channel of a weaker currency.” The euro climbed after German unemployment eased for a second month, though gains fell short of reaching $1.20 following the abovementioned deflationary print. At 1025 GMT, the single currency traded at $1.19835, up 0.4% since New York’s close as a dollar sell-off continued. Sterling rose to eight-month highs against the dollar, strengthening to as much as $1.3465 at 1028 GMT, and was up around 0.3% versus the euro. In commodities, oil prices gained, reversing overnight losses. Brent climbed 56 cents to $45.84 a barrel while WTI futures rose 47 cents to $43.08 a barrel. Gold prices also rose, to their highest in two weeks. Market Snapshot S&P 500 futures up 0.3% to 3,510.75 STOXX Europe 600 up 0.2% to 367.28 MXAP up 0.4% to 173.35 MXAPJ up 0.5% to 574.03 Nikkei down 0.01% to 23,138.07 Topix down 0.2% to 1,615.81 Hang Seng Index up 0.03% to 25,184.85 Shanghai Composite up 0.4% to 3,410.61 Sensex up 0.8% to 38,948.09 Australia S&P/ASX 200 down 1.8% to 5,953.41 Kospi up 1% to 2,349.55 German 10Y yield rose 0.9 bps to -0.388% Euro up 0.3% to $1.1971 Italian 10Y yield rose 5.0 bps to 0.968% Spanish 10Y yield rose 0.8 bps to 0.417% Brent futures up 1.2% to $45.82/bbl Gold spot up 1.1% to $1,989.57 U.S. Dollar Index down 0.3% to 91.91 Top Overnight News from Bloomberg A private gauge of China’s factory activity grew at the fastest rate in August since January 2011, helped by exports and domestic recovery Global trade is expected to rebound faster than after the 2008 financial crisis, according to Germany’s Kiel Institute for the World Economy. The number of coronavirus cases approaches 25.5 million worldwide, while deaths surpass 850,000 The euro zone’s inflation rate went negative for the first time since 2016. Meanwhile Germany’s hit from the coronavirus will be less severe than feared, as the government’s efforts to kick start Europe’s largest economy show signs of bearing fruit A closely-watched euro-area interbank borrowing rate fell to a record, dragged down by all the money sloshing around the economy A quick look at global markets courtesy of NewsSquawk: Asian equities traded cautiously as the region took its cue from the losses seen across most global counterparts despite Wall St. notching its biggest monthly gain since April and its best August performance in more than 3 decades, while participants also digested encouraging Chinese Caixin Manufacturing PMI data. ASX 200 (-1.8%) underperformed and briefly wiped out all of the prior month’s gains on a collapse below the 6,000 level with the downturn led by hefty losses in tech and energy, while the detention of a Chinese-Australian television anchor further highlighted the souring bilateral relations with China. Nikkei 225 (-0.1%) was indecisive but with downside stemmed by recent currency weakness and political continuity hopes with Chief Cabinet Secretary Suga said to be supported by the largest faction of the ruling LDP and is set to announce an intention to continue with Abenomics and the pandemic response when declaring his candidacy on Wednesday. Elsewhere, Hang Seng (U/C) and Shanghai Comp. (+0.4%) swung between gains and losses as mild support was seen following the strongest Caixin Manufacturing PMI reading since January 2011, but with upside also capped after the PBoC drained CNY 230bln from the interbank market and due to lingering US-China tensions after White House trade adviser Navarro stated the US will go after others not just TikTok and WeChat. Finally, 10yr JGBs were higher following the recent gains in T-notes and indecisive risk tone in the region, although some of the gains were reversed after all metrics pointed showed weaker results at the 10yr JGB auction. Top Asian News Total Enters Giant Korean Floating Wind Projects in Green Push Samsung’s Heir Jay Y. Lee Indicted in Succession Probe Supreme Court Approves 10-Year Rescue Plan for Indian Telcos SoftBank Corp. Is ‘Surprise’ Addition to Japan’s Nikkei 225 Earlier gains across European equities have somewhat faded (Euro Stoxx 50 +0.4%) despite a lack of fresh macro catalysts, with the region now ultimately mixed, whilst losses in UK’s FTSE 100 (-1.3%) persist amid a catch-up play from its long weekend Bank holiday. Sectors performance is also varied with no clear risk profile to be derived: the IT sector outperforms as chip-makers cheer reports that Apple is aiming to launch four new iPhone models next month, with volumes in the 75mln region. Thus, the likes of STMicroelectronics (+1.1%), Dialog Semiconductor (+3.3%), Infineon (+1.2%) remain propped up. On the other side of the spectrum resides Travel & Leisure, alongside Banks and Oil & Gas. In terms of individual movers, Novartis (+3.0%) keeps the healthcare sector afloat on the back of a broker upgrade at Morgan Stanley coupled with an announcement that it has developed new ESG targets in order to ramp up access to medicines and achieve full carbon neutrality. Sticking with the healthcare sector, Sanofi (+0.6%) has largely brushed off its COVID-19 Kevzara vaccine failing to meet primary and key secondary endpoints in its Phase III trials. Meanwhile, AstraZeneca (-0.5%) succumbs to the weakness in the post-bank holiday UK markets but with downside somewhat cushioned by a positive update for its Farxiga, Imfinzi and COVID-19 vaccine deal with Canada. Elsewhere, Shell (-2.0%) and BP (-2.1%) are subdued despite higher oil prices, and with losses more pronounced that its cross-border counterparts amid catch-up play alongside reports UK Chancellor Sunak could increase fuel duty by 5p to help pay for the coronavirus in the Autumn budget. Top European News U.K. Manufacturing Output Expands at Fastest Pace in Six Years European Factories Brace for Economic Rebound to Falter Russia Passes 1 Million Covid-19 Cases as Epidemic Simmers German Joblessness Falls Again Amid Revival of Economic Activity In FX, the Dollar is suffering from a post-month end hangover as the DXY slips to a new 2020 low of 91.741 amidst broad losses vs G10 peers and most EM currencies. Confirmation of a firm US manufacturing PMI via the final release and ISM matching expectations for a pick-up in headline activity could conceivably provide the Greenback some respite, but the index remains toppy on rebounds over 92.000 as buoyant risk sentiment counters renewed bear-steepening along the Treasury curve. NZD/CAD/GBP/EUR – The major beneficiaries of ongoing Buck weakness as the Kiwi pivots either side of 0.6750 awaiting NZ terms of trade for Q2 and the Loonie extends through the psychological 1.3000 level with some assistance from firm crude oil. Meanwhile, the Pound has scaled another big figure and briefly breached a mid-December 2019 peak (1.3422), as Eur/Gbp unwinds modest RHS demand for the August/September turn from circa 0.8950 towards 0.8900 irrespective of more negative sounding Brexit news (EU chief negotiator Barnier reportedly unwilling to discuss new UK fishing proposals unless Britain compromises on other contentious issues). Elsewhere, the Euro has tested round number resistance at 1.2000 vs the Dollar, but market contacts note heavy offers related to option expiries and on that note 1.1 bn rolling off between 1.1895-1.1900 at today’s NY cut may keep the headline pair supported given little net reaction to mixed Eurozone manufacturing PMIs and even weak, deflationary inflation. JPY/AUD/CHF – Also firmer against the Greenback, albeit mildly as the Yen hovers midway within a 106.03-105.60 range, the Aussie fades after another 0.7400+ foray and Franc fails to breach 0.9000. For the record, the RBA stuck to the script overnight, though did extend and expand its Term Funding Facility, while July building approvals smashed estimates and the Q2 current account surplus was wider than forecast. However, relations with China are going from bad to worse as barley imports from Australia’s CBH Grain company are suspended. SCANDI/EM – Not much response to rises in Swedish and Norwegian manufacturing PMIs, but China’s stronger than expected Caixin reading has helped the Yuan appreciate further vs the Dollar in contrast to a decline in the Turkish headline index that is weighing on the already lagging Try. In commodities, WTI and Brent front month futures continue to ebb higher in early European trade, in what is a continuation of price action seen overnight as a function of the weakening Dollar, whilst the complex also remains underpinned by overall risk sentiment. Aside from that, pertinent news flow has been on the light side, although sources reported that UAE’s ADNOC pumped some 2.693mln BPD of crude in August in order to meet domestic demand – above its quota under the OPEC+ pact. That being said, sources added that the country will compensate for the undercompliance in the months ahead, whilst Iraq submitted a plan to OPEC that proposes additional cuts of 400k BPD in August and September and Kazakhstan plans additional cuts of 95k BPD over the same two-month period, according to sources. Further, Goldman Sachs raised 2020 Brent crude price forecast to USD 43.63/bbl from USD 40.51/bbl and raised 2021 forecast to USD 59.38/bbl from USD 55.63/bbl. WTI October holds its head above USD 43.00/bbl having found an overnight base around USD 42.75/bbl, whilst its Brent counterpart inches higher towards 46/bbl from a low of 45.47/bbl. Elsewhere, the weaker Buck keeps precious metals afloat with spot gold inching higher towards the USD 2000/oz mark (vs. low 1965/oz) whilst spot silver extends gains above USD 28.75/oz (vs. low 28.04/oz). Meanwhile, LME copper prices climbed to levels last seen over two years ago – bolstered by the Chinese Caixin Manufacturing beat coupled with the softer Dollar, whilst Dalian iron ore saw mild gains due to the same factors. US Event Calendar 9:45am: Markit US Manufacturing PMI, est. 53.6, prior 53.6 10am: ISM Manufacturing, est. 54.8, prior 54.2 10am: Construction Spending MoM, est. 1.0%, prior -0.7% Wards Total Vehicle Sales, est. 15m, prior 14.5m DB’s Jim Reid concludes the overnight wrap Never has the restrictions of social distancing felt so liberating. As of today I can break the shackles of two weeks in quarantine. It’s been tedious, tiresome and ponderous. As least during full lockdown we went out for a nice walk once a day and I had heaps of work to occupy me. Of these past 14 days, 10 were spent on holiday at home (or weekends) and 4 at work in my home office. The latter were infinitely more enjoyable and less stressful for me. Much less for my wife. Every morning the twins repeatedly say “Go Mummy car”. They can’t work out why we don’t go out and are very confused. Hopefully they’ll squeal with delight when they realise their wish is finally going to come true. So with a dull second half of August behind me we welcome in September today. To mark this we are launching our monthly survey this morning as a back to school special. This month’s includes plenty of questions about life around the virus including some questions on whether you will be first up volunteering to take any vaccine, whether you think they should be compulsory and how your understanding is on the effectiveness of vaccines generally. Also a number of other questions. It only takes 3 mins to fill in and results will come in the days ahead. Here is the link. All help filling in the survey very much appreciated. This morning Henry is publishing the monthly performance review. It was another good month for risk especially for Silver (+15.39%) and the Nasdaq (+9.59%). It was also the best August for the S&P (+7.01%) since 1986 and the best individual month since April – just after the pandemic lows. See the full review in your inboxes soon for more. Even with the good month, August ended with the S&P 500 slipping slightly, falling -0.16%, as even large gains in tech stocks were unable to keep the index in the green. Roughly 70% of the index was lower on the day after stocks dipped mid-session on reports of China blocking US companies from buying social media company TikTok. In a story that speaks to the power of retail investing in the current market, Apple and Tesla powered the Nasdaq +0.68% higher to another record after their pre-announced stock splits were enacted. The two stocks added +3.39% and +12.57% of value respectively by just lowering the sticker price. In Europe with the UK markets closed, the Stoxx 600 fell -0.62% during the last session of August, reversing a gain of as much as +0.7% early in the session. This left the index up +2.86% on the month for its best August performance since 2009. Core sovereign bonds diverged much like equities with US 10yr Treasury yields down -1.6bps to finish at 0.705%, while 10yr Bund yields rose +1.2bps to -0.40%. The dollar resumed its slide as well (-0.25%), falling for the fifth session in a row. Overnight Asian markets are a little directionless with the Nikkei (-0.07%) and Hang Seng (-0.02%) trading flat while the CSI (+0.12%) and Shanghai Comp (+0.04%) are posting modest advances. The Kospi (+1.06%) is leading the way on news that the government is preparing to boost its 2021 budget by 8.5%. In FX, all G-10 currencies are up (0.2-0.6%) against the greenback with the Euro trading closer to the 1.20 handle at 1.1992. Meanwhile the onshore Chinese yuan is up +0.42% to 6.8202, the highest level in over a year. Futures on the S&P 500 are up +0.11% while those on the Nasdaq are up +0.40%. Elsewhere, crude oil prices are trading up c.1% this morning while gold and silver are up +0.91% and +1.81% respectively. It’s another round of global PMIs today and we’ve already kicked things off in Asia with China’s Caixin manufacturing PMI printing at 53.1 (vs. 52.5 expected and 52.8 last month), the highest reading since Jan 2011 and further emphasising the China recovery story. Yesterday, we saw China’s official August PMIs with manufacturing printing 0.2pts lower than expectations at 51.0 while services were at 55.2 (vs. 54.2 expected). Back to today and Japan’s final manufacturing PMI reading was confirmed at 47.2 (vs. 46.6 in flash). South Korea also showed an improvement at 48.5 (vs. 46.9 last month) while for Taiwan it was at 52.2 (vs. 50.6 last month), the highest reading in 2 years. However, readings for Vietnam (at 45.7 vs. 47.6 last month) and Australia (at 53.6 vs. 53.9 in flash and 54.0 last month) retreated on account of renewed lockdowns during the past month. Following the policy framework changes laid out by Fed Chair Powell last week, yesterday Federal Reserve Vice Chair Clarida spoke to the possibility of using Treasury yield caps at some point, but suggested that it is not currently in the plans. He also noted that it is appropriate in many circumstances for inflation to overshoot the 2% goal. Markets also heard from the Fed’s Bostic, who said that he was ‘very worried’ about the drop in fiscal support for economy. Given that several participants argued for more accommodation in July, a lack of fiscal response and further gridlock may cause more committee members to opt for additional easing. With the next FOMC in two weeks this meeting will slowly come into the market’s view. On the coronavirus, yesterday news came that Paris will now offer free testing at various locations throughout the city in order to identify and contain the spread of infections within the French capital. Cases in the country grew by 35,000 in the last week which is almost as many as seen at the country’s April peak, but there has not yet been a significant change in hospitalisations. The pace of new cases in the US continues to slow even as confirmed cases passed 6 million. Earlier this month New York City mayor said that indoor dining would be closed until June 2021, and then yesterday added that any resumption of indoor dining may hinge on a “huge step forward” such as a vaccine. With no guarantee of an effective or widely administered vaccine and colder months coming, this could lead to lower mobility and business output from the largest US city. Across the other side of world, India is now undoubtedly the global epicenter of the virus with the rise in new cases topping 70k on a daily basis. It also has the third highest fatalities now at 64,469. A reminder that we still publish our daily tables in the full pdf if you click on “view report”. There was a good deal of attention on the US Presidential race this weekend after the conclusion of the Republican National Convention last Thursday night. We will see what kind of polling bounce President Trump receives, if any, by the end of the week as very few polls currently include the final, higher profile nights of the convention. In 2016, President Trump saw a nearly 5pt improvement in head-to-head polls against Secretary Clinton after the RNC. He even led her in polling averages for a small amount of time before seeing the bounce decline within a month. That said, Mr. Trump has seen his poll numbers vs Mr. Biden improve by nearly 2.8ps over the past 6 weeks. The RealClearPolitics polling average measures his nadir at 40pts in mid-summer. Mr. Trump is now back to the head-to-head polling range of 42-44pts he was sitting at following the first wave of outbreaks in the US. Overall RCP measures a +6.9pt spread for Mr. Biden (49.7%) over Mr. Trump (42.8%) but check in later this week to see how the RNC may change that. Today we get final August manufacturing PMI’s from around the world, along with the ISM readings from the US, which will give us an indication of how the global economy has fared through the month as some economies opened up further and some became more restricted as viral patterns differed around the world. Note that the flash readings for the Euro Area saw a loss of momentum in the early part of August as its composite PMI fell from 54.9 to 51.6. Outside of the PMI’s, we will get July unemployment data out of the Euro Area, Italy and Japan, while seeing August unemployment change from Germany. Back to this week’s calendar and later in the week the main highlights are the corresponding services and composite PMIs (Thursday) as well as the US jobs report on Friday. On payrolls, consensus on Bloomberg is currently expecting a further +1.518m increase in nonfarm payrolls last month, which would bring the total growth in nonfarm payrolls to 10.797m since April trough. However that would still be less than half of the 22.16m jobs lost in March and April. We have the day by day highlights for the rest of the week at the end. To quickly recap last week for those on holiday yesterday, global equity markets continued to rise as the Federal Reserve’s new inflation targeting approach percolated through the financial system late in the week. The S&P 500 finished up +3.26% (+0.67% Friday) over the course of the week, having closed at record highs for 6 sessions in a row. The index has now risen 8 of the last 9 weeks since coronavirus cases rose quickly throughout the Southern and Western United States in June. The tech-focused Nasdaq rose +3.39% (+0.60% Friday) finishing at fresh highs as well and is now up over 30% YTD. In Europe, equities lagged behind their US counterparts, but the Stoxx 600 ended the week +1.02% (-0.52% Friday) higher. Core sovereign bonds fell significantly on the week, before gaining on Friday with yields near their highest levels since June. The US yield curve steepened significantly following Fed Chair Powell’s statement on Thursday around the policy review and average inflation targeting. US 10yr Treasury yields rose +9.3bps (-3.1bps Friday) to finish at 0.721%, the highest weekly close since late March. Meanwhile 10yr Bund yields rose a similar +9.8bps (-0.2bps Friday) to -0.41% and 10yr Gilts rose +10.5bps (-2.5bps Friday) to 0.31%. The US 2y10y yield curve steepened +10.9bps to the highest levels since early June. In other markets, the dollar fell -0.94% on the week and is set to finish August lower for a fifth straight month.