DB’s Jim Reid concludes the overnight wrap
The toughest thing over the last 24 hours has been finding an asset that has gone down. Post the FOMC conclusion we’ve seen global equities rally in unison, bond yields fall sharply, credit tighten, EM rejoice and commodities stride confidently on.
If you’re really looking for weakness then the following is the (small) list of assets we found that have fallen post-FOMC, not including the obvious decline for the Dollar: Egyptian, Slovakian and Macedonian equities, Corn, Natural Gas, Taiwanese Dollar, Kiwi Dollar and the Chile 2y bond. On another day that might look like a reasonably diversified portfolio!
The ‘everything’ rally seems to have been sparked by a relief that the uncertainty of the Fed is now out the way and markets feel they have a window to exploit carry. Yesterday the S&P 500 closed +0.65% and at one stage traded to within half a percent of its all time highs. It also takes the post FOMC rally to +1.53% for the S&P with real estate names leading the way.
European equities were earlier playing catch up with the Stoxx 600 (+1.58%) and DAX (+2.28%) rising steeply. The vast majority of emerging markets have also had a bumper last 35 hours or so. Bourses in Mexico, South Africa, Argentina and Brazil are all up 2-3%. It’s much the same in credit too. CDX IG was another 2.5bps tighter yesterday and is now 5bps tighter in the same time frame, while the iTraxx Main and Crossover indices rallied 3bps and 14bps respectively yesterday. Oil has also been firm with WTI now +1.10% since the FOMC despite dropping this morning in Asia. The VIX has also fallen back to a two-week low following a 20% or so drop.
The bond market has also responded as though it’s been giving the green light for the next few months. The Treasury curve flattened for a second consecutive day. 2y yields were fairly unchanged at 0.772%, but 10y yields were down another 3.3bps to 1.619% and 30y yields finished down closer to 4bps at 2.336%. 10y Treasury yields are now down some 8bps or so in yield post the FOMC but even more impressive have been the moves in European bond markets. 10y Bunds have in fact been one of the biggest outperformers after yields tumbled 9.8bps yesterday to -0.099% – the strongest day since the immediate post-Brexit reaction on June 24th. Other sovereign bond yields in Europe closed 6-10bps lower yesterday.
So as we move slightly away from focusing as much on central banks, we’ll slowly now build to the US elections as the next major observable macro test. Monday’s first debate between the candidates will mark the start of the serious battle ahead. At a micro level earnings season in the US is also just around the corner so that’ll be another important upcoming period.
Switching over to the latest in Asia this morning where Japan is open again following a public holiday yesterday. After initially falling half a percent or so at the open, the Nikkei (-0.12%) has pared most of the early decline, while the Topix is currently -0.26%. The reports of an undersea earthquake 250km from Japan’s coast is perhaps to blame and it’s resulted in the Yen (-0.34%) weakening a bit more this morning.
There was good news on the data front though with Japan’s flash manufacturing PMI rising 0.8pts to 50.3 in September. Elsewhere it’s a bit more mixed. The Shanghai Comp (-0.10%) and CSI 300 (-0.28%) are both in the red, while the Hang Seng (+0.07%), Kospi (+0.11%) and ASX (+0.62%) have climbed. Sovereign bond markets have continued to rally. 10y JGB’s are 2bps lower at -0.056% while yields in the rest of Asia are generally 1-8bps lower.
Moving on. The economic data yesterday was largely focused on the US, although it was mainly second tier releases. Perhaps the most significant was the existing home sales reading in August which declined unexpectedly (-0.9% mom vs. +1.1% expected), mirroring the soft pending home sales report. The conference board’s leading index (-0.2% mom vs. 0.0% expected) was also soft for last month, although we did see a one-tenth upward revision to July’s print.
On the positive side initial jobless claims were down 8k last week to 252k, while in the manufacturing sector the Kansas City Fed’s manufacturing survey was up a bumper 10pts to +6 (vs. -3 expected) this month, the strongest reading since December 2014. The associated text showed that ‘for the second time in four months we had a positive reading on our composite index’ and that ‘this followed 15 straight months of contraction and suggests regional factory activity may be stabilizing’.
Meanwhile, in Europe confidence indicators in France generally nudged up this month, while in the UK the CBI’s industrial trends survey for September showed no change in total orders at -5, but a 11pt rebound in the volume of output expectations for the next three months to +22 and so taking it back to pre Brexit levels. On that subject, there was a bit of focus over at the BoE yesterday with MPC member Kristin Forbes speaking to Bloomberg News. Forbes said that ‘we may be over-counting the effects’ of uncertainty following the Brexit outcome and that ‘I’ve worried a bit in our forecast that we control for many of the measures that simultaneously control for uncertainty, and then we put in uncertainty effects, so we’re putting them in twice’. Forbes also suggested that there could be some upward revisions to growth forecasts and that ‘at this point I don’t see the case for additional stimulus’. It’s worth noting here that Forbes is considered one of the more hawkish BoE committee members. Sterling was up +0.35% yesterday following those comments.
In one last mention of Brexit, today marks the first full quarter anniversary since the referendum. As a bit of fun, we’ve taken a look at the performance of various assets in that time and included two charts in the PDF today for you to look at. As the charts show, while not quite the biggest underperformer in our sample, the impact on Sterling (-12%) has been clearly evident. It’s actually Corn (-13%) which has been the worst performer although we’d imagine for reasons completely unrelated to Brexit. As a result of the move in the Pound though, looking at Sterling assets there are huge swings between performance in local currency terms and USD hedged terms. Indeed in local currency terms the FTSE 100 and Gilts have done well, returning an impressive +10% and +9% respectively. However this translates into losses of -3% and -5% respectively in US Dollar terms, and so underperforming the likes of the S&P 500 (+4%), EM Equities (+11%), Treasuries (+1%) and US credit (+2% to +4%). The top of the leaderboard, in local terms, is topped by the Hang Seng (+15%), Silver (+15%) and Brazilian Equities (+14%). The same three occupy the top spots in USD terms, albeit in a different order. The bottom of the leaderboard also shows that Oil (-8%) has struggled, while Italian Equities (-7%) and European Banks (-4%) have also weakened. Overall though, in local currency terms 32 out of 42 asset sample have seen positive returns, while 27 assets have seen positive returns in USD terms.
Looking at the day ahead, this morning in Europe we’ll first of all kick off with the final revisions to Q2 GDP in France (no change from the 0.0% qoq reading expected). After that it’s all about the PMI’s with the flash September numbers due out for the Euro area, Germany and France. The market is expecting a very modest deterioration in the composite for the Euro area (52.8 vs. 52.9 previously) led by the manufacturing sector. In the US this afternoon the only data due out is the flash manufacturing PMI which the market consensus expects to stay unchanged at 52.0. Away from the data it’s a reasonably busy day for Fedspeak which should keep the market interested. Harker, Mester and Lockhart are all due to take part in a panel discussion at a conference this evening at 5pm BST, while Kaplan will speak shortly after at 5.30pm BST. The ECB’s Weidmann is also scheduled to speak this afternoon.
