Fra zerohedge
Global markets and US equity futures fell on Samsung Galaxy Note 7 contagion concern, while the dollar rose to its strongest level in 11 weeks and U.S. bonds declined as investors boosted wagers that the Federal Reserve will raise interest rates this year.
The dollar continued its recent rise against all of its 16 major counterparts after Chicago Fed President Evans said policy “may well be changing soon,” even as he argued for keeping interest rates low until core inflation moves higher. Treasury two-year note yields jumped to the highest in more than four months. The rand tumbled the most since June after Finance Minister Pravin Gordhan was summoned to appear in court. Samsung Electronics Co. led Asian stocks lower after the company told retail partners to stop sales and exchanges of its Galaxy Note 7 smartphone. U.S. crude oil retreated from its highest price in 15 months.
The uSD has been supported by increasing speculation that the U.S. economy will be sufficiently strong to withstand higher borrowing costs even after last week’s jobs report came in below economists’ predictions, and even as the NY Fed expects Q4 GDP to rise a paltry 1.2%. Markets await more clues on Fed thinking on Wednesday with the release of the minutes of the Federal Open Market Committee’s Sept. 20-21 meeting. A government report Thursday will show retail sales rebounded in September, according to a Bloomberg survey of economists. Investors will also get a chance to assess the health of U.S. companies, with Alcoa Inc. unofficially kicking off the U.S. reporting season on Tuesday.
“Futures are increasingly pricing in a December hike and that itself is driving the dollar higher,” even after data on Friday showed that U.S. non-farm payrolls climbed less than economists forecast, said Mitul Kotecha, head of Asia currency and rates strategy at Barclays Plc in Singapore. “The general backdrop of a firmer dollar is weighing on Asian currencies.”
Sue Trinh, head of Asia foreign-exchange strategy for RBC in Hong Kong confirmed that dollar gains are “entirely linked to the fact that the market has been upwardly rerating expectations of a December rate hike,” said . “Three weeks ago, the implied probability of a December hike discounted by fed funds futures was under 50 percent, today it is close to 70 percent.”
Asian stocks were shaken by the troubles at Samsung, which after announcing it would cut sales of its flammable Note 7 smartphone, subsequently confirmed this morning it would cease production altogether. The MSCI Asia Pacific index slides 0.6% as 7 out of 10 sectors fall; infotechm financials underperform while energy, telcos outperformed.
The Stoxx Europe 600 Index slipped less than 0.1 percent in London. Gains in luxury-goods companies tempered declines; LVMH Moet Hennessy Louis Vuitton SE rose 4.9 percent after reporting sales that topped analysts’ estimates. Christian Dior SE and Burberry Group Plc advanced at least 1.8 percent. Banks and health-care shares led declines among Stoxx 600 groups. Deutsche Bank AG dropped 0.8 percent, for the worst performance on Germany’s benchmark DAX Index. 13 of 19 Stoxx 600 sectors fall with technology, banks underperforming and personal & household, utilities outperforming; 54% of Stoxx 600 members decline, 44% gain
S&P 500 Index futures declined 0.2%, after the S&P500 closed up 0.5% on Monday as surging oil boosted energy producers.
Much attention continues to be focused on Oil, which yesetrday kicked off in the red, but WTI rallied back from late morning to close +3.09% higher at $51.35/bbl. It’s fractionally lower this morning and you have to go back to July 2015 to find the last time WTI closed higher. Prices were initially under upward pressure after the Saudi Arabia’s energy minister said that he was optimistic that a deal between major producers would be reached by November 30th. However that was then overshadowed by comments from Russia President Vladimir Putin. He said that ‘in the current situation we think that (an oil output) freeze or even an oil production cut is likely to be the only right decision to maintain the stability of the global energy sector’ and that ‘Russia is ready to join the joint measures to cap production and is calling for other oil exporters to join’. Those comments also sent Brent up +2.33% and above $53/bbl (at $53.14/bbl) for the first time in a little over a year. It also means that Brent is now up an extraordinary +90% from the lows of mid-January.
However, with the USD continuing to rise, many traders ask themselves how long before the old USD-Crude correlation reasserts itself. As the following chart from Deutsche Bank shows, crude is now 30% overpreiced relative to the Trade-Weighted Dollar.
Yields on 2Y Treasuries increased three basis points to 0.86%, the highest since June. 2. Ten-year note yields rose six basis points to 1.77%. Trading resumed after the Columbus Day bond-market holiday on Monday. The decline in Treasuries is also being driven by the willingness of Saudi Arabia and Russia to cooperate on an oil output deal, said John Gorman, head of non-yen rates trading for Asia and the Pacific at Nomura Holdings Inc. in Tokyo. Higher oil prices tend to boost inflation, which erodes the value of the fixed payments on bonds. European government bonds were little changed, with the yield on benchmark German 10-year bunds at 0.05 percent. The yield on similar-dated U.K. gilts fell three basis points to 0.99 percent. Asian government debt dropped, with yields on 10-year Australian bonds up six basis points to 2.25 percent. Yields on similar maturity notes in Japan climbed by 1.5 basis points and those in South Korea jumped seven basis points.
With the Alcoa Q3 reports after the close, investors will turn their attention to earnings for indications of the health of corporate America. Analysts forecast a 1.6 percent contraction in three-month profit for S&P 500 members, which would be a sixth straight quarterly drop.
