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With China's Market Chaos Offline, Futures Levitate On ECB Easing Hopes

With China closed today, the usual overnight market manipulation fireworks out of Beijing were absent but that does not meant asset levitation could not take place, and instead of the daily kick start out of China today it has been all about the ECB which as we previewed two days ago, is expected - at least by some such as ABN Amro - to outright boost its QE, while virtually everyone else expects Draghi to not only cut the ECB's inflation forecast, which reminds us of the chart which in March we dubbed the biggest hockeystick ever (we knew it wouldn't last)...


... but to verbally jawbone the Euro as low as possible (i.e., the Dax as high as it will get) even if the former Goldmanite does not explicitly commit to more QE.

Elsewhere in Asia, stock markets traded mostly higher amid a rebound in the recent global stock market rout, with Chinese markets closed for Victory Day. The Nikkei 225 (+0.5%) outperformed as risk on sentiment saw all sectors trade in the green, driven by another burst of USDJPY levitation early in the session. ASX 200 (-1.4%) bucked the trend after Myer (-16.81%) fell the most on record following reports of a share sale, while a miss on Australian retail sales also weighed on sentiment. 10yr JGBs traded lower as strength in Japanese equities dampened demand for safer assets, while a well-received enhanced liquidity auction failed to spark demand.

Despite the looming risk events, most notably tomorrow's NFP payrolls which is the September rate hike make-or-break event, stocks in Europe traded higher (Euro Stoxx: 1.5%) as market participants used the decrease in volatility amid the close of markets in China for Victory Day parade as an opportunity to re-establish longs. Nevertheless, the upside was led by health care sector, underpinning the fragility of the latest bounce. In terms of notable equity movers, EasyJet (+5.3%) shares surged higher after the carrier raised its FY pre-tax view, on the other hand EDF (-4.2%) shares traded lower since the open after the company announced that their new nuclear plant in Normandy is being pushed back until the end of 2018 and will run USD 2.2bIn over budget.

In terms of fixed income, Bunds head into the North America crossover in modest positive territory ahead of the risk event of the day in the form of the ECB rate decision, with market participants looking out for any indications of a possible extension to ECB QE.

In FX, EUR gained across the board, albeit modestly, as market participants positioned for the upcoming ECB policy meeting and reduced carry trade allocation. This in turn saw shorter-dated vols collapse, however there is a risk of another leg higher in case the President of the ECB delivers a dovish statement, which in widely expected to focus on the developments surrounding China and Eurozone inflation.

Despite the recovery in riskier assets overnight, AUD remains under selling pressure, with the selling driven by less than impressive Australian retail sales data which printed its 1st decline in 3 months which saw AUD/USD fall below 0.7000 level.

Going forward, market participants will get to digest the ECB rate decision and accompanying press conference as well as the release of the latest US weekly jobs report and ISM non-manufacturing.

With China offline, another asset class missed its usual acrobatis: oil. The energy complex heads into the NYMEX pit open fairly flat after light newsflow overnight, while the metals complex sees an unwind of recent trends, with gold lower on the day, while palladium underperforms after the recent pressure on the metal given that China makes up 20% of global palladium consumption.

Market Wrap

  • Europe’s Stoxx 600 rises 1.6%
  • DAX up 1.9%, FTSE 100 up 2%
  • V2X down 9.3% at 30.5
  • Euro up 0.05% at $1.1232
  • LME 3m Nickel up 2.1%, LME 3m Copper up 2.1%
  • S&P 500 futures up 0.4% at 1955.70
  • Credit: iTraxx Main down 1.7 bps to 72.51, iTraxx Crossover down 4.8 bps to 336.07
  • Chinese markets closed for 2-day holiday

Bulletin Headline Summary from Bloomberg and RanSquawk

  • Despite the looming risk events, stocks in Europe traded higheras market participants used the decrease in volatility amid the close of markets in China for Victory Day parade as an opportunity to re-establish longs
  • EUR gained across the board, albeit modestly, as market participants positioned for the upcoming ECB policy meeting and reduced carry trade allocation
  • As well as the ECB rate decision, market participants will get to digest the release of the latest US weekly jobs report, ISM non-manufacturing and EIA natural gas storage change data
  • Treasuries steady before ECB rate decision, Draghi press conference; market focus on tomorrow’s August payrolls report, est. 217k, unemployment rate 5.2%.
  • Weaker commodity prices, slowing trade and a rout in global equities make it likely the ECB will downgrade its quarterly inflation forecasts at his press conference on Thursday
  • The ECB is seeking to acquire as much as EU645m ($725m) of Dutch and Irish mortgage bonds as it increases efforts to buy asset-backed securities, according to three people familiar with the matter
  • Bill Gross says if the Fed raises rates in September, policy makers are likely to wait at least six months before a second hike. Market measures indicate the wait may be twice that long
  • The war of words between Republican presidential candidates Donald Trump and Jeb Bush took another personal turn on Wednesday when Trump admonished his rival for not speaking English on the campaign trail
  • Chinese hedge fund Shanghai Chaos Investment Co. apologized to investors for losses from a deepening rout in the country’s financial markets
  • As fighter jets streaked through the skies of Beijing and tanks rolled through Tiananmen Square to commemorate the end of World War II, Chinese President Xi Jinping told the world that the nation was committed to peace and announced the biggest cuts to the army in almost two decades
  • One IG deal, a SSA, priced $1b yesterday, first in 11 sessions. No HY since August 19. BofAML Corporate Master Index -1bp to +169; reached +172 last week, widest since Sept 2012; YTD low 129. High Yield Master II OAS -5bp to +573; reached +614 last week, widest since July 2012; YTD low 438
  • Sovereign 10Y bond yields mostly higher. Asian stocks mostly higher, European stocks gain, U.S. equity-index futures rise. Crude oil falls, gold lower, copper gains

US Event Calendar

  • 7:30am: Challenger Job Cuts y/y, Aug. (prior 125.4%)
  • 8:30am: Initial Jobless Claims, Aug. 29, est. 275k (prior 271k)
    • Continuing Claims, Aug. 22, est. 2.255m (prior 2.269m)
  • 8:30am: Trade Balance, July, est. -$42.2b (prior - $43.8b)
  • 9:45am: Markit US Composite PMI, Aug. F (prior 55)
    • Markit US Services PMI, Aug F, est. 55 (prior 55.2)
  • 9:45am: Bloomberg Consumer Comfort, Aug. 30 (prior 42)
  • 10:00am: ISM Non-Mfg Composite, Aug., est. 58.2 (prior 60.3)
    • Central Banks
  • 7:45am: ECB Main Refinancing Rate, est. 0.05% (prior 0.05%)
  • 8:30am: ECB’s Draghi holds news conference
  • 9:00pm: Fed’s Kocherlakota speaks in Missoula, Mont.
  • 11:00am: U.S. to announce plans for auction of 3M/6M bills, 3Y/10Y notes, 30Y bonds

DB's Jim Reid completes the overnight recap

With China off on holidays for the rest of the week, one source of recent volatility will be off the table until Monday at least. However before you relax and put your feet up remember that its ECB meeting day today and payrolls tomorrow, the latter being the most important economic print left before one of the most eagerly anticipated FOMC meetings in a decade 10 days later.

With regards to the ECB, Draghi’s press conference will be closely watched. DB’s Mark Wall expects the council to, as a minimum, highlight downside risk, reiterating its commitment to QE and signaling its ‘readiness’ to act. However Mark thinks that this may not be enough and instead the rhetoric may go further than in the last meeting. In particular, the Governing Council and Draghi could explicitly mention that there is an increased likelihood that the ECB will have to do more to achieve a sustainable inflation path towards 2%. This could eventually include extending the duration or increasing the monthly target of asset purchases. Also worth watching will be the staff inflation forecasts where Mark expects the 2017 forecast to be revised marginally lower. This fits in with our view that central banks will likely be forced to do more for some time to come.

We'll fully preview payrolls tomorrow but it’s been interesting reading Joe LaVorgna's work over the last few weeks. He thinks there is a negative seasonal bias in the August report that if repeated again tomorrow could be the final nail in the coffin for a September hike. So his forecast is 170k on payrolls versus 217k on the street.

In a prelude to Friday’s report, there was a fair degree of attention on yesterday’s ADP employment change reading, which while coming in slightly below expectations at 190k (vs. 200k expected), was sufficient enough to keep payrolls forecasts unchanged for the most past. July’s reading was revised down a touch (to 177k from 185k) while gains last month - with the exception of the energy industry - were said to be largely broad based. The data saw 10y US Treasury yields nudge up 4bps to an intraday high of 2.197%, before paring all of that move following some weak July factory orders data (+0.4% mom vs. +0.9% expected), only to then move higher into the close again to finish up 3.2bps on the day at 2.185%. A decent rebound in US equity markets with the S&P 500 closing up 1.83% was the other notable highlight yesterday, seemingly on the back of some relief out of China as bourses there rebounded off the day’s lows following some more reports of state intervention ahead of the two-day holiday.

With China out, it’s been a decent start to trading in Asia and one that’s felt a lot calmer relative to recent sessions. Markets in Japan in particular are following the lead from the US yesterday with the Nikkei (+1.40%) and Topix (+1.64%) enjoying a strong session. The Kospi (+0.09%) has seen some more modest gains while the ASX is down -1.03% as we to print. S&P 500 futures are more or less unchanged and 10y Treasuries are down around a basis point. In the FX space it’s been a relatively mixed start across most EM currencies, while DM currency moves are highlighted by more weakness for the Aussie Dollar which has fallen 0.3% and pushing close to breaking through $0.70 following a softer than expected retail sales print this morning.

Back to markets yesterday. One source of volatility which continues to plague markets at the moment is the Oil complex where yesterday we saw WTI (+1.85%) bounce back after the heavy losses on Tuesday. That closing level masked a steep decline of some 6% yesterday afternoon following the latest US supply numbers out of the EIA which showed supplies last week rose 4.7m and the most since April after expectations for a rise of just 900k. However after the falls, a late-afternoon rally helped the complex close back in positive territory.
The rest of the US dataflow was a tad more mixed meanwhile. Nonfarm productivity for Q2 surprised to the upside with a 3.3% qoq saar reading (vs. +2.8% expected) although unit labour costs for the same quarter surprised to the downside (-1.4% qoq saar vs. -1.2% expected). There seemed to be more attention than usual on the Fed’s Beige Book however (although perhaps a sign of just a quieter day all round for news-flow) after the findings revealed that 11 out of the 12 Fed districts reported moderate or modest growth while several districts were said to have reported increasing wage pressure as a result of labour market tightening. Of interest also were the notable mentions of China by some of districts in various contexts including as a source of slowdown in certain industries. The country was mentioned eleven times in all having not been mentioned in the July release. All told though there’s been no change to the current pricing for a September liftoff relative to this time yesterday with it staying at 32%.

It was a pretty quiet session closer to home in Europe yesterday. After reasonably muted moves during the session, most European equity markets closed up with the Stoxx 600 (+0.27%) in particular snapping a two-day losing run. European credit markets finished more or less unchanged while 10y Bunds ended 1.5bps lower in yield at 0.780% and trading in a fairly tight range with very little data in the region to react to. An in-line Euro area PPI print for July (-0.1% mom) the only notable release yesterday.

Of more interest in Europe was Greece and specifically with regards to the latest GPO opinion poll which showed New Democracy taking a small lead over Syriza. The poll showed Syriza gaining 25% of the total votes which was behind New Democracy at 25.3%. These polls will take on more importance as we run closer to the September 20th election date, but for now it’s interesting to see the first signs of ND taking a (albeit marginal) lead over Syriza. Expect to see more and more polls out over the next couple weeks.

Turning over to today’s calendar now. It’s set to be a busier session this morning for data in Europe with the final August services and composite PMI readings for the Euro area, Germany, UK and France as well as employment data in the latter. Euro area retail sales data is also expected before the ECB meeting at lunchtime. Elsewhere and over in the US this afternoon we’ve got more employment data in initial jobless claims and Challenger job cuts although the highlight may well be the ISM non-manufacturing reading and employment component in particular. The final services and composite PMI prints will also be due along with the July trade balance.