Morning Briefing – risk slips on stealthy yuan

<p>Monday is beginning to look like a temporary extension of last week’s uplift in risk seeking, helped by relief that Turkey didn’t implode despite the risk of that happening.</p>

  • Monday is beginning to look like a temporary extension of last week’s uplift in risk seeking, helped by relief that Turkey didn’t implode despite the danger of that happening. Firm earnings from Bank of America and other big US groups plus of course news of one of the biggest M&A events of the year, also kept things ticking along nicely.
  • On Tuesday though, the increasingly draconian looking dragnet on alleged coup plotters in Turkey is beginning to unnerve markets anew. North Korea‘s latest salvo of self-aggrandizing (but ultimately irrelevant) inter-ballistic missiles has also pared back more bullish dealing a little.
  • Another point worth throwing in as markets begin to seem increasingly disengaged and volumes slip to summer holiday season levels: a stealthy devaluation of the yuan. China’s currency steadied against the dollar on Tuesday, a day after slipping below the psychologically important 6.7 level for the first time in more than five years.
  • Despite the bounce on the day, traders expect downward pressure on the currency to persist. The People’s Bank of China allowing the yuan to reach such levels—unquestionably deliberate in view of the bank’s daily fixings—could trigger renewed ‘currency manipulator’ criticisms from the US Treasury, an accusation which the PBOC has always (unsurprisingly) denied. Either way historically, regardless of such criticism, the yuan rate has seldom remained around such low levels for a protracted period. That means the current episode may herald actual or expected volatility, similar to the kind we saw in global markets last August, though in that case the abruptness of the devaluation was a major factor. Obviously the market looks askance at both actual and notional competitive currency devaluations. In China itself, the risks might be ringing a little more acutely, given that a much more aggressive administration might be running the show on Capitol Hill from next year. Overnight, the PBoC set its key midpoint band for onshore and offshore yuan trading just 1 basis point weaker vs. dollar at its routine daily fix, suggesting it might be reluctant to push China’s currency much lower in the near term. The Shanghai Composite index ticked 0.2% lower.
  • Perhaps fortunately for Japan’s stock market, the potential drag from sentiment over China was eclipsed by the impetus to catch up with Monday’s global stock rallies following a one-day Japanese holiday. That offered a cushion for the Nikkei, which closed 1.4% higher, against such negatives as a 10% fall by SoftBank in reaction to news of its huge intended purchase of ARM Holdings, and the yen showing signs of looking to resume its all-year-long grind upwards. The yen was mildly bid at 106.13 though; after the dollar touched a new monthly high of 106.32 yen during the session.
  • US stocks also managed to tip the balance upwards, despite poor result from fast-growing Netflix, whose shares slipped 14% in after-hours trading after poor customer growth and lower than expected subscriber forecasts. The S&P 500 still achieved an upteenth all-time high, whilst beginning to look technically overbought, and as S&P futures sell-off quite definitively.
  • Perhaps the global extension of the recent rally for stocks might also have been expected to reach the UK too, particularly after inflation numbers this morning beat forecasts, with the apparent help of airfares. Almost all of the data are pre-referendum though. Inflation rose 0.5% annually compared to 0.4% expected. The pound received a temporary boost in the run-up in anticipation, but was already looking offered again at last look, at $1.3206, and well capable of testing the higher end of the $1.31 handle
  • A persisting bout of softness on the oil futures might explain the FTSE’s 28 point drop. Brent crude oil was down about 0.2% and more importantly keeping a lid on the price from breaking free above $46.
  • For the DAX, which was losing 121 points at the time of writing, the source of the disquiet is likelier to be economic expectations. Readings from the ZEW on business sentiment underlined that market’s main worry going forward, post Brexit vote. The ZEW may not be official data and it’s readings are also volatile. But when the forward-looking component falls off a cliff into the negative at -6.8 from positive 19.2, and 9.8 forecast, markets take notice. Particularly ahead of more empirical data like a Eurozone PMI, coming on Friday.
  • The euro galloping higher again against the pound by 0.4%, some 31 pips, is also cautionary. It was flat on the open against the dollar. At 1.1074, it looks like currency traders appeared comfortable that the rate had not strayed too far from weekly highs. Of course for equities that might not be a good sign ahead of the ECB meeting this week.
  • The main economic news of the week will of course be that ECB decision and press conference, on Thursday. No changes are expected this time, though further steps are widely expected in September. The most interesting part of the proceedings will, as ever be comments by the ECB’s chief policymaker Mario Draghi. He’s widely expected to face tricky questions at the press conference about the effectiveness and sustainability of the ECB’s monetary policy and the state of Italian banks, struggling under the burden of bad debt.
  • Inflation expectations and German bond yields have tanked since the EU referendum. That has fueled speculation that the ECB might have to extend its money-printing programme and, that it might begin to have difficulties in finding bonds to buy that meet its criteria. Subsequently, the bank could be forced to lower the threshold for deciding which bonds are eligible for its programme. The ECB is not expected to take further action on Thursday. It’s likelier to wait for updated inflation forecasts at the 8th September policy meeting. Stabilisation of financial markets since the Brexit vote have also bought the bank more time.
  • Next up on the data watch, US Housing Starts this afternoon, UK jobs on Wednesday, UK Retail Sales on Thursday morning before the ECB, that EU composite PMI release, and a UK manufacturing PMI on Friday before Canadian CPI and Retail Sales

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