Today’s podcast

https://soundcloud.com/user-291029717/draghi-gets-vigorous-brexit-gets-more-confusing-oil-soars

Overview:  That’s no way to get along

• Heightened US-China trade tension keeps risk assets wary at the start of the new week
• OPEC refusal to increase output pushes Brent above $81 for the first time since Nov-2014
• Euro unable to sustain gains from Draghi’s vigorous view on inflation
• But Draghi induced jump in Bunds is sustained – Core global yields also higher on Draghi and oil
• Souring in sentiment weighs on AUD and NZD
• US data and Central Bank speakers the focus today

That’s No Way to Get Along – Eric Clapton

After cancelling trade talks with the US, late yesterday China released a White Paper accusing the US of intimidation adding that negotiations “cannot be carried out under the threat of tariffs”. The White Paper set a wary tone to price action overnight with the tech heavy NASDAQ the only major equity index closing in positive territory. ECB President Draghi remark of ‘relatively vigorous’ pick-up in underlying inflation triggered a short lived euro uplift, but the jump in Bunds yields was sustained with core yields also heading higher buoyed by a pick-up in oil prices following OPEC’s decision not to increase output. The souring in sentiment weighs on AUD and NZD and GBP outperforms on M&A news, but UK/Brexit politics take some of the gloss off.

Currencies

The ongoing US China trade tensions have seen risk assets begin the new week with a wary tone and as a result  the AUD and NZD are among the G10 underperformers. AUD now trades at 0.7253, 0.47% lower relative to levels 24 hours ago and NZD is down 0.66% currently trading at 0.6643. The new round of US China tariffs came into effect yesterday and late yesterday China’s Cabinet published a White Paper accusing the US of intimidation adding that negotiations “cannot be carried out under the threat of tariffs”. The paper defended China’s policies, indicating how foreign companies have “taken the initiative” to work voluntarily with Chinese companies and how American companies have received “huge returns through technology transfer and licensing”. This paper followed weekend reports that China would not meet with the US this week for planned trade talks.

For now AUD and NZD price action remains mainly driven by sentiment emanating from US-China trade tensions. But with China’s tariffs likely to come into effect today (China was on holiday yesterday), may be focus will shift away, at least temporarily, from trade tensions with the Fed and RBNZ later this week taking centre stage. For now the AUD seems unable to sustain moves above 73c and as long as the pair does not move above 0.7350/7400 the downtrend established late in January will remain in place, encouraging AUD bears to retain their positions.

Overnight ECB Draghi repeated his message from the mid-September policy meeting noting the 9.2mln jobs created since the trough in 2013 and rising wages. But he then embellished the message adding that wages are up from 1.5% in 2017 to 1.7% in Q1 2018 to 2.2% in Q2. In addition he also introduced the phrase of a ‘relatively vigorous’ pick-up in underlying inflation. The comment saw the Euro jump from 1.1752 to an overnight high of 1.1815, but the move proved short lived with the Euro now trading at 1.1748.

The souring in sentiment evident in equities alongside the steady rise in oil prices appears to have supported the USD later in the session. That said GBP has been the G10 outperformer up 0.4% to 1.3120, recovering some of the chunky 1.5% fall seen on Friday.  The move was supported by the weekend M&A news, with US company Comcast winning the bid to buy Sky.  There have also been a number of Brexit headlines, too numerous to mention.  The Opposition Labour party conference is underway and there has been some intense debate on whether to allow another referendum on Brexit.  Spokesman Starmer confirmed that the party will vote against any deal PM May brings back on Brexit that doesn’t meet Labour’s tests.

Commodities

Oil prices were the big movers overnight following OPEC’s decision to leave production steady at its weekend gathering. Brent now trades at $81.39 (+3.26%), a four year high as market grapples with the idea of supply shortage with Iran sanctions coming into effect in November while mounting evidence suggests the increase in supply from other countries won’t be enough to offset the Iranian decline (WTI gained 2% to $72.27).

Copper (-1.05%) and metals (LMEX -0.40%) underperformed overnight amid heightened US-China trade tensions and implicit concerns over global growth outlook

Bonds

Higher European yields have helped underpin US Treasury yield with ECB Draghi’s vigorous comment pushing 10y Bund yields by 4bps to 0.51bps while comments from UK labour party officials renewing the party’s intention to renationalize the nation’s power and gas networks, if Labour wins the next election, pushed 10y UK gilts by 6bps to 1.612%. The move higher in oil prices has also been a factor keeping core bond yields on the up. 10y UST gained1.5bps to 3.088% and, like last week, meeting some resistance at 3.09%.

Equities

European equities closed in negative territory across the board amid growing concern about the outlook for global trade, industrial shares led the S&P 500 Index lower after China warned it won’t meet with American officials unless they stop threatening to expand tariffs. The Nasdaq 100 edged a small gain as the largest tech shares advanced and Comcast Corp. shares stabilised after initially falling on news agreeing to buy Sky Plc.

Economics/politics

• German IFO marginally beat expectations with Business Climate at 103.7 against expectations of 103.2, but still down from last month’s 103.9.
• President Trump instructs Secretary of State Mike Pompeo to arrange second North Korean summit
• ECB’s Nowotny (Austria) reiterates his hawkishness, stating: “We are in a really very good economic situation …I think the normalization should perhaps take place somewhat more quickly,” “I’m not entirely alone in my opinion but it is still an open discussion,”.

Coming up

• It’s a quiet data of data releases but we have several Central Banks leaders on speaking duty which no doubt will steal a few headlines. The 73^rd session of the UN General Assembly also starts today with the 193 members gathering for the general debate.
• In terms of data releases, focus will be in the US with House prices, Richmond Fed Survey and the Conference Board Consumer Confidence reading all due out for release.
• This morning the BoJ releases Minutes from its July meeting, this afternoon BoJ Governor Kuroda speaks in Osaka and later tonight ECB Praet, BoE Vlieghe and ECB Coeure are also on the speaking roster.

Market prices

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