August 27, 2015

Markets Today: Positioning, liquidity, uncertainty

Difficult huh? You thought you knew which direction this was all going? After big moves there can often be big reversals. It doesn’t mean that the underlying issue is resolved but rather is often a factor of positioning, liquidity and uncertainty. We have a jumble of all three going on.

Difficult huh? You thought you knew which direction this was all going? After big moves there can often be big reversals. It doesn’t mean that the underlying issue is resolved but rather is often a factor of positioning, liquidity and uncertainty. We have a jumble of all three going on.

China’s equities ended down, helping drive down European equities, and European EM currencies, but the US had a very strong upswing. That could be because markets thought that the Fed wasn’t going to hike, except bond yields were higher. Growth pricing wasn’t exactly surging as oil prices and iron ore were lower. And despite the Fed pricing change (less priced for September), the USD was stronger, with the EUR and JPY under pressure in particular. The lack of consistency points to the positioning, liquidity and uncertainty described above.

What we do know is that the Fed is less certain of its hiking cycle now, and the ECB are wary about meeting its inflation target and are willing to do more QE. The difference in the currencies is that one is going to potentially do nothing but the other is going to potentially ease further. Cue the EUR decline. And the rollercoaster continues. It will be interesting to see the developments next week as the Northern Hemisphere returns to work and the central banks report. We have the unwinding of positions of the past few weeks, an increase in liquidity and more clarity on what the central banks are thinking.

Yesterday, we implemented a quasi red (down) and green (up) flag system to keep the desk informed of the gyrations in the Shanghai equity market. There was a flurry of semaphore incomprehension going on. The AUD gave up, after first trying to follow (as did we). We ended the day with Shanghai -1.3%. After first allowing the Chinese currency to weaken and move to a more market orientated system there has been pressure on the CNY to weaken further. Be it driven by equity market weakness, concerns about domestic growth, a need for USDs or speculative pressures. The PBoC are trying to contain this weakness to some extent and the daily USD/CNY fix has been lower than many anticipated of late. There has also been direct intervention since the deval. The problem is that there are still capital controls and the PBoC are trying to implement independent monetary policy. Attempting to control the exchange rate, capital flows and monetary policy can prove problematic. That is perhaps behind the rising concerns about what is happening and why there is a degree of nervousness with regards to policy options. And what it means for the rest of the world. So while we may be confused on an intra-day basis, it remains a key factor in the weeks ahead.

Clearly the ECB and the Fed are watching. First up last night was the ECB’s Praet who noted that there was a downside risk in achieving their inflation target, and that they would act if needed to address this (ie more QE). The Fed’s Dudley followed this up with saying (in the Q and A) that the decision to begin to the normalisation process at the September meeting seems less compelling, but he noted it could become more compelling with additional information. So he doesn’t rule out a hiking cycle, but that the equity decline and the uncertainty surrounding China are factors they are watching. It makes it harder to suggest that they will have all the information that they need before mid-September. Markets seem to think so.

On the upside, the durable goods orders were pretty good, albeit very volatile.

Coming Up

Apologies, I erroneously wrote yesterday that we would get capex on Wednesday. It is today. The same holds- absent a big move, which is in line with the existing mood of markets, it is unlikely to have an impact on the day. That is not to say it isn’t important in the longer term view of growth; markets just won’t want to know today.

The ECB’s Couere speaks today, and after Praet signalled that the ECB were concerned about inflation this will be watched with interest. A lack of concern would generate some volatility but a conformation of Praet’s worries would add to the EUR pressure but are less likely to generate the moves seen today.

The US reports its Q2 GDP revision today, which is expected to improve. But, with GDP being a lagging indicator, and the potential for a shift in global growth expectations, this may not get a look in for market’s thinking.

What is likely to be more important, but ramp up over the weekend, is the annual Fed Jackson Hole symposium. The key topic is on inflation and monetary policy, hugely important at present, with inflation remaining very low and the Fed in particular itching to raise interest rates. With Yellen not attending, Deputy Chair Fisher will be the main event. There are no speakers officially on the agenda, but expect headlines as attendees arrive.


On global stock markets, the S&P 500 was +3.90%. Bond markets saw US 10-years +10.91bp to 2.18%. On commodity markets, Brent crude oil +0.83% to $43.57, gold-1.2% to $1,125, iron ore +0.4% to $53.67. AUD is at 0.7121 and the range was 0.707 to 0.7158.

  • US Durable goods headline +2%A, -0.4%E, +4.1P
  • US Durable goods ex transport +0.6A, 0.3E, 1P
  • US Durable goods ex aircraft non defence 2.2A, 0.3E, 1.4P

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