News & Views: Wednesday, October 22
What you need to know for today's trading day.
Pimco banking chief expects 18 lenders to fail ECB stress test (Reuters)
Currency Wars Evolve With Goal of Avoiding Deflation (Bloomberg)
Yes, 100% of economists were dead wrong about yields (Marketwatch)
BOE Officials Gloomier on Economy, Minutes Show (WSJ)
BHP First-Quarter Iron Ore Output Rises 17% Amid Surplus (Bloomberg)
Overnight, UK rates dropped following the release of the BoE minutes, which were perceived as dovish. Although two of the MPC members dissented, again, because Mark Carney may have to formally write a letter to British Parliament that he is going to miss the 2% inflation goal by a full percentage point (to the downside), the odds of a rate hike in the UK, which has the highest odds of being the first rate hike in the G7, keep getting pushed out. And with those odds getting pushed further out in the UK we see a corresponding effect in the US. Short-sterling futures were showing the largest positive risk-adjusted gain across all assets earlier, but that has almost fully waned.
The offshore Yuan is showing the largest positive risk-adjusted gain in currencies and the Hang Seng is showing the second largest gain for equities. I take this to mean that offshore investors are pouring money into China thinking that slightly stronger growth and continued support from the government is going to be enough to push assets higher in China. Also, it appears that the early third quarter slowdown in China was just an aberration with power production reports showing big increases.
There was a big slowdown in Australia CPI last night across all metrics, but oddly it wasn't enough to move the needle for the AUD. I expect that the Reserve Bank of Australia (RBA) will need to join its neighbor New Zealand in selling FX to lower its currency because it is unable to make any interest rate adjustments. The comments from BHP Billiton's (BHP) on iron ore were very interesting. It does not see a major disruption of demand from China and the latest decline in iron ore prices has shaken out some of the higher cost production from the market.
The Japanese Nikkei showing largest positive risk-adjusted gain across all assets overnight as it catches up to the gains seen in Western markets. Yesterday, Nippon Life, the second largest pension fund in Japan ($654bln in assets) announced its investment strategy for the second half of the fiscal year (til April) and said that it would be increasing unhedged bond strategies and decreasing local government bond holdings in favor of foreign bonds if JGB yields remain at low levels. It may also buy high yield bonds, local and international, if the price is right.
A PIMCO exec points out that he expects 18 banks to fail the ECB's Asset Quality Review (AQR), the results will be released in the coming days or on Monday. One thing to keep in mind before getting too beared up on European financial stocks is that they are among the worst performers this year and are expected to rally once the results are released, provided they're not a mess.
The US consumer price index will be released at 8:30am ET this morning. It is highly likely given the recent declines in gasoline prices and home prices, it seems highly likely we see a second consecutive decline in the CPI. Additionally, if core prices do not show monthly growth, then one of two things will happen: the market will price in much easier monetary policy, and the Treasury curve will bull steepen.
- Australia CPI (3Q) YoY down to 2.3% vs 2.3% expected, prior 3.0%
-- QoQ up 0.5% vs 0.4% exp, prior 0.5%
-- Trimmed Mean YoY down to 2.5% vs 2.7% exp, prior 2.8%
-- Weighted Median YoY down to 2.6% vs 2.6% exp, prior 2.7%
- Japan trade balance (Sep) widens to -958.3B JPY vs -780B exp, prior -948.5B
-- Exports YoY up 6.9% vs 6.5% exp, prior -1.3%
-- Imports YoY up 6.2% vs 2.7% exp, prior -1.4%
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