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Therefore, this week we have seen above expectations inflation surprises in China, Sweden, India, the UK and the US and the interest rate markets have changed quite markedly this week. There is now a 46% chance the Fed hike in December, relative to a 25% probability seen last week and it’s no surprise in this environment that US tech is underperforming (the
S&P 500 tech sector closed -0.4%), while banks continue to find support.
That said, the reflation trade was already quite mature and we had seen the US 10-year treasury gain from 2.01% on 8 September to 2.20% just before the inflation report. Judging by market moves, it seems higher inflation was largely discounted and after the 10-year treasury pushed to 2.22% (on the hotter CPI report), we saw yields drifting in to close unchanged at 2.19%. Banks followed suit and the USD index has ultimately taken a breather, closing -0.4%.
After the close we saw a spike lower in the USD, taking USD/JPY into ¥110.05 and AUD/USD back into the 80c handle, with comments from US Treasury Secretary Steven Mnuchin that the Trump Administration were “less concerned about inflation than economic growth”. The market has seemingly taken this as a view that Trump is a huge fan of subdued inflation, which probably plays into a higher probability that Yellen gets re-elected as Fed Chair. A view heightened somewhat earlier in the day when Trump detailed that he respects Yellen and that “stock market is doing very well”.
The bigger moves though on the day have been seen in GBP and also Bitcoin. GBP/USD has seen the bulk of the GBP flow, as you’d expect, gaining 1.4% on the session and eyeing a move to the September 2016 highs of $1.3445. The Bank of England, in its monthly central bank address, detailed to markets that “all policymakers” are of the view that they want to see a withdrawal of monetary stimulus in the “coming months”.
The interest rate markets have naturally responded and we can see the probability of a hike from the BoE in November now sitting at 51%, this probability stood at 18% last week. In the UK fixed income market, we have seen UK 10-year gilts moving 9bp higher to 1.23% and the yield differential to US treasuries has closed to a new yearly low of 96bp and giving the GBP move genuine backbone. One to watch, but it's clear GBP is just not sensitive to Brexit headlines and has seemingly adopted the status of a cyclical currency again and not one simply beholden to politics. This is a huge positive for GBP bulls.
As mentioned, Bitcoin has seen huge flow overnight, courtesy of a 12.5% move lower in price, inspired by the Chinese regulators targeting a closure of all local Bitcoin exchanges by the end of September. This is clearly a blow to the Bitcoin advocates as China was such an integral part of the overall architecture, although Chinese traders can still trade crypto, they just have to do so in a foreign crypto exchange and are obviously beholden to China’s capital controls that limit the movement of capital. Chinese traders will find a foreign crypto exchange to trade on here but are just limited in their exposures. Bitcoin has been smashed of late, and the cynics would say the “bubble” has popped, although I would be fully focused now on the 4 August gap high of 2877. That is the key line in the sand for me and the bulls will want to see this hold.
Turning to the markets open for Asia, and we can see fairly uninspiring and lackluster leads. The S&P 500 closed -0.1% and basically hasn’t moved for three days (hence we see the VIX index at 10.4%), with high yield credit spreads widening a few basis points, while SPI futures closed 9 points higher in the night session at 5744. Our call for the ASX 200 sits at 5742 and should see any gains capped into 5777, while the downside should be limited to 5718, although on a positive note the index and looks destined to snap three weeks of losses.
US crude closed 0.9% higher and even had a look above $50 for parts of US trade before settling at $49.72. Aussie energy stocks should find buyers on that ground, while if we look elsewhere in the commodity space we can see copper -0.7%, while iron ore lost 3.4%, while in the Dalian futures complex iron ore fell 2.7%, steel lost 1.1% and coking coal dropped 2.2%. BHP should open 1% lower, while the pure plays may struggle (Vale’s US-listing closed -2.7%).
Clearly, the balance of power is held by the Aussie financials and while the higher inflationary macro backdrop is a positive for the space on open, let’s not forget the ASX financial sector has gained 3.6% this week and if the US banks are to go by we may see traders fading the opening levels, which in turn could weigh on the index.