Markets broadly began the week on a risk-on tone, which saw Treasuries sell-off; the benchmark 10-year yields were up over 33bps over the week. During this time the US dollar index (DXY) fell 0.14% while the offshore renminbi rallied 0.85% against the greenback.
The eagerly awaited ECB announcement last week appeared to pacify most market makers. Draghi announced an ECB cut in the deposit facility rates from -0.4% to -0.5% and €20 billion per month of open-ended QE. Importantly, the ECB will also introduce a two-tier system for reserve remuneration which will cushion the blow on the profitability of Europe’s major banks, as further negative rates bite.
Ahead of the meeting Germany’s announcement of a “shadow budget” caused some concern. As the country is on the brink of a recession the proposed “shadow budget” would allow the new debt to be issued by public investment agencies to fund infrastructure and climate protection projects, without the federal budget being affected.
The yield on the 10-year Bund fell 19bps and the euro gained 0.4% against the dollar. Mr Trump was quick to jump on his currency manipulation bandwagon voicing his concerns that the ECB wishes to depreciate the currency against the stronger dollar; however, we believe that a strong euro is not in the ECB’s interests.
In China CPI came in marginally higher than expectations at 2.8%yoy in August, due to rising pork prices. August retail sales, fixed asset investments and industrial production readings came in softer versus market expectations. All the while, trade concerns took somewhat of a backseat following Trump’s announcement that there will be a delay in the 10% tariff hike on USD 250bn worth of Chinese goods. This was apparently by request of China’s Vice Premier after China announced that it is looking to purchase more US agriculture goods. Later on in the week we heard that Trump was willing to consider an “interim deal” with China greeting to stick to its intellectual property and US import commitments.
On Tuesday, China’s State Council announced the removal of quotas on both the Qualified Foreign Institutional Investor (QFII) and RMB Qualified Foreign Institutional Investor (RQFII) programs. The latter will now also be available to all overseas institutional investors as opposed to those from specific countries and regions. The relaxation in the quotas will further support China’s drive to open up its financial markets.
Over the weekend we heard of thee drone attacks on two of Saudi Arabia’s oil plants. As a result, oil spiked ~20% higher this morning - the largest such move on record - we will closely monitor the effects this week as Aramco investigates the damage which could affect ~5% of global oil supplies. Despite this setback Saudi Arabia remains in a favourable position with $500bn of FX reserves, low public debt, and strong banking positions; allowing adequate financing options. The Kingdom also has sufficient oil reserves, ~200m/b to support export demand. We look forward to the statement from Aramco tomorrow.
On the data front, US CPI marginally missed the market consensus at 1.7%yoy and retail sales readings broadly beat expectations. This week will see August US industrial production, housing starts, existing home sales and Empire manufacturing. UK CPI will be watched keenly as will August retail sales prints. Eurozone CPI and Germany ZEW will be of interest as will Italy’s and Japan’s August CPI readings.
All eyes will this week will turn to the Fed; the markets are pricing in a 25bps cut on the 19th. The Swiss National Bank and BoJ will also be watched closely as will the BoE as the Brexit debacle unfolds and Boris Johnson’s actions are called to question. As a reminder, the current list of countries continuing or returning to easing includes: US, EU, UK, Russia, Turkey, Mexico, Brazil, South Africa, Japan, China, Hong Kong, India, Korea, Indonesia, Philippines, Thailand, Australia and New Zealand.