* Markets were dominated in the second half of last week by the terrorist attack in Barcelona, whilst political uncertainty in the US was rampant following the Charlottesville events and the US President’s handling of it. European markets ended in the red (DJ Eurostoxx -0.5%), German 10-year Bund yields briefly dipped below 0.40%, as the Spanish 10-year spread widened some 12 bps. A ‘modest’ risk-off sentiment was still perceptible going into the weekend although the yield on 10-year Treasuries edged up 1 bps to 2.19%.
* Greek yields responded positively this morning after a Fitch rating upgrade announced late on Friday, with a modest tightening vis-à-vis their German counterparts. Although the country is still far from an investment grade rating, Fitch upgraded its rating of Greece to B- from CCC. The rating agency said that ongoing economic growth and a reduction in political risk warranted an upgrade of the country’s rating.
* These improvements and compliance with the ESM programme should ultimately lead to a VAST improvement in Greece’s debt ratios. Additionally, Fitch has added a positive outlook to its B- rating, reflecting the agency’s expectations that a third review of Greece’s compliance with the terms of the ESM support should be concluded with a positive outcome, and that the Eurogroup will then move to give Greece substantial debt relief in 2018.
* Last Friday witnessed a rebound in the University of Michigan’s survey of consumer sentiment, with the headline index rising 4.1 points to 97.6, not far from the survey’s post-GFC peak set in January. The current conditions index fell back ‘moderately’, but this was more than compensated by a sharp rebound in the expectations index. The upshot of this is that American consumers believe that they are doing VERY well and that economic prospects are great too.
* The ousting of Steve Bannon as President’s Trump chief strategic adviser over the weekend potentially heralds a NEW beginning of what so far has been a rather ineffective presidency that has led to a gradual alienation from his Republican base. A renewed focus on tax reforms and less contentious probes into the US-China trade relationship could help Mr. Trump reconnect with his support base. But we should emphasize ‘potentially’ as Mr Bannon was NOT the only economic nationalist in Trump’s team (notably on trade) and it remains unclear as to how much influence Bannon actually had (and still has?) on the president.
* Indeed, expectations that USD bulls would celebrate Friday’s departure of Steve Bannon from the White House are already being pared back. Bannon is a strong advocate for protectionism and trade confrontation. That said, his demands for a US exit from NAFTA have already been watered down into a renegotiation and a national security probe of steel imports has stalled amid widespread opposition. Despite the harshly worded attacks on China from BOTH Trump and Bannon, ironically strong demand for steel from China this year has lifted the world price for the commodity helping to support American mills. Also, last year less than 3.0% of US imports of steel came from China.
* With earnings season coming to an end there is NOT much to be bullish about right now. Market sentiment is fairly negative with geo-political risk still elevated on the Korean peninsula, whilst the political risk of Trump’s presidency remains a driving factor. Donald Trump’s administration continues to unravel. On Friday, Steve Bannon, Trump’s chief policy strategist resigned while Carl Icahn, an advisor on regulation followed suit. Initially, Wall Street reacted positively to Bannon’s resignation, as it arguably improves the position of Gary Cohn, a more market-friendly advisor.
* However, the chaotic nature of the administration just reflects HOW difficult it will be for Trump to achieve anything and this is a big concern for markets. Wall Street is suddenly looking more corrective and although Jackson Hole could be supportive (we will ALL have to wait-and-see!!), we are unlikely to get too many clues on monetary policy. Treasury yields bounced in the wake of Bannon’s resignation but remain on a downward path and this bounce is likely to be short-lived. However, FX markets there is a sense that there is a mixture of consolidation (EUR and GBP) while the safe-havens of JPY, CHF and gold are all around KEY medium-term levels. This is all leaving the DXY somewhat mixed. The next few days until Jackson Hole have VERY limited economic calendar data to change sentiment.
* UK PM Theresa May's government declared that it's stepping up pressure on EU to move the Brexit negotiation into trade agreements as soon as October. Brexit Secretary David Davis warned in an article in the Sunday Times that "with the clock ticking, it wouldn't be in either of our interests to run aspects of the negotiations twice." And, he argued that "it is simply not possible to reach a near-final agreement on the border issue until we've begun to talk about how our broader future customs arrangements will work."
* "Furthermore, if we get the comprehensive free trade agreement we're seeking as part of our future partnership, solutions in Northern Ireland are easier to deliver." EU's chief Brexit negotiator Michel Barnier responded by tweeting that the quicker an agreement was found on the breakup topics "the quicker we can discuss customs & future relationship." UK government started releasing a series of policy documents, covering topics such as Northern Ireland and the customs union, for Brexit negotiations, since last week.
* A paper entitled "Future Customs Arrangements" released last week triggered demand from businesses for a plan to replace customs union, an arrangement that allows movements of goods across the borders of EU member states without tariffs. Without proposing a concrete and feasible alternative, the paper indicated that leaving the EU represents leaving the EU Customs Union, and the government seeks a new arrangement that "facilitates the freest and most frictionless trade possible in goods between the UK and the EU". The next round of Brexit talks, which start on 29 August.
* Bitcoin is pausing for breath after the massive surge over the past few days. Resistance is at all-time high at $4,480 (17/08/2017 high). Hourly support lies very far at $2,403 (26/07/2017 low). The road is wide open for another bullish move. In the long-term, the digital currency has had an exponential growth. There is the decent likelihood that the asset will consolidate WELL above $1,500. Long-term support is given at $1,464 (04/05/2017 low).
* The typical hyperbolic verbiage may have contributed to a sell-off in USDJPY (it did trade at an intra-day HIGH at 109.4 in mid-Asian trade) which took the pair below the 109.00 figure in late Asian session trade, but it found buyers at that level and snapped back above the 109.00 handle .After testing support at 108.50 ‘at least’ 3 times over the past month USD/JPY appears to possibly have found a base at this level and the key question this week will be whether the greenback can stage any sort of counter trend rally ahead of Jackson Hole symposium this week.
* Sep E-mini S&Ps (ESU17 -0.01%) this morning are down -0.04% and European stocks are down -0.21% ahead of the gathering of world central bankers later this week in Jackson Hole, Wyoming. Losses were limited as energy stocks rose with Sep WTI crude oil (CLU17 +0.27%) up +0.29% at a 1-week high after Libya declared force majeure on supplies of crude from its Sharara oil field after it was blocked on Sunday by armed rebels. An upbeat report from the Bundesbank limited losses in European stocks after the German central bank said the German economy "may grow more strongly than was expected in June forecasts."
* Asian stocks settled mixed: Japan -0.40%, Hong Kong +0.40%, China +0.56%, Taiwan +0.05%, Australia -0.37%, Singapore -0.15%, South Korea -0.08%, India -0.84%. China's Shanghai Composite climbed to a 2-week high as a rally in copper prices (HGU17 +0.99%) to a 2-3/4 year high boosted mining and commodity producing stocks. Japan's Nikkei Stock Index fell to a fresh 3-1/2 month low as exporter stocks declined as the yen held gains from safe-haven demand amid lingering concerns over US politics.
* The DXY is down -0.02%. EUR/USD is up +0.05%. USD/JPY is down -0.11%. Sep 10-year T-note prices (ZNU17 +0.06%) are up +1.5 ticks. In its monthly report the Bundesbank said, "record-high sentiment in manufacturing, robust orders, and the large portion of not yet completed orders point to IP picking up anew in the current quarter. The German economy may therefore grow more strongly this year than was expected in June forecasts."
* Sep crude oil (CLU17 +0.27%) this morning is up +$0.14/bbl (+0.29%) at a 1-week high and Sep gasoline (RBU17 -0.60%) is -$0.0127/gal (-0.78%). Friday's closes: Sep WTI crude +1.42 (+3.02%), Sep gasoline +0.0371 (+2.34%). Sep crude oil and gasoline on Friday closed higher with Sep gasoline at a 1-week high due to a weaker greenback, and on the increase in the crack spread to a 2-week high, which gives incentive for refiners to purchase crude oil to refine into gasoline.
* Metals prices this morning are mostly higher with Dec gold (GCZ17 +0.19%) +1.4 (+0.11%), Sep silver (SIU17 +0.32%) UNCH and Sep copper (HGU17 +0.99%) +0.032 (+1.09%) at a ‘new’ 2-3/4 year nearest-futures high. Friday's closes: Dec gold -0.8 (-0.06%), Sep silver -0.053 (-0.31%), Sep copper +0.0015 (+0.05%). Metals on Friday settled mixed. Metals price found support on a weaker greenback, and on the -4,450/MT decline in LME copper inventories to a 1-1/2 month low of 271,350/MT, a sign of tighter copper supplies. A negative factor for metals was the recovery in US stocks from their worst levels, which curbed safe-haven demand for precious metals.