Across the Curve

More FX

Via Marc Chandler at Brown Brothers Harriman:

A Couple of Surprises Start the New Month

• UK manufacturing PMI posts record bounce, sending sterling a cent higher
• French and Italian PMIs disappoint
• China’s official manufacturing PMI is at its highest level since October 2014
• Japan’s soft capex figures warn of risk of downward revision to Q2 GDP, and corporate profits fall 10% in Q2

Sterling shot higher on the economic surprise, but the dollar remains firmer against the euro and yen.  The euro remains mostly in yesterday’s range while the dollar is poking through JPY103.50.  The Antipodean currencies are firm, even though Australian data  (PMI and retail sales) disappointed.  The dollar is firm against most emerging market currencies, with the notable exception of the South African rand, that is bouncing around as political issues continue to be worrisome.   The MSCI Asia-Pacific Index eked out its third gain this week, during which time it up 0.1%.  MSCI Emerging Market equity index is off for third day this week.   The 0.3% decline, though is the smallest this week.   European stocks are mostly higher with the Dow Jones Stoxx 600 up 0.7%, while the FTSE 100 is flat to lower. Of note, as we have been noting this week, the financial sector in Europe continues to perform well.   It is the strongest sector.  Italian bank shares are also rallying.  This is their third day of the march higher, during which time, they have risen over 9%.    Benchmark sovereign bonds yields are most firmer, with the 10-year Gilt yield jumping 6 bp to lead the move.  

The new month has begun with a couple of surprises.  The biggest surprise has been the record jump in the UK manufacturing PMI to 53.3 from 48.3.  A much smaller rebound was expected in August after the Brexit shock drop in July.  

There is a linear type of thinking that appears to be driving the market’s response which was to take sterling a cent higher against the dollar.  The idea is that pundits, economists. many policymakers (including the Bank of England) and investors have bought the hype about Brexit being bad for UK economy.  However, this misses the point and misunderstands an important aspect of how markets work.  

The reason the PMI jumped was driven by the decline in sterling.  It is about exports.   While the market logic of taking sterling higher on the better than expected news is understandable, from an economic point of view, it blunts a key driver.  

Two points need to be made.  First, when thinking through the impact of a shock event, investors need to consider not just the event, but the market response.  This is the kernel of truth in the self-correcting aspect of the market, which may be exaggerated by market fundamentalists.  The decline in sterling and UK interest rates will help cushion a potential economic blow, and the short-term cost of which is greater price pressures, which were also evident in the PMI report.  

Second, while some observers played up the impact of the referendum on more than market psychology, many, including ourselves, were more concerned about the implications after the divorce for the UK and the future of a medium-sized country with a large current account deficit, reliant on financial services in an era of deleveraging.   We also recognized, like many, that business decisions will take the time to filter through.  We have compared the issue to cooking frogs rather than frying bacon.  Don’t be lulled to sleep by warm water.  The risks are that it will still boil.  

The immediate hurdle for sterling is near $1.3280 and then $1.3370. Given the spike up on the news, many short-term participants will watch how the pullback unfolds to help determine whether and or where to fade this bounce.   The euro fell to test GBP0.8400.  The August low was seen near GBP0.8340, which would be the next downside target.  

The eurozone surprised today too.  Its final manufacturing PMI slipped to 51.7 from 51.8 of the flash reading and 52.0 in July.  It is the second consecutive decline.   Next week’s service PMI is more important, not just because it is a larger part of the economy, but also because services reflect more domestic rather than international forces.  Yesterday’s slightly softer than expected CPI also seemed to reflect weakness in service prices.  This is a yellow flag about the economic momentum, which will likely be noted by the ECB next week.  

The headline disappointment is minor compared with a couple of the country reports.  Germany matched the flash reading, so we cannot look to Berlin.  France’s manufacturing PMI was revised down to 48.3 from 48.5 flash estimate and 48.6 in July.  It has not been above the 50 boom/bust level since February.  Italy was even a bigger disappointment.  Its reading fell to 49.8 from 51.2.  It is the first sub-50 reading since January 2015.  

There were three surprises from Asia-Pacific to note.  First, the Australia’s manufacturing PMI dropped to 46.9 from 56.4.  It is the first sub-50 print and the lowest reading since June 2015.  Australia also reported flat July retail sales figures, for which the median forecast was for a 0.3% bounce after 0.1% gains in May and June.  However, the Australian dollar was not sold.  It is recovering from yesterday’s dip below $0.7500 for the first time since the start of August.  

Second, Japan’s surprise was the weaker than expected Q2 capex figures, which warn of the risk that Q2 GDP is revised lower. Capex was expected to have risen by 5.5% after 4.2% gain in Q1.  Instead, it increased by 3.1%.  Separately, Japan reported that corporate profits fell 10% in Q2, which is the largest decline since 2011.  It was a function of two factors, a 3.5% drop in sales (weaker domestic demand) and the rise of the yen (translation of foreign earnings).    

Third, China surprised.  The official manufacturing PMI rose to 50.4 from 49.9.   It is the highest reading since October 2014.  The Caixin measure, which has a greater weight for smaller companies than the official measure, slipped to 50.0 from 50.6.  The official services PMI eased to 53.5 from 53.9.  It appears that China can host the G20 meeting this weekend and note the economy appears to be stabilizing.  

The euro has been mostly confined to yesterday’s ranges.  We again highlight support in the $1.1110-$1.1125 area, which houses a retracement objective and the 200-day moving average.  Resistance is seen near $1.1170.    Meanwhile, the dollar is extending its gains against the yen for the seventh consecutive session.  If a foothold above JPY103.50 is secure, the market appears to have its sights set on JPY104.  Support is pegged just below JPY103.  

The North American session features a full slate of data, but two reports stand out:  the manufacturing ISM and the auto sales.  Both are expected to soften a bit.  The other reports, like Q2 productivity and labor costs, are not typically market movers, though important for understanding the economy and US competitiveness.  Weekly jobless claims do not attract much interest the day before the national report.  Construction spending is also not a market mover, but an increase in July would snap a three-month drop, and boost confidence that GDP is recovering, and it broadens outside of consumption.  

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Financial Stability and Rate Hikes

Via Bloomberg:

Matthew Boesler
boes_
August 31, 2016 — 5:30 PM EDT

Inflation takes backseat with mute projected price pressures
Evans says anchored rate expectations to limit financial risk

With U.S. inflation low and seen staying that way, Federal Reserve officials who favor raising interest rates point to preserving financial stability as another reason to move. Chicago Fed President Charles Evans, a key advocate of delaying action, is making a new argument to push back against that notion.

His comments in Beijing earlier on Wednesday touch on key questions for the policy-setting Federal Open Market Committee when it meets next month: Do officials need to increase rates before inflation rises to their 2 percent target, in order to avoid the need for faster tightening later on and to keep financial risks at bay? Or should they let inflation reach their goal first to make sure it gets there and stays there?

Remarks by Fed Chair Janet Yellen in Jackson Hole, Wyoming, on Aug. 26 are “consistent with the former” view, said Michael Gapen, chief U.S. economist at Barclays in New York. “There is a group within the Board that is consistent with the latter, and I think Charlie is part of that group.”

The Fed’s preferred inflation gauge has been below the target for more than four years and Fed staff project it will still be slightly below 2 percent in 2018.

Minutes of the FOMC’s July meeting showed that several officials had argued the Fed “would likely have ample time to react if inflation rose more quickly than they currently anticipated,” while several also voiced concern that keeping rates low for longer “risked intensifying incentives for investors to reach for yield and could lead to the misallocation of capital and mispricing of risk.”

“The core of the committee is behaving as though they are willing to risk overshooting here, and Evans has been at the forefront,” said Ethan Harris, global head of economics research at Bank of America in New York. “The Fed has been already making this compromise for years now: that we know that zero-rate policies can create very aggressive behavior in the markets, and so we need to keep an eye on that, but we’re willing to do it anyway.”

Boston Fed President Eric Rosengren, who spoke at the same conference in Beijing, flagged elevated valuations in commercial real estate as a potential risk, arguing that the Fed should continue raising rates soon to ensure it could tighten slowly. The desire is to avoid a repeat of what happened in 2013, when the Fed signaled a shift in its policy stance by discussing the tapering of asset purchases, triggering an unsettling surge in yields.

Evans, at the same conference, said the prospect of a faster pace of tightening later on, in the event that the Fed forgoes rate increases until inflation has reached 2 percent, shouldn’t present such concern.

He cited recent conversations with life-insurance industry executives who told him that subdued expectations for interest rates over the longer run are “being built into business plans,” which implies that “lower policy rate expectations act as a restraint on how much long-term rates could rise following a surprise over the near-term policy path.”

The yield on 10-year U.S. Treasury notes has fallen about nine-tenths of a percentage point since June 2015. A survey of big hedge funds and asset managers conducted by the New York Fed supports Evans’s thesis: The results suggest a lower expected path of the Fed’s policy rate over the next 10 years accounts for most of the decline in yields.

Still, Evans’s argument may not be enough to sway his colleagues on the FOMC who worry about a repeat of the asset-price crashes that triggered the last two U.S. recessions, Gapen said, referring to the 2007-2008 housing collapse, and the technology bubble that burst in early 2000.

“The last two cycles should give us enough evidence that we are incapable of seeing the development of these risks in real time,” he said. “A better procedure is to do something — go a little bit slower, and not just be full-steam.”

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Lower Bar for Fed to Hike

Via Bloomberg:

Yellen Speech Contained Clue to Reading the August Jobs Report
2016-09-01 09:00:00.8 GMT

By Michelle Jamrisko
(Bloomberg) — An overlooked line in Federal Reserve Chair
Janet Yellen’s speech last week could hold the key to whether
Friday’s U.S. jobs report clinches an interest-rate increase
this month.
While the focus was on Yellen’s statement that the case for
an interest-rate increase “has strengthened in recent months,”
she followed with new language that the central bank’s decisions
depend on the degree that data “continues to confirm” the
outlook. That, and other recent remarks by Fed officials,
suggest that job gains need to be merely solid — rather than
extraordinary — to warrant raising borrowing costs for the
first time in 2016.
After global developments and weak May employment derailed
Fed rate-hike plans earlier this year, U.S. payrolls surged in
June and July, and economists expect Friday’s Labor Department
figures to show a gain of 180,000 in August, in line with the
average for 2016. That would provide evidence the economy is on
steadier ground and faster wage gains are coming, context that
some Fed officials have been waiting for.
“Unless there’s a massive disappointment, the bar seems
pretty low for the Fed,” said Laura Rosner, a senior U.S.
economist at BNP Paribas in New York. Yellen’s language “gives
the impression that the indicators and the data are already
consistent with the outlook, and they want to see that
confirmation continue. And so it doesn’t mean things need to
ramp up and accelerate way above and beyond what we’ve seen.”
Payrolls rose by 255,000 in July. Unemployment may have
dropped to 4.8 percent in August from 4.9 percent, according to
the median projection in a Bloomberg survey.

September Meeting

Yellen and her colleagues have left the door open to an
interest-rate hike at their Sept. 20-21 meeting without giving
an explicit signal that they are likely to take such action.
Trading in federal funds futures shows about one-in-four odds;
investors see better chances of such a move by year-end.
An increase may also hinge on gauges of wage growth and
labor-market slack in Friday’s report, and officials could still
point to tame inflation, weak business investment and uncertain
global prospects to justify keeping borrowing costs on hold.
As for the headline payrolls figure, the Fed could still
make the case that the employment picture is bright enough if
only 100,000 or so jobs were added, since that’s all that’s
needed to keep up with the growth in the labor force, said Scott
Brown, chief economist at Raymond James Financial Inc. in St.
Petersburg, Florida. San Francisco Fed President John Williams
said in a recent speech that just 80,000 jobs a month are needed
to satisfy the increase in available American workers.
Still, a 100,000 increase in employment would be the
second-worst reading since early 2015. PNC Financial Services
Group Inc.’s chief economist, Stuart Hoffman, pegs the Fed’s
threshold at closer to 200,000, or if there are large upward
revisions to prior months. The PNC economists project the next
rate hike for December.

August Curse

Two potential issues complicate the report: One, the
payrolls data have been cursed in August, with the survey median
undershooting the first print for the month in each of the last
five years, by an average 47,000.
“At least over the last few years there’s a few guarantees
— there’s death, taxes, and a disappointing August first
print,” said Ryan Sweet, a senior economist at Moody’s Analytics
Inc. in West Chester, Pennsylvania.
Culprits include low response rates in a popular vacation
month and difficulty adjusting for seasonal effects at the start
of the school year. Even so, four of those last five Augusts
looked better by the time the Labor Department released its
final estimate. From 2011 to 2014, they were revised up by an
average of 94,000 between the first and the latest prints.
The second issue is that wages could be subject to a
calendar quirk. The report’s survey week doesn’t include the
15th — a payday for many workers — and that pattern frequently
has resulted in weaker average hourly earnings growth.
In the past five instances of this calendar makeup over
three years, average hourly earnings showed one monthly decline
and four unchanged readings, Morgan Stanley’s Ted Wieseman said
in a research note. The Bureau of Labor Statistics and Bank of
America Merrill Lynch each point to research that shows the
calendar pattern doesn’t result in a statistically significant
impact on the wage figures.

Hourly Earnings

Average hourly earnings probably rose 0.2 percent after
climbing 0.3 percent, according to the Bloomberg survey. They
increased 2.5 percent from August 2015 after 2.6 percent in the
year through July, the median estimate shows.
A solid increase in payrolls could give some cover for a
less-than-stellar wages reading, said Michael Gapen, chief U.S.
economist at Barclays Plc in New York, who predicts the Fed’s
only interest-rate increase of 2016 will be in September.
“If the number is pretty good, I think it’ll confirm their
suspicions and their belief in the labor market, and they take a
really strong cue from that,” said Gapen, a former Fed
economist. “The order of importance would be employment growth,
the interaction of the unemployment rate and the participation
rate, and then wages.”

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Some FX Musings

Via Kit Juckes at SocGen:

<http://www.sgmarkets.com/r/?id=h113cc38c,18274870,18274871&p1=136122&p2=50f4f6384a99a7bfa4d119b5bf3d35e6>

Welcome to September – season of conkers, blackberries and mushrooms (here, anyway). The pick of August’s currencies were the oil-sensitive COP, RUB, and NOK. Not so much this morning though as yesterday’s US oil inventory data took prices down. On a 12-month view, oil prices are almost unchanged, the big correction from USD 100/bbl is over and we’ll be in tighter rangers from now on, though SG forecasts are for a slow appreciation from here. The best of the oil-sensitive currencies on a 12-month look-back is RUB and since it’s one of those with decent yields, it’ll remain a core FX long. Within G10FX, both NOK and CAD have rather lost their shine, benefitting from the oil bounce but lacking domestic foundations for a further rally. A marginal bearish USD/CAD and EUR/NOK bias, is nothing to get over-excited about

Oil and FX – settling down…..

[http://email.sgresearch.com/Content/PublicationPicture/231644/1]

It’s PMI season this morning, with mixed results so far. China’s official PMI bounced, but the Caixin measure didn’t follow suit, while we’ve seen upside surprises in India, Indonesia and Taiwan but disappointment in Australia and South Korea. The net result of that is a mixed overnight session for Asian currencies and equities, and a wait-and-see mood ahead of the US ISM and tomorrow’s payroll data.

The most closely watched PMI may be the one in the UK, which fell from 52.2 to 48.2 in July as a reaction to the EU referendum result. The only surprising feature of Brian Hilliard’s forecast of a bounce to 50.5, is that it’s the highest forecast in the Bloomberg survey. A 50% retracement of a sharp drop seems reasonable and would tell me absolutely nothing new about the UK economy or the impact of leaving the EU on it. I like medium-term shorts in GBP/USD and if we get a big enough fall in EUR/GBP today I think that would be worth buying. Just for today though, if your horizon is short enough, buying GBP looks like a decent risk-reward bet.

If EUR/GBP falls today, we’ll go long

[http://email.sgresearch.com/Content/PublicationPicture/231644/3]

Europe is digesting ongoing political gridlock in Spain, and very mixed economic messages overall. EUR/USD is holding just above its 200-day moving average and remains as exciting as watching the kettle boil. The US data this afternoon may see the ISM dip a bit, from 52.6 to 51.0, which wouldn’t help the dollar break higher ahead of tomorrow’s data. 1.58% on 10year notes makes these as dull as EUR/USD and bond bears still aren’t getting much help. Which, taken together, may leave us with a mild dollar bullish bias, but nothing more exciting than that.

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Some Corporate Bond Stuff

Via Bloomberg:

IG CREDIT: Volume Higher Led by Client Selling of MSFT Issues
2016-09-01 10:00:29.365 GMT

By Robert Elson
(Bloomberg) — Secondary IG trading ended with a Trace
count of $16.8b vs $15.4b Tuesday, $16.1b last Wednesday. 10-DMA
$13.6b; 10-Wednesday moving avg $17.4b.

* 144a trading added $2.0b of IG volume vs $2.1b on Tuesday,
$2.4b last Wednesday

* The most active issues longer than a year:
* MSFT 2.40% 2026 was 1st with client and affilate flows
accounting for 89% of volume; client selling 3.2x buying
* MSFT 3.70% 2046 was next with client and affiliate
trades taking 90% of volume; client selling twice buying
* ACT 2.35% 2018 was 3rd with client flows taking 100% of
volume
* BATSLN 2.75% 2020 was the most active 144a issue with client
trades taking 100% of volume

* Bloomberg Barclays US IG Corporate Bond Index OAS again
unchanged at 135, the low for 2016
* 2016 high/low: 215 (a new wide since Jan. 2012)/135
* 2015 high/low: 171/122
* 2014 high/low: 137/97
* All time high/low back to 1989: 555 (Dec. 2008) / 54
(March 1997)

* Current market levels vs early Wednesday:
* 2Y 0.809% vs 0.813%
* 10Y 1.597% vs 1.582%
* Dow futures +29 vs -9
* Oil $44.57 vs $46.11
* ¥en 103.57 vs 103.15

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Credit Pipeline

Via Bloomberg:

CREDIT PIPELINE: September Expected to See Over $100b
2016-09-01 09:42:54.28 GMT

By Robert Elson
(Bloomberg) — August ended with a startling IG issuance
total near $140b vs last year’s $64b; sans SAS deals $117b.

* September may be lower than some expectations if some of
those deals were pushed forward into August
* September still expected to see an estimated ~$125b; recent
history suggests that taking the over is the best strategy

LATEST UPDATES

* Transurban Group (TCLAU) Baa1/BBB+, mandates BAML/C/JPM for
investor meetings Sept. 8-14; debt issuance may follow
* Municipality Finance (KUNTA) Aa1/AA+, to hold Green Bond
roadshows over the coming weeks; 144a/Reg-S deal expected to
follow
* Woodside Finance (WPLAU) Baa1/BBB+, to hold investor
meetings Aug. 31 – Sept. 7, via C/CS/JPM/UBS; USD deal may
follow
* Kingdom of Saudi Arabia (SAUDI), may raise more than $10b
following roadshows in late Sept.
* Said to have hired 6 banks to lead first intl bond sale
(July 14)
* Korea National Oil (KOROIL) Aa2/AA, has mandated
C/GS/HSBC/SG/KDB/UBS for investor meetings to begin Sept. 6;
144a/Reg-S deal may follow
* Pfizer (PFE) A1/AA, to buy Medivation (MDVN) for ~$14b;
expects to finance deal with existing cash
* Moody’s maintained its negative outlook on PFE, saying
low cash levels may “lead to future debt issuance for
US cash needs.”
* Couche-Tard (ATDBCN) Baa2/BBB, expects to sell USD bonds
related to ~$4.4b acquisition of CST Brands (CST) Ba3/BB
* NongHyup Bank (NACF) A1/A+, mandates C/CA/HSBC/JPM/Nom/UBS
to hold investor meetings Aug. 29-Sept. 1; 144a/Reg-S deal
may follow
* Enbridge (ENBCN) Baa2/BBB+, files $7b mixed shelf Aug.22;
$350m maturies Oct. 1
* General Electric Company’s plan to take on additional $20b
of debt could pressure ratings, Moody’s says
* Industrial Bank of Korea (INDKOR) Aa2/AA-, mandates HSBC/Nom
for roadshow from Aug. 22; 144a/Reg-S deal may follow
* Cabot Corp (CBT) Baa2/BBB, filed debt shelf; last priced a
new deal in 2012, has $300m maturing Oct. 1
* Israel Electric (ISRELE) Baa2/BBB-; said to hire C, JPM for
at least $500m bond sale in 4Q

MANDATES/MEETINGS

* Sumitomo Life (SUMILF) A3/BBB+; investor mtg July 19
* Woori Bank (WOORIB) A2/A-; mtgs July 11-20

M&A-RELATED

* Analog Devices (ADI) A3/BBB; ~$13.2b Linear Technology acq
* To raise nearly $7.3b debt for deal (July 26)
* Bayer (BAYNGR) A3/A-; said to review Monsanto (MON) A3/BBB+
accounts as bid weighed (Aug. 4)
* $63b financing said secured w/ $20b-$30b bonds seen
* Danone (BNFP) Baa1/BBB+; ~$12.1b WhiteWave (WWAV) Ba2/BB
* Co. Says deal 100% debt-financed, expects to keep IG
profile (July 7)
* Thermo Fisher (TMO) Baa3/BBB; ~$4.07b FEI acq
* $6.5b loans, including $2b bridge (July 4)
* Zimmer Biomet (ZBH) Baa3/BBB; ~$1b LDR acq
* Plans $750m issuance post-completion (June 7)
* Air Liquide (AIFP) A3/A-; ~$13.2b Airgas acq
* Plans to refi $12b loan backing acq via USD/EUR debt
(June 3)
* Great Plains Energy (GXP) Baa2/BBB+; ~$12.1b Westar acq
* $8b committed debt secured for deal (May 31)
* Abbott (ABT) A2/A+; ~$5.7b St. Jude buy, ~$3.1b Alere buy
* $17.2b bridge loan commitment (April 28)
* Sherwin-Williams (SHW) A2/A; ~$9.3b Valspar buy
* $8.3b debt financing expected (March 20)
* Shire (SHPLN) Baa3/BBB-; ~$35.5b Baxalta buy
* Closed $18b Baxalta acq loan (Feb 11)

SHELF FILINGS

* IBM (IBM) Aa3/AA-; automatic mixed shelf (July 26)
* Nike (NKE) A1/AA-; automatic debt shelf (July 21)
* Potash Corp (POT) A3/BBB+; debt shelf; last issued March
2015 (June 29)
* Tesla Motors (TSLA); automatic debt, common stk shelf (May
18)
* Debt may convert to common stk
* Reynolds American (RAI) Baa3/BBB filed automatic debt shelf;
sold $9b last June (May 13)
* Statoil (STLNO) Aa3/A+; debt shelf; last issued USD Nov.
2014 (May 9)
* Corporate Office (OFC) Baa3/BBB-; debt shelf (April 12)
* Rogers (RCICN) Baa1/BBB+; $4b debt shelf (March 4)

OTHER

* Visa (V) A1/A+; CFO says will issue $2b debt for buybacks by
yr end (July 21)
* Investment Corp of Dubai (INVCOR); weighs bond sale (July 4)
* Alcoa (AA) Ba1/BBB-; upstream entity to borrow $1b (June 29)
* GE (GE) A3/AA-; may issue despite no deals this yr (June 1)
* Discovery Communications (DISCA) Baa3/BBB-; may revisit bond
market this yr, BI says (May 18)
* American Express (AXP) A3/BBB+; plans ~$3b-$7b term debt
issuance (April)

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Some Corporate Bond Stuff

Via Bloomberg:

IG CREDIT: Volume Higher on Client, Affiliate Trades
2016-08-30 09:50:17.758 GMT

By Robert Elson
(Bloomberg) — Secondary IG trading ended with a Trace
count of $14.5b Monday vs $9.4b Friday, $10.3b the previous
Monday. 10-DMA $13.6b.

* 144a trading added $1.4b of IG volume vs $1.1b Friday, $1.3b
last Monday

* The most active issues:
* MSFT 2.40% 2026 was 1st with client and affiliate flows
accounting for 55% of volume
* WFC 4.30% 2027 was next with client trades taking 100%
of volume; client selling 2.5x buying
* C 2.65% 2020 was 3rd with client and affiliate flows
taking 98% of volume; client buying twice selling
* Aviation Capital Group (PACLIF) 6.75% 2021 was most active
144a issue with client trades taking 94% of volume; client
buying 3:2 over selling

* Bloomberg Barclays US IG Corporate Bond Index OAS unchanged
at 135, a new low for 2016
* 2016 high/low: 215 (a new wide since Jan. 2012)/135
* 2015 high/low: 171/122
* 2014 high/low: 137/97
* All time high/low back to 1989: 555 (Dec. 2008) / 54
(March 1997)

* Current market levels vs early Monday, Friday:
* 2Y 0.825% vs 0.839% vs 0.780%
* 10Y 1.583% vs 1.611% vs 1.568%
* Dow futures +7 vs -14 vs +7
* Oil $47.35 vs $46.92 vs $47.16
* ¥en 102.32 vs 102.16 vs 100.42

* IG Bondwrap: Monday Volume Highest in Over 2 Weeks
* August volume $128.14b; YTD $1.15t

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FX

Via Marc Chandler at Brown Brothers Harriman:

Greenback Remains Firm, Awaiting Fresh Cues

• The dollar has held on to most of its recent gains
• Japanese labor market remains tight and consumption is improving
• EC rules against Apple
• The September Fed funds futures imply a 36% chance of a hike next month vs 42% before the weekend

The US dollar enjoys a firm tone mostly within yesterday’s ranges.  We expect the dollar to ease in North America today as it continues to consolidate.  The dollar is firmer against the yen for the fifth consecutive session, the longest streak since March.  Equities are mostly higher after yesterday’s Wall Street gains.  The MSCI Asia-Pacific Index gained a quarter of a percent, largely offsetting yesterday slippage.  The MSCI Emerging Market equity index is up 0.6%, also reversing yesterday’s decline.  European share are moving higher as well.  The Dow Jones Stoxx 600 is up 0.5, led by a 1.2% rise in the financials, (banks +1.5%).  Of note, Italy’ s banks are up 1.8% today.  It is the fifth advance in the past seven sessions.  Asia-Pacific bond yields were lower following the pullback in US yields yesterday.  Today US and European yields are slightly firmer.  The dollar is firm against most emerging market currencies.  Notable exceptions include the South Korean won and Taiwanese dollar.  The South African rand is fractionally lower.  It has falling for the eighth consecutive session.  

The US dollar is trading firmly, largely within yesterday’s ranges.  The odds implied by the September Fed fund futures eased to 36% from 42% before the weekend, but ahead of Fischer’s Bloomberg TV appearance, and tomorrow’s ADP employment estimate, the market seems cautious about fading the dollar’s strength.  

There are several developments to note today.  First is the batch of Japanese data.   The key takeaway is that the labor market remains tight, with the unemployment rate slipping to 3.0%, the lowest since 1995, and consumption appears to have begun Q3 on a firm note.  Employment rose by 200k in July, while unemployment fell 70k.  The participation rate slipped to 60.3% from 60.5%.  Although both retail sales and overall household spending remain lower than a year ago, both rose in July and by more than expected.  Household spending rose 2.5% in July, and retail sales rose 1.4%.  

The market’s focus is on the BOJ meeting later this month and Kuroda’s recent reiteration that monetary policy has not been exhausted.  The dollar has already traded on both sides of yesterday’s narrow range against the yen.  Yesterday’s high was near JPY102.40, and a close above it would be constructive.  Resistance is seen near the month’s high in the JPY102.65-JPY102.85 range.  Rising equities today and the firmer US bond yield, (though the 10-year is below the 1.63% level seen at the end of last week),  may see the dollar probe higher in early North American turnover.  

Australia reported an 11.3% surge in July building approvals.  It is ten-times more than expected, though follows a downward revision to the June series (to -4.7% from -2.9%).  It is the strongest report in two years.   However, it was not sufficient to lift the Australian dollar.  The Aussie encountered fresh selling near $0.7580, just shy of yesterday’s high.  Yesterday’s low was seen near $0.7525, which appears safe.  Another run at the highs in North America seems likely given the intraday technical readings.  

In Europe, the preliminary German state August inflation reports warn of downside risks to the median forecast for a 0.5% year-over-year rise for the country as a whole.  In turn, this could risk tomorrow’s eurozone preliminary CPI (median estimate is for a 0.3% increase after 0.2% year-over-year in July).  Spain’s August estimate was in line with expectations (-0.3% year-over-year).  

The more interesting focus today in Europe is the EC’s ruling on the tax concessions Ireland made to Apple.  The EC ruled that Apple may have to repay 13 bln in taxes and interest.  The EC argues that Ireland’s tax concessions amounted to an illegal subsidy. The EC claimed that the selective treatment given to Apple allowed ti it pay a tax rate of 1% on its European profits into 2003 and 0.005% in 2014.   The US Treasury is at loggerheads with the EC over the handling of the issue.  Note that the foreign tax that US companies pay, reduces their liability to the US tax authorities.  Apple and Ireland will likely appeal whatever judgment is delivered, but Apple will likely seek credit from US tax authorities for any additional taxes they pay to Ireland.  Some 700 US companies have facilities in Ireland, employing 140k people.  ]

The US data stream is light with house prices and consumer confidence the only reports of note.  However,  Canada reports Q2 current account.  The deficit is likely to approach the record shortfall posted in Q3 2010 of C$20.2 bln.  The larger the deficit, the more the downside risk of Q2 GDP, which will be reported tomorrow.  Canada is the only G7 country that appears to have contracted in Q2.  The median forecast is for a 1.5% annualized pace of contraction.    The US dollar may challenge a downtrend against the Canadian dollar that comes in today just below CAD1.3100.    

The euro and sterling are trading with a softer bias near yesterday’s lows. We anticipate that both currencies will pare their losses in the North American session.  The euro needs to resurface above $1.1200, and sterling faces initial resistance near $1.3100-$1.3120.

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Credit Pipeline

Via Bloomberg:

IG CREDIT PIPELINE: Sweden, Woodside Added to the List
2016-08-30 09:32:32.851 GMT

By Robert Elson
(Bloomberg) —

LATEST UPDATES

* Kingdom of Sweden (SWED) Aaa/AAA, mandates Barc/C/HSBC for
$bench 144a/Reg-S 5Y
* Woodside Finance (WPLAU) Baa1/BBB+, to hold investor
meetings Aug. 31 – Sept. 7, via C/CS/JPM/UBS; USD deal may
follow
* Kingdom of Saudi Arabia (SAUDI), may raise more than $10b
following roadshows in late Sept.
* Said to have hired 6 banks to lead first intl bond sale
(July 14)
* Korea National Oil (KOROIL) Aa2/AA, has mandated
C/GS/HSBC/SG/KDB/UBS for investor meetings to begin Sept. 6;
144a/Reg-S deal may follow
* Pfizer (PFE) A1/AA, to buy Medivation (MDVN) for ~$14b;
expects to finance deal with existing cash
* Moody’s maintained its negative outlook on PFE, saying
low cash levels may “lead to future debt issuance for
US cash needs.”
* Couche-Tard (ATDBCN) Baa2/BBB, expects to sell USD bonds
related to ~$4.4b acquisition of CST Brands (CST) Ba3/BB
* NongHyup Bank (NACF) A1/A+, mandates C/CA/HSBC/JPM/Nom/UBS
to hold investor meetings Aug. 29-Sept. 1; 144a/Reg-S deal
may follow
* Enbridge (ENBCN) Baa2/BBB+, files $7b mixed shelf Aug.22;
$350m maturies Oct. 1
* General Electric Company’s plan to take on additional $20b
of debt could pressure ratings, Moody’s says
* Industrial Bank of Korea (INDKOR) Aa2/AA-, mandates HSBC/Nom
for roadshow from Aug. 22; 144a/Reg-S deal may follow
* Cabot Corp (CBT) Baa2/BBB, filed debt shelf; last priced a
new deal in 2012, has $300m maturing Oct. 1
* Israel Electric (ISRELE) Baa2/BBB-; said to hire C, JPM for
at least $500m bond sale in 4Q

MANDATES/MEETINGS

* Sumitomo Life (SUMILF) A3/BBB+; investor mtg July 19
* Woori Bank (WOORIB) A2/A-; mtgs July 11-20

M&A-RELATED

* Analog Devices (ADI) A3/BBB; ~$13.2b Linear Technology acq
* To raise nearly $7.3b debt for deal (July 26)
* Bayer (BAYNGR) A3/A-; said to review Monsanto (MON) A3/BBB+
accounts as bid weighed (Aug. 4)
* $63b financing said secured w/ $20b-$30b bonds seen
* Danone (BNFP) Baa1/BBB+; ~$12.1b WhiteWave (WWAV) Ba2/BB
* Co. Says deal 100% debt-financed, expects to keep IG
profile (July 7)
* Thermo Fisher (TMO) Baa3/BBB; ~$4.07b FEI acq
* $6.5b loans, including $2b bridge (July 4)
* Zimmer Biomet (ZBH) Baa3/BBB; ~$1b LDR acq
* Plans $750m issuance post-completion (June 7)
* Air Liquide (AIFP) A3/A-; ~$13.2b Airgas acq
* Plans to refi $12b loan backing acq via USD/EUR debt
(June 3)
* Great Plains Energy (GXP) Baa2/BBB+; ~$12.1b Westar acq
* $8b committed debt secured for deal (May 31)
* Abbott (ABT) A2/A+; ~$5.7b St. Jude buy, ~$3.1b Alere buy
* $17.2b bridge loan commitment (April 28)
* Sherwin-Williams (SHW) A2/A; ~$9.3b Valspar buy
* $8.3b debt financing expected (March 20)
* Shire (SHPLN) Baa3/BBB-; ~$35.5b Baxalta buy
* Closed $18b Baxalta acq loan (Feb 11)

SHELF FILINGS

* IBM (IBM) Aa3/AA-; automatic mixed shelf (July 26)
* Nike (NKE) A1/AA-; automatic debt shelf (July 21)
* Potash Corp (POT) A3/BBB+; debt shelf; last issued March
2015 (June 29)
* Tesla Motors (TSLA); automatic debt, common stk shelf (May
18)
* Debt may convert to common stk
* Reynolds American (RAI) Baa3/BBB filed automatic debt shelf;
sold $9b last June (May 13)
* Statoil (STLNO) Aa3/A+; debt shelf; last issued USD Nov.
2014 (May 9)
* Corporate Office (OFC) Baa3/BBB-; debt shelf (April 12)
* Rogers (RCICN) Baa1/BBB+; $4b debt shelf (March 4)

OTHER

* Visa (V) A1/A+; CFO says will issue $2b debt for buybacks by
yr end (July 21)
* Investment Corp of Dubai (INVCOR); weighs bond sale (July 4)
* Alcoa (AA) Ba1/BBB-; upstream entity to borrow $1b (June 29)
* GE (GE) A3/AA-; may issue despite no deals this yr (June 1)
* Discovery Communications (DISCA) Baa3/BBB-; may revisit bond
market this yr, BI says (May 18)
* American Express (AXP) A3/BBB+; plans ~$3b-$7b term debt
issuance (April)

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Heads I Win, Tails You Lose

This story reminds me in a small way of the aftermath of the subprime crisis. Suddenly, when healthy gains turned to career threatening losses, some portfolio managers professed that they were rubes who had just fallen off a turnip truck and who lacked understanding and comprehension of complicated derivatives. They understood them when they were performing but couldnt take the heat when they melted.

There is a similar situation in the UK in which derivatives on sterling have turned toxic following the post Brexit meltdown in that currency.

Via Bloomberg:

Suchicki’s problems started in early 2013, when the pound, spurred on by a buoyant U.K. economy and a series of Polish rate cuts, began a two-year ascent versus the zloty. Ordinarily, such moves would have helped the bottom line of Best Foods, which imports Polish meats and vegetables into the British market. Instead, according to the legal filings, the company suffered heavy losses. At one stage, the company said it was paying as much as 16 times more than it would have in the market to transfer pounds into zlotys.

Soured Contracts

It’s unclear just how many companies are struggling with soured contracts like these. Vedanta Holdings, a firm that provides financial expertise for lawyers who bring misselling cases, has helped its clients settle seven currency product cases, and says it has received 18 inquiries since the June 23 Brexit vote. Collyer Bristow is currently working on about half a dozen cases.

Few are likely to make it to court, according to Clive Zietman, a partner at Stewarts Law. “We are seeing more of these types of claims, but we are talking about small businesses, and it’s prohibitively expensive to bring action,” said Zietman. “They are complicated, there’s a lot of evidence work, and banks and other sellers will fight them.”

The total market for foreign exchange derivatives is close to $3 trillion globally, according to the Bank of International Settlements’ most recent review, but most of that is made up of transactions among large financial institutions, funds and sophisticated multinationals.

Big Players

Still, the money to be made from the small and midsize companies market has attracted big players. In August 2014, Bridgepoint, one of the U.K.’s biggest private equity firms, acquired Moneycorp in a deal worth 212 million pounds. The previous year, World First UK Ltd. sold a 40 percent stake to U.S. private equity firm FTV Capital for an undisclosed sum.

A spokesman for Bridgepoint declined to comment. World First and FTV Capital didn’t reply to e-mails seeking comment.

The U.K.’s Financial Conduct Authority has seen little evidence of widespread misselling and doesn’t view it as a significant problem, according to a person at the regulator, who asked not to be cited by name. The FCA declined to comment.

So far, at least, many brokers have been willing to work with companies to find a solution behind closed doors — either through restructuring, delaying payments or increasing credit limits.

The situation could change if the pound continues its Brexit-spurred descent because most buyers of the derivatives haven’t posted enough collateral to cover the losses they would face, according to Collyer Bristow’s Henry. If enough businesses are affected, it would be the brokers’ profits that ultimately get slammed.

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