September 11, 2019 / 7:59 AM / 9 days ago

Daily Briefing: Fear subsides, although caution remains

The partial reversal of August’s “fear trades” continued overnight as investors positioned for the upcoming big central bank meetings in Frankfurt and Washington and re-assessed a plethora of political, economic and policy risks while re-emerging from a host of summer safety trades.

The German share price index graph is pictured at the stock exchange in Frankfurt, September 10, 2019

U.S. President Donald Trump’s sacking of his hawkish National Security Adviser John Bolton overnight was seen as potentially easing risks of a military confrontation with Iran and has combined with the gradual easing of both no-deal Brexit fears and worst-case scenarios from the Hong Kong protests to let the air out of some safe-haven trades. The planned resumption of U.S.-China trade talks has helped.

China has exempted 16 types of U.S. products from additional retaliatory tariffs in a conciliatory sign from Beijing, amid some reports it will buy U.S. agricultural produce after all - adding to the improved mood even amid signs of ongoing industrial slowdown.

Data showed China’s auto sales fell for a 14th consecutive month in August. While incoming economic numbers are hardly encouraging, they appear to be better calibrated with market expectations and economic surprise indices are turning positive for the first time in months.

All that has led to a paring back of some of the more aggressive easing expectations from the European Central Bank and Federal Reserve over the week ahead. Several reports suggested the ECB may stop short of beginning a new bond-buying campaign just yet. Governments in Germany and elsewhere in Europe were talking about more active use of fiscal policy to support growth.

Overall, that’s seen bond yields climb and some sector rotations to value from growth stocks over recent sessions. Wall Street’s major stock benchmarks were mostly flat on Tuesday and the 10-year U.S. Treasury yield climbed to its highest since Aug. 12 overnight and hovered above 1.71% first thing. The inversion of the yield curve between three months and 10 years narrowed to its lowest in more than five weeks.

The perceived safe-haven of the Japanese yen also continued to unwind, with dollar/yen rising close to 108 for the first time since Aug. 2 – helped by reports the Bank of Japan is considering further easing next week, too.

Gold prices fell to their lowest since Aug. 13 overnight before stabilising. In Europe, where all the focus is on tomorrow’s ECB meeting, Germany’s 30-year bund yield remained positive early on Wednesday after popping back above 0% for the first time in more than a month yesterday. Euro/dollar held just shy of $1.1050.

Asian stock markets were mostly upbeat, with the yen retreat and BOJ speculation helping Japan’s Nikkei to rise almost 1% earlier. Seoul’s Kospi was up about 0.9% too, while Hong Kong’s Hang Seng outperformed again with gains of 1.6% as activists call off protests on Wednesday in remembrance of the Sept. 11, 2001 attacks on the United States, helping to deflect accusations in Chinese media that terror attacks were being planned.

Shanghai stocks were the laggard on Wednesday, losing 0.5% despite the scrapping of foreign investment quotas in Chinese assets yesterday. China’s offshore yuan was steady.

European and U.S. stock futures were higher first thing. Sterling held most of its gains of the past week against the dollar and euro, with parliament now suspended for five weeks as PM Boris Johnson tries to find some way to seal a new Brexit deal with the European Union before the Oct. 17-18 summit or be forced to seek an extension of the Oct. 31 deadline.

Boris Johnson puts his hand up to answer a question as he attends a history class with pupils during a visit to Pimlico Primary school in London, September 10, 2019

Emerging markets generally benefited from the wider return of risk appetite, but Turkey’s lira fell for a fifth day running before an expected interest rate cut on Thursday. That’s its longest losing streak since it reached its low for the year in early May. Money markets pointed to a cut to about 17% from 19.5%.                                             

In European corporate news, Apple's launch of its new iPhone 11 series may help lift the mood across chipmakers, Infineon, Dialog Semiconductor and STMicro, although the lower price tag and new features may not be enough to win customers in China, the world's largest smartphone market, which is already crowded with cheaper and feature-packed rival handsets.

The owner of clothing chain Zara, Inditex, posted first-half profits and sales in line with expectations, buoyed by good summer weather in Europe and favourable foreign exchange effects. But dealers say the absence of a positive surprise from the world's top fashion retailer may weigh on the stock.

In luxury goods, French handbag maker Hermes delivered strong sales growth in mainland China in July and August that helped offset the impact of Hong Kong's protests in Hong Kong. Traders said its EBIT growth was better than expected, which should lift shares 2% to 3%.

A report that French retailer Carrefour was weighing a possible bid for Casino may pressure Carrefour and was giving a significant lift to its debt-laden rival. Casino could rise as much as 10%, dealers say.

— A look at the day ahead from EMEA markets editor Mike Dolan. The views expressed are his own —

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