LCG: Sovereign bond sell-off hits sentiment, gold dives below $1500

10 sep 2019

The 10-year German bund yield eased to -0.585% from above -0.70% at the beginning of this month. The euro held ground above 1.10 against the greenback, but the topside remained limited at 1.1070 ahead of Thursday’s European Central Bank (ECB) meeting.

The US dollar gained against most G10 currencies overnight, except Kiwi. The US stock markets closed flat on Monday on worries that some parts of the US may have stepped into recession.

Gold dived below the $1500 level an ounce, as risk-averse investors appear to be turning to cash on increased cross-asset volatilities.

Asian equities traded mixed. Nikkei (+0.34%) and Topix (+0.58%) edged higher, while Shanghai’s Composite (-0.36%) and ASX 200 (-0.74%) remained on the back foot, after the data showed lower business conditions and confidence in Australia in August as the squeezed Chinese economy continues weighing on the investor sentiment.

But energy stocks rallied 2.45% in Sydney, as oil advanced on news that Saudi’s new energy minister said to back OPEC and its allies’ lower production regime to match the fading global demand.

In China, the consumer price inflation remained unchanged at 2.8% y-o-y in August, versus 2.7% expected by analysts. The resilient consumer price inflation somewhat tamed the dovish expectations regarding the People’s Bank of China’s (PBoC) further stimulus plans. But the factory gate prices slumped 0.8% in year to August, the most in three years, versus -0.3% printed a month earlier.

But Chinese officials have a bigger problem on their agenda this week. China’s pork crisis continues making the headlines before the Mid-Autumn festival, as the scarcity could further dampen the mood at festivities at the zodiac year of the Pig.

FTSE futures (-0.03%) traded on the sidelines.

The FTSE is expected to open 11 points lower at 7225p. The fading positive momentum in Britain’s blue-chip index is partly explained by a stronger British pound. The 20-day negative correlation between the sterling and the FTSE has jumped up to 70% last month, as the pound tanked on no-deal Brexit worries. Although the negative correlation tends to ease with improved sterling, the FTSE could challenge the 7200p mark, the 200-day moving average, on further pound recovery and mixed risk appetite across the global equity markets.

Johnson surrenders after final defeat to throw an early election

Things get bizarre in the UK. After consecutive defeats to throw a snap election, having failed to convince Members of Parliament to leave the EU without a deal by October 31st and having lost 21 members on the way, UK Prime Minister Boris Johnson finally surrendered. ‘I will go to that crucial summit in Brussels on Oct. 17, and no matter how many devices this Parliament invents to tie my hands, I will strive to get an agreement in the national interest’, he said.

Meanwhile, a bill ruling out a no-deal Brexit by October 31st became a law now and Parliament is suspended until 14th of October. In fact, the UK politics are not at their best to negotiate a healthy deal under the current circumstances. Hence, the chances are that there will be at least three-month delay in Brexit, unless an agreement is reached by October 19th. On the other hand, the Liberal Democrats ask revoking the Article 50 and back another Brexit referendum.

Cable settled above the 1.2290/1.2295, the 50-day moving average and the minor 23.6% Fibonacci retracement on March – September decline. Released on Monday, the industrial and manufacturing production surprised on the upside, as the GDP grew 0.3% in July, reverting a part of recession worries in the UK.

Due today, the British unemployment rate is expected to have remained steady at 3.9% in three months to July, with a stable average earnings growth of 3.7%. But it is worth keeping an eye on the Office of National Statistics employment figures. A consensus of analyst expectations suggest that 55’000 jobs were added in July versus 115’000 printed a month earlier.

The pound has potential to extend recovery toward the 1.25 mark on fading worries of an imminent no-deal Brexit. From a technical perspective, this is also the major 38.2% Fibonacci resistance, if cleared, the sterling will step in the medium-term bullish consolidation zone against the US dollar.

Ford cut to junk

Moody’s downgraded Ford to the highest junk rating (Ba1) on low cash flow and profit margin expectations over the next two years. The company’s profit margin fell below 8% from 10% in 2016, as earnings deteriorated despite favourable market conditions for the auto industry.

Still, Ford has investment grade rating (BBB) at Fitch and S&P, despite a negative outlook. This means that most investors should not hurry to jump ship just yet. For now, more than half of analysts surveyed by Bloomberg remain on hold and 38% recommend buying the stock with a twelve-month average price target of $10.97 (current price at $9.54). Less than 5% advise selling the stock.

Opening calls

FTSE to open 11 points lower at 7225

DAX to open 14 points lower at 12212