Euro Pressured as Volatility Rises on Jackson Hole, FOMC Meeting
The euro started the week on a defensive footing amid thin flows as the market’s focus remained fixed on the central bankers’ summit at Jackson Hole, Wyoming later this week, which has kept intact demand for long-volatility trades. Even as odds have diminished that the Federal Reserve’s annual symposium could be a game changer for markets, the euro’s one-week implied volatility rose the most since July 13 as long-vega trades gained traction. U.S.-South Korea joint military drills starting Monday, which raises the risk of a rebound of North Korea-related tensions, also supported the case for such positioning. The relative premium to own exposure in euro-dollar options over Jackson Hole rose to a three-week high. One-month volatility in dollar crosses also jumped as the tenor captured the aftermath of the Fed’s Sept. 20 meeting. The Bloomberg Dollar Spot Index was slightly higher as of 10:18 a.m. London with flows closer to the lower part of this month’s range, according to Europe-based traders. The euro was sold by intraday accounts, they added, as interbank and leveraged names were seen willing to fade moves 0.5 percent away from current spot price.
U.S. drillers cut oil rigs for second week in three
U.S. energy firms cut oil rigs for a second week in three, data showed on Friday, with drillers cutting spending plans in reaction to declining crude prices. Drillers cut five oil rigs in the week to Aug. 18, bringing the total count down to 763, General Electric Co’s Baker Hughes energy services firm said in its report on Friday. That compares with 406 active oil rigs during the same week a year ago. Drillers have added rigs in 56 of the past 64 weeks since the start of June 2016. The rig count is an early indicator of future output. U.S. production is expected to rise to 9.4 million barrels per day (bpd) in 2017 and a record 9.9 million bpd in 2018 from 8.9 million bpd in 2016, according to federal projections. Those output gains have pressured crude prices lower in recent months, prompting several exploration and production companies. Those companies and others had mapped out ambitious spending programs for 2017 when they expected U.S. oil prices to be higher than the near $48.50 per barrel range where they are currently trading. Despite recently announced spending cuts, the E&Ps still plan to spend much more this year than last year.
China to strengthen oversight of ‘regulatory arbitrage’: central banker
China will strengthen oversight of arbitrage that takes advantage of uncoordinated regulations and increase penalties to try to prevent structural risks from getting out of control, a senior central banker said. Yin Yong, deputy governor of the People’s Bank of China, told a conference in Beijing on Saturday six forms of arbitrage were problematic. He said they involved differing maturities, credit conditions, investment liquidity, exchange rates, capital and information. “These six forms of malicious regulatory arbitrage, which circumvent the regulatory system and its arrangements, and take advantage of the incompleteness of regulation, could result in risks to the entire financial system getting out of control,” he said. Chinese financial regulators have adopted a slew of “de-risking” measures this year in the face of ballooning debt and have ramped up efforts to unearth hidden problems that could become systemic threats. Yin called for clear rules and procedures on who qualifies to make certain investments, and said information disclosure procedures should be improved while risk management is made easier.