Overseas Headlines – September 4, 2018

Date: September 4, 2018 

United States:

Dollar Advances as Stocks Fall With EM Currencies: Markets Wrap

The dollar advanced and stocks fell as trade tensions persisted and emerging markets came under pressure, with turmoil in currencies spreading from Turkey and Argentina to South Africa. Declines in the yen and gold left investors with few havens. Miners and chemical companies led declines on the Stoxx Europe 600 Index, and contracts on the Dow, S&P 500 and Nasdaq pointed to a lower open before U.S. trading resumes after Labor Day. Nike fell in the pre-market on a politically controversial advertising campaign. Stocks in Japan slipped with the yen. Italian 10-year notes jumped, extending Monday’s advance on the government’s more conciliatory stance toward European Union spending limits. The greenback’s fourth daily advance added pressure to developing-market shares, and a gauge of the currencies headed for its lowest close this year. South Africa’s rand was the worst performer as the country entered a recession. Investors are shifting focus to the U.S., where trading resumes after a holiday during which Argentina’s urgent financial measures increased concern about more volatility in emerging-market stocks and currencies. The jitters may add to the outperformance of developed markets, which advanced during the summer despite trade salvos from President Donald Trump and a Federal Reserve that’s heading toward a late-September rate hike. Meanwhile, U.S. trade negotiators are in difficult talks with their Canadian counterparts over a revision to the North American Free Trade Agreement already agreed to by the U.S. and Mexico. On the China front, Trump may announce implementation of tariffs on as much as $200 billion in additional Chinese products as soon as Thursday. Major data releases include manufacturing numbers on Tuesday and trade figures on Wednesday. Elsewhere, copper fell and the pound extended a decline. Oil climbed as a storm threatened U.S. production on the Gulf Coast. Terminal users can read more in our Bloomberg Markets Live blog here.



Italian Markets Jump After Salvini’s Vow to Respect Budget Rule

Italy’s markets extended a rally following conciliatory language on the country’s budget plans. Yields on 10-year bonds dropped the most in seven weeks and stocks led regional gains. Deputy Prime Minister Matteo Salvini is targeting a deficit of up to 2 percent, La Stampa reported, which follows his pledge to respect “all rules”. The country’s leaders will begin discussing the 2019 budget Tuesday. “The rally is reflecting the more supportive tone in Salvini’s comments over the past days, in essence that the 2019 deficit will remain within the 3 percent band,” said Antoine Bouvet, a strategist at Mizuho International Plc. Italy’s 10-year yield dropped 11 basis points to 3.05 percent, after falling eight basis points on Monday. The bonds led gains in peripheral euro-area debt and the yield spread with their their German counterparts narrowed 12 basis points to 270 basis points. Government officials in Tuesday’s meeting are expected to first assess which policies they will include and the impact on public finances. Five Star leader Luigi Di Maio has stressed the need to put the people’s interests over those of investors, who are looking for signs of just how far the coalition government will push the European Union’s budget limits. “Unbridled spending is not in the party’s DNA so we might get more supportive soundbites after the meeting,” Bouvet said. “This is a more measured tone than from Di Maio for example, who so far refused to rule out breaching that limit.” The coalition government may opt to be less confrontational than investors fear ahead of 2019 European elections, with a focus on “zero-cost” measures rather than challenging reforms, though the “fear factor” may lead to significant volatility in coming weeks, Citigroup Inc. said in a note. Italy’s FTSE MIB index rose 1 percent as of 9:47 a.m., led by banks, and was the best performer among major western European gauges. The Italian benchmark has been under pressure since reaching a 9 1/2-year high on May 7, and is down 5.7 percent so far this year. While highlighting the political risks, Citigroup is constructive on the Italian stock market and expects the FTSE MIB to rise from current levels by the end of the year. “Overall, it is likely to be an uptrend bumpy ride,” its strategists said.



Japan Bonds Set for Biggest Foreign Outflow in Two Years on BOJ

Global funds are cutting their holdings of Japanese debt at the fastest pace in more than two years, as investors juggle the possibility of higher yields in the world’s second-largest bond market. Non-resident investors sold a net 1.47 trillion yen ($13.2 billion) of Japanese bonds between July 27 and Aug. 24, according to weekly portfolio flow data from the finance ministry. That points to the biggest monthly outflow since March 2016.  “I think the selling reflects foreign investor expectations that a reduction in the BOJ’s bond buying will lead to rising yields,” said Shuichi Ohsaki, chief rates strategist for Japan at Bank of America Merrill Lynch. However, “I expect foreigners to gradually come back as they will see yields struggling to rise.” Japan’s benchmark 10-year yield climbed to an 18-month high in early August after the Bank of Japan said it would allow for a wider swing in bond yields to improve the dysfunctional market. Still, the yield has dropped right back along with volatility as consensus among investors emerged that the policy tweak isn’t sufficient for a sustainably higher trading range. The finance ministry’s weekly and monthly data don’t provide a breakdown of government and other debt purchases, but balance-of-payments reports show inflows have been typically concentrated in government securities. Global funds have been the biggest net buyers of JGBs among major investor classes so far this year, purchasing 8.9 trillion yen through the end of July, according to the Japan Securities Dealers Association. That compares to 52.2 trillion yen in bonds acquired by the BOJ during the same period. Still, there are already signs that demand from international funds may be recovering. They turned net buyers of JGB futures in the week ended Aug. 10 after selling the largest amount since at least 2014, data from Japan Exchange Group Inc. show.