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Big misses, big revisions, and multi-decade lows in unemployment rates… the algos seem confused.
VIX flash-crashed and Nasdaq spiked… and then tumbled back to the lows of the day…
And Treasury yields are going straight up…
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Ahead of today’s jobs report, Nomura’s Bilal Hafeez summarized the worst case scenario as “weak employment but high wage growth.” And moments ago, we got one half of this scenario materializing when the BLS reported that in September only 134K jobs were added, well below the 185K expected (and certainly far lower than the 500K print implied by the latest ISM nonmfg report). This was the lowest print going back to March 2017 when only 50K jobs were added.
However, offsetting the September weakness was the revision to the August jobs report, which was pushed higher from 201K to 270K, while July was revised from 147K to 165K. With these revisions, employment gains in July and August combined were 87,000 more than previously reported.
Even as payrolls missed, the unemployment rate ticked lower again, sliding from 3.9% to 3.7%, below the 3.8% consensus estimate, and the lowest print in 49 years.
The more important average hourly earnings print came in line, with wages rising 0.3% on the month, and 2.8% on the year, both in line with expectations.
Developing
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Americans love to brag about our wonderful freedoms, but sometimes they forget the level of red tape that entangles every commercial transaction. Take a look at the hundreds of hours in training and, often, the thousands of dollars in tuition the state requires to get a permit to perform virtually any occupation you can contemplate.
The only thing that saves us are those bureaucratic workarounds—and the lack of sufficient inspectors to monitor everything we do. And black markets, also. If Americans felt compelled to followed every jot and tittle of every regulation, they might not feel so optimistic about the state of our freedoms.
But maybe the pendulum is about swing back in the other direction. Gov. Jerry Brown has been wrapping up his final legislative session, where he is signing hundreds of bills into law. Almost all of them add new rules and regulations. To his credit, he signed three laws that expand our commercial freedoms, albeit in relatively small ways, writes Steven Greenhut.
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So will good news be bad news or good news… or will bad news be good news..or bad?
The last few months have reminded us of previous times when the machines lifted stocks no matter what happened with the payrolls print – beat or miss – as asset gatherers and narrative pushers pumped the markets full of ‘goldilocks’ chatter.
As Bloomberg reports, the Treasury market last month broke a trend of fleeting reaction to U.S. employment reports with a decisive selloff sparked by a bigger-than-forecast increase in average hourly earnings. Of the previous five releases, all but May’s –which President Donald Trump alluded to about an hour before the release — had little lasting impact.
Full Details (NFP numbers below are as reported at initial release, not as subsequently revised):
August data released Sept. 7: NFP rose 201k vs 190k est.
Treasuries fell, lifting yields across the curve by as much as 8bp (5Y), as average hourly earnings increased 0.4% m/m, double the median forecast; 10Y yield rose as much as 7.5bp and closed higher by 6.6bp
S&P 500 fell 0.2%
July data released Aug. 3: NFP rose 157k vs 193k est.
Market reaction was minimal as smaller-than-forecast payrolls increase was offset by upward revision to June, while 0.3% average hourly earnings increase and 3.9% unemployment rate were in line with forecasts; following bigger-than-forecast drop in July ISM non- manufacturing index and a selloff in Italian bonds that drove gains for core euro-zone and U.K. yields, U.S. 10Y yield closed lower by 3.7bp
S&P 500 rose 0.5%
June data released July 6: NFP rose 213K vs 195k est.
Market reaction was muted as bigger-than- forecast payrolls increase was outweighed by lower-than-forecast increase in average hourly earnings and unexpected uptick in unemployment rate; 10Y yield closed lower by 0.7bp after dropping as much as 2.4bp
S&P 500 rose 0.9%
May data released June 1: NFP rose 223k vs 190k est.
Report showed stronger-than- expected data; comment by Trump on Twitter an hour ahead of the release suggesting it would be strong sparked declines for Treasuries, and move was extended after publication of numbers; losses were pared over the rest of the session, however curve flattening persisted
S&P 500 rose 1.1%
April data released May 4: NFP rose 164k vs 193k est.
Data, which included a smaller-than- forecast 0.1% increase in average hourly earnings and a downward revision to March wage growth number, spurred gains for Treasuries that faded quickly; 10Y yield declined as to be down as much as 3.7bp from prior close, reaching session low within 15 minutes after the data, before rebounding to end the day little changed. Catalysts for reversal included focus on following week’s auctions, expectations for heavy IG credit issuance and gains for U.S. stocks
S&P 500 rose 1.3%
March data released April 6: NFP rose 103k vs 185k est.
Data initially sparked bull steepening of UST curve, however futures volumes in 30 minutes following the release was unusually light for a jobs report day; curve subsequently reversed steepening move as yields shifted lower over U.S. session amid a selloff in U.S. stocks that was spurred by escalating trade tensions with China
S&P 500 fell 2.2%
Today’s report for September, to be released Friday at 8:30am ET, is forecast to show a 185k increase in non-farm payrolls, 3.8% unemployment rate and 0.3% m/m increase in average hourly earnings.
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Did the Chinese government just ‘disappear’ the head of Interpol?
In a disturbing development that could destabilize Interpol, an international agency responsible for coordinating law-enforcement cooperation to track down international criminals, French police have opened an investigation into the disappearance of Interpol chief Meng Hongwei, a Chinese national who formerly held senior public security positions within the Chinese government. Meng never returned to Lyon, the location of Interpol’s headquarters, after visiting family in China.
His wife contacted police in Lyon, the French city where the Mengs lived, after Meng never returned from China, where he had traveled on September 29, according to Reuters.
Meng was elected president of Interpol in November 2016 with his term set to end in 2020. At the time, human-rights groups worried that Meng would use his position to hunt down Chinese dissidents living abroad. Beijing has long sought the help of foreign countries to arrest and deport Chinese citizens accused of crimes including corruption and terrorism.
If the Chinese government is behind his disappearance (Beijing certainly has a reputation for capturing government officials, dissidents and criminals and detaining them without alerting friends and family), this would almost certainly damage the relationship between China and the West at a time when China’s human rights abuses (particularly pertaining to ethnic minority groups) have been occupying a lot of space in the public eye.
But while Meng’s disappearance is certainly tragic, there’s an element of humor there, to which the Internet readily latched on.
Someone should ask Interpol to try and trace the head of Interpol.
— . (@twlldun) October 5, 2018
How have we misplaced the Head of Interpol, ffs https://t.co/AazpEM2hlv
— Eddie 🌐 (@Edwoodwood25) October 5, 2018
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This week, Kurt Loder reviews A Star is Born and Venom. A snippet:
The plot remains as syrupy as it was in the three previous iterations of this story (1937, with Janet Gaynor and Fredric March; 1954, the gold standard, with Judy Garland and James Mason; and 1976, the aluminum standard, with Barbra Streisand and Kris Kristofferson). But Bradley Cooper’s take on A Star Is Born is a revelation on a couple of levels. The cinematography, by Matthew Libatigue, has a rich, creamy warmth; and first-time director Cooper, also the movie’s star and cowriter (and co-songwriter and producer, too), pushes the camera in for long, tight closeups in most of the two-shot scenes, creating a rare feeling of intimacy. And just as striking is the quality of the audio in the many concert segments (all recorded live, not pre-taped)—it’s both gut-tremblingly loud and crystalline in its musical detail.
Read the whole article at the link below.
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The selloff across Italian assets returned on Friday, with stocks and bonds sliding as traders had a chance to go over the additional budget details released on Thursday evening and consensus quickly forming that the controversial budget plans of Italy’s populist government are hanging on an economic premise that looks too optimistic.
Italy’s GDP projections now include growth of 1.5%, 1.6%, and 1.4% over the next three years. By comparison, the median in Bloomberg’s latest survey is for expansion of no more than 1.2 percent. According to Deutsche Bank, “this is much more optimistic than forecasts from DB’s economists, the Bank of Italy, the ECB, the IMF, or the private sector consensus.” Rome also said that with the current legislation, GDP growth would be 1.2% for 2018.
Debt to GDP is also to be targeted at 130.0% in 2019, 128.1% in 2020 and 126.7% in 2021 while the deficit, as we already knew, was confirmed at 2.4% for next year, 2.1% in 2020 and 1.8% in 2021.
The “growth targets are ambitious, but not unrealistic and could be exceeded for at least two reasons,” Finance Minister Giovanni Tria said in the foreword to the report including the new estimates and targets. The finance chief mentioned the impact of planned investments and the elimination of legal and bureaucratic obstacles to their full implementation as well as a gradual reduction of public debt financing costs after tensions on financial markets subside.
“Whilst government forecasts always fall on the optimistic side, this particular assumption hints at significant fiscal slippage risk ahead in case of an economic slowdown,” said Axel Botte, a strategist at Ostrum Asset Management.
La Stampa also reported that ECB’s Draghi met with Italy President Mattarella on Wednesday, and may have warned about the budget and discussed the government “undervaluation” of effect on market. Draghi is also said to have warned about the trend of the Italian bond spread in the context of the winding down of the ECB’s quantitative-easing program.
In any case, with Italy’s highly unrealistic budget now public, traders resumed selling Italian stocks on fears it will be summarily rejected by Europe, and the FTSE MIB benchmark index dropped over 1%, the worst performer among major European markets on Friday.
Meanwhile, Italian BTPs breached yesterday’s worst levels after Ansa reported that Deputy Premier and Interior Minister Matteo Salvini blasted European Commission President Jean-Claude Juncker and Economic Affairs Commissioner Pierre Moscovici after they criticised the Italian government’s budget plans.
“The EU said yes to (past) budgets that impoverished Italy and made its situation precarious,” Salvini told a fair staged by agriculture association Coldiretti in Rome. “So I don’t get up in the morning thinking about the judgement that people like Juncker and Moscovici, who have ruined Europe and Italy, have of the government and of Italy.”
“They can say what they want. We’ll keep going straight on with peace of mind”.
On Wednesday, Salvini said that debt will decline “because more people will go back to work.” But short-term fiscal stimulus won’t solve longer-term issues that have left Italy as the slowest-growing economy in the euro area.
“The reality is that Italy’s problems are not about whether it meets its budget deficit next year or the year after,” Talib Sheikh of Jupiter Asset Management told Bloomberg Television. “It’s about can they undergo some deep-seated structural change. Italy’s ultimate problem is a lack of structural growth and it’s not clear to me that many of the populist agendas make any step toward that.”
The renewed war of words between Italy and Brussels after a few days of detente, is not what the market wanted to see, and the result was a prompt selloff in Italian bonds, with the 10Y yield rising as high as 3.422%, just shy of Wednesday’s highs which were the highest going back to early 2014. The drop was led by the front end, with 2y yields climbing as much as 21bps to 1.42% as the Italian budget crisis is nowhere close to getting resolved.
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Submitted by Bilal Hafeez of Nomura
Markets are creaking after the recent surge in yields. European equities are weak today, credit spreads are widening and some EM are underperforming. But we need to be careful in calling for full-on risk aversion as US data is still strong and importantly the Fed could easily guide the market to a lower r* (ie lower long-term rates).
What could undermine both these supports would be resurgent inflation. So far markets are pricing a benign picture – that is, inflation to pick up in the short-run but the Fed to be able to contain it. Today’s payrolls report could be important in that regard – weak employment but high wage growth would be the worse mix.
As for markets to focus, I’m looking at US credit and FANG stocks. High-yield US credit is behaving remarkably well given the rise in US yields. What has probably helped is that oil prices are high, but also that growth is still strong. Real yields are still comfortably below real growth and the gap between the two doesn’t seem to be worsening yet (see first chart).
On the equity side, we have to remember that US stock outperformance has masked a very mixed sectoral performance. Only half the MSCI sectors are comfortably in positive territory and of those, three stand out: tech, consumer discretionary and health (see second chart). And within these sectors, the outperforming companies are the FANG ones – Apple, Alphabet (tech) and Amazon (consumer discretionary). Yesterday, tech stocks underperformed, so today’s session will be important. Also, US earnings season is soon upon us, and these companies report towards the end of the month.
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Traders were greeted with another sea of red from overnight equity markets, and even as Thursday’s vicious rout slowed ahead of today’s all important jobs report, Asian tech stocks were hammered following Bloomberg’s report that Beijing had hacked American computer networks using a microchip built by its spies.
“Stocks are firmly in the red as investors are worried about rising U.S. government bond yields, emerging-market economies, and Italy’s political situation,” said David Madden, market analyst at CMC Markets. To that he can also now add the tech rout amid Asian stocks following yesterday’s Bloomberg spying report.
Markets remain on edge about the sharp jump in US and global interest rates, although after the surge earlier this week US 10Y Treasury yields have remained relatively flat for the second consecutive day. Benchmark U.S. Treasury yields were at a seven-year top and on their way to their biggest weekly yield rise since February while European yields were adding to their biggest rise in months as well.
And with talk of plenty more U.S. interest rate hikes growing louder, it put all the more focus on the U.S. jobs data later. Eaton Vance portfolio manager Justin Bourgette said though there was too much hype around the payrolls figures, whichever way you approach it, the U.S. labor market is currently super strong. The latest Bloomberg consensus sees 185,000 new jobs and average hourly earnings increasing 0.3 percent in September after leaping 0.4 percent in August.
“Whatever the Fed’s concept of the neutral interest rate is, it must be rising,” Bourgette said. “And it is going to be trial and error to some degree (on how high rates go), because you just don’t know where the choking point is.”
Looking at today’s jobs report, DB’s Jim Reid said it best:
Given the rout in markets that started with Treasuries on Wednesday and has since reverberated throughout risk assets over the last 24 hours you’d be hard-pressed to find a more conveniently timed payrolls Friday than today. Indeed, with 10y Treasury yields up nearly 13bps from Friday’s close to 3.191% as of this morning, the S&P 500 (-0.82%) and NASDAQ (-1.81%) falling by the most since June 25th yesterday with FANG stocks (-2.89%) at the heart of it, the VIX (+2.61pts to 14.22) at one stage surging past 15 again yesterday, EM currencies lower across the board and EM equities (-2.38%) down by the most since February yesterday, the stakes have certainly been raised.
The sell-off in Treasuries led to contagion in Europe, where Germany’s 30-year security is poised for its biggest one-week yield increase since April and the 10Y Bund yield rose to 5 month highs, while Italian bonds slipped, as GDP forecasts failed to convince investors the country will be able to meet fiscal targets.
An interesting observation by Bloomberg, is that unlike in the US where higher yields have traditionally helped bank stocks, in Europe there has been a notable and concerning decoupling between the 10Y Bund yield and bank stocks. If not even a steepening in the yield curve can help Europe’s bank stocks, then Mario Draghi may be fresh out of luck.
Stocks in Europe followed Asia into the red rounding out a tough week in which a rout in technology shares roiled Asian equity markets while the stronger dollar, which slammed emerging markets, resumed rising ahead of the September payrolls report.
Europe’s Stoxx 600 index fell, led lower by miners as metal prices fell, while tech and banking shares also slipped. Lingering worries about Italy’s finances and an overoptimistic budget proposal pushed Milan down 0.9% making it the worst performer among major European markets on Friday. Deutsche Bank said the government’s budget plan, including growth of 1.5%, 1.6%, and 1.4% over the next three years, “is much more optimistic than forecasts from DB’s economists, the Bank of Italy, the ECB, the IMF, or the private sector consensus.”
London’s FTSE, Frankfurt’s DAX and the CAC in Paris were off 0.6-0.8% and Wall Street futures were modestly weaker. Danske Bank A/S headed for the biggest drop in seven years after Denmark’s regulator said it should hold more capital to prepare for potential fines.
Earlier, benchmark stock indexes fell across Asia, led by tech stocks with the MSCI AC Asia Pacific Infotech Index dropping to the lowest since July 2017. Taiwan’s Taiex index fell 1.9% in Taipei for its lowest close since May. The broader MSCI Asia Pacific Index headed for its worst week since March.
Tech stocks led declines after Bloomberg reported that China infiltrated U.S. companies with hardware hacks. The story came the same day Vice President Mike Pence criticized China across economic, commercial and diplomatic fronts in a keynote speech. As a result, Chinese PC maker Lenovo Group plunged as much as 23% in Hong Kong, its biggest loss in almost a decade before paring some of its decline by the close on Friday. In a statement, Lenovo said Super Micro Computer Inc., the company at the center of the hacking chip investigation, is “not a supplier to Lenovo in any capacity” and the company will take steps to protect the ongoing integrity of its supply chain, however that was not enough for traders who sold first and asked questions later.
In a note to clients, JPMorgan recommended shorting Lenovo with a six-month time horizon given the company’s PC and server sales to the U.S. “Whilst Lenovo isn’t directly implicated in the expose, it is hard not to see U.S. slow down their procurement of servers near term,” the note said and added that investors may also consider shorting Taiwanese computer companies including Quanta Computer, Inventec, Wiwynn and Wistron Corp which gets about 20% of its enterprise server business from Super Micro.
Other semiconductor names were similarly crushed: ZTE, a Chinese communications-gear maker that’s been hit by American sanctions, fell 11% in Hong Kong, the most since June. Walsin Technology, the top emerging-market stock through the first half of the year before becoming the worst since mid-July, dropped 9.9% in Taiwan. Taiwan lens maker Largan Precision, an Apple supplier, fell 7.3%. Realtek Semiconductor was down 8.3% to a July low.
“Electronics produced in China may be viewed unsafe due to this news, and tech shares are falling in general because of that,” Ray K W Kwok, an analyst at CGS-CIMB Securities Hong Kong Ltd., said of the Bloomberg story.
Losses in Asia followed Thursday declines in the U.S. where the Nasdaq saw its worst one-day drop since June, as Amazon and Apple – companies named as being affected by the China hack – dropped at least 1.8%. The tech rout has added to the pain suffered by Asian stocks which have so far taken the brunt of the US-China trade war.
The tech rout was the latest blow for global stocks in a week that saw 10-year U.S. Treasury yields climb to to seven-year highs, reducing demand for riskier assets. Fed Chair Jerome Powell stoked the rates surge when he said the central bank could eventually boost its benchmark “past the neutral level“, after data that underscored the strength of the U.S. economy. Investors’ focus is now squarely on Friday’s monthly U.S. payrolls report for further clues on the policy outlook.
The painful combination of rising oil prices, higher interest rates and a climbing dollar have also been rocking emerging markets which tend to be vulnerable to all three. MSCI’s 24-country emerging market equity index was down 0.7 percent and headed for its worst week since February and plenty of currencies were carrying heavy losses too.
Earlier on Friday, India’s rupee feel to a new record low and bonds rallied after the country’s central bank unexpectedly kept its policy rate unchanged. The country’s Sensex benchmark stock index slumped 2.3%, the most since February, taking its slide from an August high to 12%, falling for a third straight session, dragged down by energy firms one day after the government announced a cut in fuel prices.
In the latest Brexit news, former UK Foreign Minister Boris Johnson welcomed EU Council President Tusk’s offer of a Canada type deal, he added it shows there is a “superb” way forward. Separately, EU Diplomatic Sources says that a divorce deal on Brexit is “very close” with Britain according to Reuters. However, Irish Foreign Minister Coveney says it is “hard to know” if the backstop proposal would work.
Elsewhere, Brent crude futures gained 0.5 percent to $85.03 barrel, and U.S. crude rose 0.7 percent to $74.88 barrel. That kept both just under 4-year highs. They have also risen an staggering 15-20 percent since mid-August. “Iranian exports could fall below 1 million barrels per day in November,” U.S. bank Jefferies said, referring to looming U.S. sanctions on Tehran. The investment bank said there was enough oil to meet demand, but “global spare capacity is dwindling to the lowest level that we can document … meaning any further supply disruptions would be difficult for the market to manage – and could lead to spiking crude oil prices”.
Today’s expected data include trade balance, non-farm payrolls, and unemployment. No major companies are reporting earnings.
Market Snapshot
Top Overnight News from Bloomberg
Asia-Pac stocks are traded mixed following a negative lead from Wall St. where tech names led the sell-off amid US-China trade concerns and as the US 10-year yield hit the highest since 2011. ASX 200 (+0.2%) bucked the trend and recuperated initial losses as financial and precious metal names supported the index, while Nikkei 225 (-0.8%) was subdued due to a recovery in the currency and weakness in tech names. Elsewhere, Hang Seng (-0.2%) struggled after opening in bear-market territory as a result of US headwinds and weakness in the energy sector, while tech names also sold off following reports that U.S. tech companies’ systems had been infiltrated by malicious chips inserted by Chinese intelligence agents. Meanwhile, mainland China remained closed due to the Golden Week holiday.
Top Asian News
European equities are down again, with traders mindful of Italian updates, the current yield environment, US-China trade tensions and the upcoming US job report. Comments from EU sources that a divorce deal for Britain is close has lifted the GBP and pressured the FTSE 100 into negative territory. The IT sector is underperforming amidst the technology supply line infiltration, and comments from Trump that he thinks China is not ready to make a deal creating additional strain on US-China relations. INTU Properties are up by over 28% following murmurs of privatisation led by a consortium including their deputy chairman. Danske Bank are at the bottom of the Stoxx 600 following yesterday’s share buyback discontinuation and being downgraded today to Neutral at Credit Suisse.
Top European News
In FX, GBP extended gains above the 1.3000 mark, and briefly through some stops at the next psychological level around 1.3050 on the back of more constructive Brexit news in the form of EU diplomatic sources suggesting a UK divorce agreement is ‘very close’. Eur/Gbp breached its 200 DMA circa 0.8840 in response and tested bids below 0.8820 before the Pound broadly ran out of steam. JPY was the other relative G10 outperformer, albeit marginal in the pre-NFP amble, as the headline pair remains hemmed in either side of 114.00, but some way above decent support and option expiry interest at the 113.50 strike where 1.1 bn runs off at the NY cut. EUR/CAD – Also softer vs the Greenback, with the single currency unable to sustain momentum on advances beyond 1.1500 and technically weak while under 1.1550 and a 1.1546 Fib, while the Loonie remains contained within a 1.2915-40 range vs its US counterpart awaiting Canadian jobs data due at the same time as NFP. EM – Some consolidation after widespread depreciation vs the Dollar for the most part this week, but not for the Inr that hit fresh all time lows following the RBI’s decision to stand pat on rates against consensus for a 25 bp hike, although it did switch policy stance to ‘calibrated’ tightening from neutral. Elsewhere, more intervention from the Indonesian Central Bank, while the Real may see some upside ahead of Sunday’s Brazilian election after the latest poll put Bolsonaro a bit further ahead of his main rival.
In commodities, the oil market is uneventful heading into the weekend with trade tentative ahead of the US labour market data later in the day, and the fossil fuel essentially flat for the day. The crude complex is set for its fourth consecutive weekly gain, as supply-driven gains have pushed the commodity to 4 year highs this week. The latest plats survey revealed OPEC compliance stands at 110% in September for members with quotas, alongside stating that Saudi output rose by 100k BPD, and that they have exceeded their targeted 1mln BPD increase. In metals markets, gold is also essentially unchanged as traders hold off ahead of a US jobs report that could tempt the Fed to implement a tighter monetary policy should signs of wage growth be seen. Aluminium is also steady, with the construction material set for its biggest weekly rise since April as supply concerns have lifted prices.
US Event Calendar
DB’s Jim Reid concludes the overnight wrap
Given the rout in markets that started with Treasuries on Wednesday and has since reverberated throughout risk assets over the last 24 hours you’d be hard-pressed to find a more conveniently timed payrolls Friday than today. Indeed, with 10y Treasury yields up nearly 13bps from Friday’s close to 3.191% as of this morning, the S&P 500 (-0.82%) and NASDAQ (-1.81%) falling by the most since June 25th yesterday with FANG stocks (-2.89%) at the heart of it, the VIX (+2.61pts to 14.22) at one stage surging past 15 again yesterday, EM currencies lower across the board and EM equities (-2.38%) down by the most since February yesterday, the stakes have certainly been raised.
Indeed, it’s definitely one of the more anticipated employment reports this year and the consensus for payrolls today is for a 185k reading for September which follows that stronger than expected 201k in August. Average hourly earnings are expected to print at +0.3% mom, however base effects are expected to result in a one-tenth of a percent fall for the yearly figure to +2.8% yoy. With this week’s ADP (230k vs. 184k expected) and the employment components of both the manufacturing (58.8) and non-manufacturing (62.4) ISMs hitting seven-month and all-time highs, respectively, too this week, it certainly feels like the risk is to the upside. Indeed, our US economists yesterday revised up their payrolls forecast to 225k in light of the data, which in their view should push the unemployment rate down to 3.8%. Our colleagues also expect a +0.3% mom/+2.8% yoy earnings print but note the risk to the annual rate is a fall of two-tenths due to the base effects from last year’s September surge due to hurricane effects. However, earnings should rebound strongly in October as these base effects unwind.
Back in markets, one of the ironic takeaways from the moves yesterday was that Treasuries actually ended up little changed which seemed to partly be a function of the flight to quality bid in light of the moves for risk assets. Indeed, while the 10y did hit an intraday high of 3.231% early in the day – more than 18bps higher than the yield lows from Wednesday – it ended last night at 3.188% and +0.5bps on the day. 2y and 30y yields ended -0.4bps and +1.3bps respectively so it was at least a day of consolidation after breaking some key technical levels. Meanwhile, the DOW (-0.75%) and Russell 2000 (-1.46%) also joined the equity selloff along with the STOXX 600 (-1.08%) while the only sector which really benefited was Banks with the S&P 500 Banks index ending +0.80% and European Banks (+0.65%). EM FX (-0.58%) fell sharply for the second consecutive day while hard currency 10y yields in the likes of Brazil and Argentina finished +9.5bps and +36.9bps higher respectively. In Europe Bunds ended +5.6bps but in fairness were playing catch-up. Elsewhere in commodity markets WTI (-2.72%) and Brent (-1.98%) Oil tumbled yesterday while base metals were also hit hard (Aluminium -1.65%, Nickel -2.19%).
There’s no doubt that the Treasury move on Wednesday played its part in the selloff for risk assets especially with real yields also marching higher. However, the Bloomberg story which hit yesterday morning about China hacking 30 US companies including Amazon and Apple, and US Vice President Mike Pence saying that there “can be no doubt” that “China is meddling in America’s democracy” and specifically accusing the nation of a “whole-of-government approach” to sway US public opinion, also played just as big or had an even bigger impact on markets yesterday.
Overnight that risk off tone has continued into Asia however losses aren’t quite to the extent of those seen on Wall Street. The Nikkei (-0.71%), Hang Seng (-0.42%) and Kospi (-0.34%) are all in the red which puts those bourses down 1% to 4% this week alone. As a reminder, markets in China are still closed due to national holidays so it could be an interesting open on Monday given the moves this week. Meanwhile futures in the US are broadly flat along with bonds for the most part. Indeed, 10y JGBs are -0.6bps lower at 0.143% and 30y JGBs are -1.1bps lower at 0.934%. Notably there was no change to the BoJ’s outright bond purchase programme this morning and the moves also come following headlines yesterday on Reuters about the BoJ seen as “tolerating higher yields”.
In other news, yesterday there was some debate about an MNI article suggesting that the ECB might consider a “twist-like” operation of reinvestments of maturing debt next year. It’s worth noting that this isn’t the first time we’ve heard such a story and the rationale is certainly nothing new insofar as the ECB may just consider potentially extending maturities with the same capital keys. There wasn’t a great deal of reaction in the market to the story with the euro up a fairly modest +0.31%.
Staying with Europe, Greek assets had another turbulent day yesterday with increasing concern about the country’s banks which feels all a bit déjà vu. Bloomberg ran a story yesterday suggesting that Greece was considering a proposal to help lenders offload bad loans into an SPV, which in turn would issue bonds backed by the state. After falling -8.78% on Wednesday Greek banks rallied back +8.31% yesterday however 5y and 10y Greek yields did rise +7.2bps and +8.8bps respectively.
On Italy, the news flow calmed a bit yesterday which was probably a relief given the volatility in markets elsewhere, though later in the evening we did get the government’s budget plans which include growth of 1.5%, 1.6%, and 1.4% over the next three years. This is much more optimistic than forecasts from DB’s economists, the Bank of Italy, the ECB, the IMF, or the private sector consensus Debt to GDP is also to be targeted at 130.0% in 2019, 128.1% in 2020 and 126.7% in 2021 while the deficit, as we already knew, was confirmed at 2.4% for next year, 2.1% in 2020 and 1.8% in 2021. It’ll be interesting to hear any comments from the European side today.
Elsewhere, yesterday’s data certainly had less of an impact on markets but it did support the consistent message of strong US growth. Initial jobless claims fell to 207,000 from 214,000, close to the 50-year low. August durable goods orders were revised 0.1pp lower to +4.4% mom, though upward revisions to July mostly offset this. August factory orders beat expectations by 0.2pp at +2.3% mom. For now, we maintain our third quarter GDP growth forecast at +3.3% saar.
Finally, while the day ahead will likely be dominated by the US employment report this afternoon, there are various other data releases to be aware of. This morning in Europe we’ve got August factory orders and PPI in Germany followed by the August trade balance reading for France. In the UK we’ll also get Q2 labour costs while in the US this evening we’ll get August consumer credit data. Away from that we’ve got central bank meetings due in India and Argentina while the ECB’s Luis de Guindos and Klaas Knot are due to speak, followed by the Fed’s Robert Kaplan and Raphael Bostic this afternoon.
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In a development that’s sure to fire up the conspiracy theory machine, a Russian official with close ties to Russian lawyer Natalia Veselnitskaya – the lawyer who had promised to deliver “dirt” on Hillary Clinton to Donald Trump Jr., Jared Kushner and Paul Manafort during a meeting at Trump Tower in 2016 – reportedly died in a helicopter crash this week, according to The Daily Beast.
Russian Deputy Attorney General Saak Albertovich Karapetyan was reportedly flying on an unauthorized helicopter flight on Wednesday when it crashed near the village of Vonyshevo, outside of Moscow.
Karapetyan’s work for the Russian government was exposed by a Swiss court this year after it exposed a plot to flip a local official into a double-agent for the Kremlin. Karapetyan, who was 58 when he died, was reportedly familiar with some of the most high-profile clandestine operations carried out under the orders of Vladimir Putin. Not only did he work closely with Veselnitskaya, he was also running some of Moscow’s most high-profile efforts to thwart international investigations into Russia’s alleged crimes.
In one instance, Karapetyan signed a letter from the Russian government telling the US that Moscow wouldn’t help with a civil case pursuing more information in the death of Sergei Magnitsky, a Russian lawyer who had reportedly tried to expose a $230 million fraud before being jailed on tax-related charges that political opponents said were political retribution for his targeting of senior Russian officials. Leaked emails reported by the New York Times showed Veselnitskaya helped draft the document sent with that letter.
Karapetyan was also reportedly involved in efforts to foil international investigations for more than a decade. He was reportedly present for a meeting in Moscow where British detectives claim they were poisoned during efforts to track down the killers of Alexander Litvinenko, who died after a dose of radioactive poison in London in 2006. Despite claims that they were trying to help, the general prosecutor’s office did everything it could to block the Scotland Yard investigation.
According to the Daily Beast, the wreckage of a helicopter allegedly carrying Karapetyan was discovered near the village of Vonyshevo. The metal was twisted and mangled beyond repair. Why the experienced pilot crashed isn’t known.
On Wednesday night, the wreckage of a helicopter believed to have been carrying Karapetyan was found near the village of Vonyshevo. Video purported to be from the scene shows the chopper mangled and burnt out amid twisted tree trunks.
It is not known why experienced pilot Stanislav Mikhnov, 54, reportedly decided to take off after nightfall in adverse conditions without authorities’ approval. A third man, Arek Harutyunyan, was also killed, according to the Russian news agency Interfax.
The Russian Deputy Attorney General’s ties to Veselnitskaya emerged earlier this year when a Swiss court exposed him for trying to recruit a high-level law-enforcement source as an agent for the Kremlin.
The top investigator was fired for “unauthorized clandestine behavior,” and allegations of bribery and breaching secrecy laws. The Swiss authorities discovered that the officer, identified only as Victor K., had met Karapetyan in Geneva and Zurich. Some time before Christmas 2016, Karapetyan called the man and invited him to Moscow, where the Russian government put him up in a luxury hotel and asked to attend a meeting with Veselnitskaya.
It’s believed that this the meeting concerned the fallout from the death of Magnitsky, who had been working to expose a massive fraud that implicated the Kremlin when he was incarcerated, beaten, and left to die. In the aftermath of his death, the lawyer’s client, Bill Browder, campaigned to enact a series of anti-corruption laws all over the world in his name.
In one of the most high-profile incidents involving Karapetyan, the one-time prosecutor was reportedly involved in an incident where two British detectives were poisoned while investigating the death of Alexander Litvinenko, a former FSB agent and Russian defector.
Karapetyan has been involved in efforts to foil international investigations for more than a decade. The Daily Beast reported that he was present for a meeting in Moscow where British detectives claim they were poisoned during efforts to track down the killers of Alexander Litvinenko, who died after a dose of radioactive poison in London in 2006.
Despite claims that they were trying to help, the general prosecutor’s office did everything it could to block the Scotland Yard investigation.
Earlier this year, Karapetyan lashed out at Britain in the aftermath of the Novichok attack against former Russian spy Sergei Skripal. He linked Skripal, Litvinenko, and Boris Berezovsky, a high-profile critic of Putin who died of suspected suicide in 2013.
“The British authorities have based the anti-Russian campaign surrounding the poisoning of former GRU officer Skripal and his daughter on a provocative scenario. A similar scenario was used in baseless allegations of Russia’s attempt on the life of Boris Berezovsky in London in summer 2003 and the circumstances surrounding the death of Alexander Litvinenko in the U.K. in November 2006,” Karapetyan said, according to Interfax.
But arranging the meeting between the Swiss law-enforcement official and Veselnitskaya wasn’t Karapetyan’s only involvement with the mysterious Russian lawyer.
Karapetyan and Veselnitskaya also worked together on another job linked to Magnitsky, where US authorities brought a civil case against a company called Prevezon for purportedly helping to launder the proceeds from the fraud that Magnitsky had uncovered.
But Prevezon refused to cooperate in the probe, which the Daily Beast said forced the US law enforcement authorities to settle the case. Prevezon agreed to pay $5.9 million, but it did not admit any role in laundering the proceeds of the fraud.
In summary, while details of the crash are sketchy – and the possibility that it may have been due to some mechanical failure has not yet been ruled out – it was par for the course to see that the Western media has already blamed Russian President Vladimir Putin.
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