Sun, 12 Aug 2018 13:36 IST
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Deutsche Bank Early Morning Reid – August 10, 2018

Yesterday we showed the best and worst performing assets in the 5 years since BNP Paribas stopped withdrawals from 3 of its investment funds and arguably started a chain of events in financial markets not seen since the 1930s. We had a lot of requests for the data and also for us to repeat the exercise in Dollar terms. So in today’s EMR we show the same period but have converted all returns into dollars. We’ve also put both returns in a table so readers can use at their leisure.

Trading wise it was another typically quiet August day with flows generally on the lighter side once again. Even with the quietness the Olympics continues to keep me up later than I should be given the early starts. This time yesterday if I’d have been given a thousand attempts to spell taekwondo I’d have failed every time. Late last night Team GB won a spectacular Gold in it and my vocabulary has been expanded. Watch out for the closing ceremony on Sunday. Hopefully it will be even crazier than the opening one. Time to organise a business trip for Rio in 2016.

Anyway onto markets. The S&P500 edged higher (+0.04%) to post its fifth consecutive gain. The US data was generally on the positive side. Initial jobless claims fell by 6k to 361k better than the 370k expected by the market. The US trade deficit was narrower than expected ($42.9bn v -$47.5bn) but wholesale inventories (-0.2% v +0.3%) surprised to the downside for July. Away from equities, credit markets traded inside a tight range with both the IG and HY CDS indices closing modestly stronger on the day. The UST 10yr yield rose again, up by 4bp to 1.688%. In commodities, Corn reached an all time high of 8.2375/bushel.

Turning to the Asian session, a big miss on Chinese exports is setting the risk tone overnight. Chinese exports rose by only +1.0% in July vs +8.0% expected. Exports to all major trading partners decelerated significantly. Exports to the U.S. grew only 0.6% yoy vs. 11.4% in the first seven months. Exports to Europe fell 16.2% yoy vs. a 4% decline in the first seven months. Imports rose +4.7% also
below the +7.0% expected. The Nikkei and Hang Seng are both down about 1% as we type although credit markets are once again outperforming with the Asia IG index 2bp tighter on the day. Asian HY benchmarks are also well bid overnight.

The poor Chinese trade data follows the disappointing industrial production report yesterday which suggests that the activity momentum will remain weak in the near term. On that note, DB’s China economist Jun Ma has downgraded his FY12 growth forecast from 7.9% to 7.7%, as well as FY13 growth from 8.4% to 8.2%. Jun now sees several new policy challenges that reduce the scope and impact of policy stimuli on the macro economy. To outline these, 1) There has been stronger-than-expected resistance within the economic system to significant monetary and credit policy relaxation. 2) There is no consensus on the causes of the recent economic deceleration. Consequently, although the number of policy prescriptions is large, very few have a significant impact. 3) While monetary and credit policies are constrained, additional fiscal stimulus is not feasible in H2 in their view. 4) The expected rise in CPI inflation from August may limit the scope for rate cuts in the remainder of this year. 5) Real estate policy relaxation also becomes less of an option for boosting the economy in the second half given expected rising prices.

Over to Europe, it was a mixed day for equities markets with the CAC, DAX and IBEX +0.54%, -0.02% and -0.56% respectively. We saw some contrasting commentary on potential ECB support yesterday. Bank of France Governor Christian Noyer told Le Point magazine “Don’t have any doubt about the determination of the governing council and its capacity to act within the terms of its mandate…our operations will be of sufficient size to have a strong impact on the markets. We should be ready to intervene very soon, prioritising
short-term debt markets”. On the other corner Europe’s former ECB board member, and current economic adviser to Germany, Otmar Issing, said the idea of the ECB buying government bonds at any price is wrong and that the Euro should revert back to being “a
stable currency, stabilised by an independent central bank, which follows a clear mandate, nothing else”. Markets showed little reaction to these comments with the 10yr Spanish bond yield closing 2bp lower.

Also in Europe, Greek unemployment rate reached a new high in May according to data released yesterday. Unemployment rate rose to 23.1% in May from 22.6% in April. This compares with 16.8% in May 2017. Youth unemployment (15-24 of age) rose to 54.9% from
41.7% in May 2010 and 31.9% in May 2010. At 54.9% youth unemployment in Greece is the highest in the EU.

In terms of the day ahead we can expect another relatively quiet day as far as data flow is concerned. No tier one data is expected from the US today with the import price index and the July’s budget statement being the only notable releases. Its slightly busier in Europe with German and Italian CPI, French IP and manufacturing data, and UK PPI to contend with.

Jim Reid

Colin Tan, CFA
Research Analyst

Deutsche Bank