Morning report apac_ central banks in focus, commodities rout spreads

Commodities slumped again overnight, with prices not likely to recover this year

The commodities rout has hit mining stocks hard, including BHP and Glencore

Crude prices have hit their lowest level in two months

FX traders are waiting for the ECB to act in its December meeting

By Saxo APAC Sales Trading

Economic data of the day (Singapore Time)

1200: MYR – GDP YoY Q3 (Prev. 4.9%), SA QoQ (Prev. 1.1%)

1230: JPY – Industrial Production MoM (Prev. 1.0%), YoY (Prev. -0.9%)

1300: SGD – Retail Sales SA MoM (Prev. 5.0%), YoY (Prev. 6.1%), Ex Autos YoY (Prev. 1.3%)

1430: EUR – France GDP YoY Q2 (Prev. 1.1%), QoQ (Prev. 0.0%)

1500: EUR – Germany GDP YoY Q2 (Prev. 0.4%), QoQ (Prev. 1.6%)

1800: EUR – Eurozone GDP SA QoQ (Prev. 0.4%)

2130: USD – Retail Sales Advance MoM (Exp. 0.2%, Prev. 0.1%), ex-autos (Exp. 0.4%, Prev. -0.3%)

2130: USD – PPI Ex Food and Energy MoM (Exp. 0.1%, Prev. -0.3%), YoY (Exp. 0.5%, Prev. 0.8%)

2300: USD – University of Michigan Sentiment (Exp. 91.1, Prev. 90.0)

Speeches

0115: USD – Fed’s Dudley Speaks on Economy and Policy in NY

2100: CAD – Bank of Canada’s Wilkins Speaks in Toronto

Overnight news

US: Federal Reserve Bank of St. Louis President James Bullard said “Prudence alone suggests that, since the goals of policy have been met, we should be edging the policy rate and the balance sheet back toward more normal settings.” A simple and prudent approach to current policy is to move the policy settings closer to normal levels now that the goals of policy have been attained”. “There is no reason to continue to experiment with extreme policy settings.”

Bullard said he wants to return to policy equilibrium “which involved relatively good monetary policy, relatively long economic expansions, and a higher nominal interest rate than we have today.” He said that the Fed has created an “interest rate peg,” “A low nominal interest rate peg, far from being a harbinger of runaway inflation, would instead dictate medium – and long-run inflation outcome,”.

Federal Reserve Bank of New York President William Dudley said “I think it is quite possible that the conditions the Committee have established to begin to normalise monetary policy could soon be satisfied … I will be evaluating the incoming information to see if it confirms my expectation that growth will be sufficient to further tighten the US labour market.” “The economy looks to be in decent shape and is likely to continue to grow at a slightly above-trend pace,”. The international economic outlook appeared “less problematic than it did just a few months ago” however “on the inflation side of the ledger, I have greater concerns because we continue to fall substantially short of our inflation objective of 2%.”

On the data front, Continuing claims came a bit higher than expected at 2,174,000 (Exp 2,155,000) but the JOTS jobs openings climbed in September to the second-highest on record to 5.526 million, a sign the labour market continues to strengthen.

ECB: Mario Draghi signaled that the European Central Bank is ready to boost its stimulus programs next month as inflation wanes and economic prospects worsen. Signs of a sustained turnaround in core inflation have somewhat weakened,” “Downside risks stemming from global growth and trade are clearly visible. He concluded: “medium-term price-stability objective is at risk, we would act by using all the instruments available within our mandate to ensure that an appropriate degree of monetary accommodation is maintained”. “The protracted economic weakness of the past years continues to weigh on nominal wage growth, and this could moderate price pressures as we move forward. From today’s perspective, this suggests that a sustained normalization of inflation could take longer than we anticipated in March when we first appraised the overall impact of our measures.”

Foreign exchange

The US dollar came off a bit yesterday on light stops in euro and the market is waiting for ECB to act in the December meeting. The Australian dollar came off from the highs reached following the release of surprisingly low unemployment rate figure was released, after base metals came off hard yesterday. Copper down 3.2%. The AUD should encounter resistance, as long as commodities fail to recover and demand doesn’t pick up in China.

In emerging markets, the worst performer was Columbia with USDCOP rallying 3.7% as the country becomes more vulnerable with higher borrowing costs if the Fed starts to hike and it will make it more difficult for the nation to fund its current account deficit, which is running at the highest in more than three decades.

Asian currencies are still trading at the highs of the recent ranges and some close to the highs of the year, including the MYR.

We saw and heard of a lot of buyers of USDJPY downside since the start of the week. There are large strikes in USDJPY at 123 pushing vols a bit higher in the European session. The move higher in euro has been triggered by short term stops and strong buyers of R/R for the upside, as the market is using this instrument to put a stop on their short positions

Rates

European stocks retreated on the back of disappointing corporate earnings and despite further dovish commentary from the ECB. Rolls-Royce (-19.6%), RWE (-9.6%) and Aegon (-11.1%) were all down due to lower than expected earnings results.

Meanwhile the commodities rout hurt mining stocks with Rio Tinto diving 3%, BHP Billiton 5%, South32 6.9%, Anglo American 8.7% and Glencore 7.6%.

In the US, markets had their sharpest falls in six weeks mainly effected by the rout in commodities putting pressure on energy and raw-material stocks. Stocks such as Chevron (-2.5%), Freeport-McMoRan (-5.8%). Exxon (-2.7%) and Alcoa (-3.2%) were all down overnight.

Expect Asian markets to track lower with energy and material stocks expected to slide amid renewed selloff in commodities.

Credit

Corporate / country news: The spreads are widening in Europe and in the US with the Bond Indices widening around 2 bps overnight. The rally in bonds stalled in November and the market is preparing itself for a potential rate hike by the Fed in December.

Beijing Properties (925 HK) will sell 3 year bonds at an IPT of around 6%.

Santos Ltd (STO AU) shares have slumped as much as 27% after resuming trading on a shortfall in the institutional part of the gas player’s underwritten $2.5 billion equity raising. Mining and oil & gas are following the move in Asia / Australia

Semiconductor Manufacturing International Corp (981 HK) was raised to “outperform” from “hold” at Daiwa Securities Co. Ltd, up 7.80%. China’s push to insourcing from domestic foundries, economic cyclical upturn from 2Q 16 to support strong growth, Daiwa analysts Rick Hsu and Olivia Hsu write in note.

Fortescue Metals Group Ltd (FMG AU), the fourth largest iron-ore supplier, will seek to repurchase more debt before the year’s end to cut interest costs amid weaker prices for the steelmaking raw material. Chief Executive Officer Nev Power said ““Our strategy has been to accumulate cash and then to use that to repay debt,” “While ever the market’s trading with our debt at a discount, we are going to pin our ears back. For us it represents phenomenal buying.” Fortescue, which had net debt of $6.6 billion at the end of September, this week said it is offering to repurchase $750 million in debt. That’s in addition to the $384 million of on-market debt repurchases it made in the September quarter.

For the Bond FMGAU 8.25 11/01/19, the company has called for tenders in the range of 88 to 93 cents. For the Bond FMGAU 6.875 04/01/22, the company has called for tenders in the range of 75 to 80 cents.

Wilmar International Ltd (WIL SP) has dropped 3.3% and 10% since end of October after the company reported in Singapore a 35% drop in third quarter profit. The company trades almost 50% of the world’s palm oil. Revenue dropped 7.8% to $10.6bn. Its rival company Olam International ltd will report its earnings on Friday

Noble Group Ltd (NOBL SP) reported an 84% drop in quarterly profit as markets remained difficult, and said its chief financial officer has stepped down. Net income fell to $24.7 million in the three months to September 30 from $153.9 million a year earlier. Sales dropped 20% to $18.7bn. Shares dropped 2.9% to 50 cents before the results were announced. The bond NOBLSP 6.75 01/29/20 dropped 8 points since November 5, to 78.77 and 3 points yesterday.

The renewed slump in commodity prices has hit miners hard, with share prices falling for Anglo American, BHP, Rio Tinto and Glencore. Photo: iStock

– Edited by Robert Ryan

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