Generally speaking, it was a quiet overnight session as traders look forward to a light calendar in the days ahead – or at least compared to the last two weeks.
There was of course another “van attack” in the UK (“van attack” has become “a thing” now). Additionally, Monday marks the start of Brexit negotiations. “This is a sad, sad day,” ECB Governing Council member Jan Smets said in a Bloomberg Television interview in Brussels. “I have been witnessing a history of the European Union and European monetary union for decades now,” he added. “We’ve always have been the process of integration, convergence and now we will negotiate about the disintegration”
So far, sterling isn’t under any notable pressure. Volatility has gotten a boost, with pound vols overperforming across the majors.
If there’s an overnight FX story, it’s probably the aussie, which got hit after Moody’s cut Australia’s Big 4 banks, citing housing risks. Here are the notable bullet points:
- Elevated risks within the household sector heighten the sensitivity of Australian banks’ credit profiles to an adverse shock, notwithstanding improvements in capital and liquidity in recent years, Moody’s Investors Service says in statement.
- While Moody’s doesn’t anticipate a sharp housing downturn as a core scenario, the tail risk represented by increased household sector indebtedness becomes a material consideration in the context of the very high ratings assigned to Australian banks
- Whilst capital adequacy is likely to strengthen further — as a result of regulatory action — and macro prudential measures will alleviate a further build-up of risks, the very high level of household sector indebtedness will take a considerable period of time to unwind
- Resilience of household balance sheets and, consequently, bank portfolios to a serious economic downturn has not been tested at these levels of private sector indebtedness
And here’s the damage:
Large expiries were seen at 0.7590 (A$2.2b) and that, Bloomberg notes, helped contain losses.
Meanwhile, risk was buoyant with European stocks taking their cues from Asia, where benchmarks were higher across the board. The CAC 40 outperformed other European markets after Macron’s Republic on the Move and allies won 350 seats in the 577-strong National Assembly – that gives them the largest majority in 15 years.
But while the “Republic” may be “on the Move”, voters were not, as turnout was the lowest in recorded history:
The Stoxx 600 is looking to pick back up where it left off two weeks ago, when the benchmark began trimming its yearly gain, which now stands at 8.3%:
It’s also worth noting that in China, the 7-day repo rate fell 23bps to 2.72%, that’s the biggest drop since April 1. The PBoC injected funds (CNY110 billion) for a fifth straight day, the longest stretch in two months. The total injected over that period comes to something like CNY520 billion.
Flows were thin in FX, but the yen was under some pressure largely due to an absence of identifiable near-term risks.
“With stocks on an uptrend for quite some time, and the global economy seen to keep expanding, the general risk-positive sentiment is continuing. In that regard, the yen is bound to come under selling pressure,” Masafumi Yamamoto, chief currency strategist at Mizuho in Tokyo remarked.
One place where things aren’t going so well is crude. Oil is trading below $45/bbl coming off its 4th weekly loss as traders continue to suspect that a record expansion by U.S. drillers will offset OPEC cuts. The oil rig count in the US rose for a 22nd consecutive week last week, marking the longest such streak in 30 years.
“The risk is to the downside at this stage, although prices may not fall too much further,” CMC Markets’ Ric Spooner said Monday. “Any more disappointing news on U.S. inventories this week will send oil lower.”
Meanwhile, BMI is “fundamentally bullish” on Brent in H2, in that kind of way where, in a note dated Friday, you say prices are “flirting with collapse.” Their Brent forecast is $57/bbl in 2017, but BMI warns that should Brent fail to rise decisively over $47/bbl in coming weeks, prices could see a “sharp decline.” Further, they note that “if crude prices fall under $40/bbl, OPEC as unlikely to offer further physical intervention in the market.”
Here’s a snapshot of global equities:
- Nikkei up 0.6% to 20,067.75
- Topix up 0.6% to 1,606.07
- Hang Seng Index up 1.2% to 25,924.55
- Shanghai Composite up 0.7% to 3,144.37
- Sensex up 0.8% to 31,303.70
- Australia S&P/ASX 200 up 0.5% to 5,805.17
- Kospi up 0.4% to 2,370.90
- FTSE 7508.16 44.62 0.60%
- DAX 12857.01 104.28 0.82%
- CAC 5311.51 48.20 0.92%
- IBEX 35 10840.80 81.40 0.76%