Dollar Tumbles On Trump’s Fed Attack, Sending Global Stocks Higher

The dollar slumped for the fourth consecutive day on Tuesday and US Treasuries dropped, after President Trump criticized higher interest rates and the Fed’s rate hike policy, while slamming China and EU for currency manipulation. The DXY index dropped 0.35%, down 1.2% in the last four days – its worst such run since late March – while the Bloomberg dollar index dropped to the lowest since August 9.

According to Bloomberg, Trump complained that Jerome Powell hadn’t been a “cheap-money Federal Reserve chairman” at a fund-raiser on Friday, and also accused China and the European Union of manipulating their currencies in an interview with Reuters.

“As of today, the Fed’s independence is guaranteed, but Trump has the ability to make his own appointments to the Fed board,” said Bob Parker, a member of the Investment Committee of Quilvest Wealth Management on Bloomberg TV. “If Fed independence does get threatened, you’re going to see a bond market reaction.”

The dollar weakness launched a sharp move higher in the euro which rose as much as 0.5%, or over 100 pips in 24 hours, spiking above $1.15 after when stops were hit in early Asian trading as funds covered short positions.

Nonetheless, JPM Asset Management said that it’s still too early to call the end to this year dollar’s rally, as escalating U.S.-China trade tensions fuel demand for the currency.

Trump’s comments were welcomed by global markets – as a reminder a weaker dollar is welcome in a world in which a dollar shortage is causing increasingly more pain for emerging markets – and U.S. stock index futures rose, and are once again just 15 points away from all time highs, following gains in Asia and Europe.

In Asia, the Shanghai Composite continued its advance, and rose over 1.3%, the most in over a week one day after state-backed funds, the so-called “national team”, were seen buying stocks to stabilize the market, while earnings optimism helped shrug-off early indecision from further liquidity efforts by the PBoC and Trump trade pessimism.

Australia’s ASX 200 (-1.0%) was the worst performer and was pressured by weakness in energy, financials and mining names with losses in industry giant BHP following disappointing earnings results. In addition, political uncertainty added to dampened tone in Australia after PM Turnbull survived a leadership challenge, although is still seen to be at risk and some have even suggested to be a dead man walking after 42% of the party voted against him. Elsewhere, Nikkei 225 (+0.1%) was initially dampened by a firmer currency but then gradually recovered.

President Trump said he has “no time-frame for ending China trade dispute” and does not anticipate much coming from the trade talks with China this week. Trump also accused China and Europe of currency manipulation and stated that when the US places tariffs on China, China artificially devalues its currency.

In Europe, the Eurostoxx 50 index rose 0.7%, with export-led UK stocks underperforming due to the stronger euro. The FTSE 100 which derives a large portion of its revenues in the United States and so benefits from dollar strength, was down -0.3%. Energy and Telecom names are underperforming while IT names outperform. Looking at individual stocks, Aggreko (+4.7%) and Bayer (+2.5%) are faring well following broker upgrades. Atlantia (+3.4%) remains in focus,  company shares are taking a breather after plunging over 9% yesterday.

But the main focus in overnight trading was the FX market in the aftermath of Trump’s comments; here the onshore yuan extended its gain for a fourth session, its longest such run since June 14, after the PBOC strengthened reference rate by the most since July 26. The onshore yuan rose 0.20% to 6.8443, pulling further away from 6.934, its weakest since January 2017 marked last week. The offshore yuan also edged higher, up 0.03% to 6.8335 per dollar as the CNH overnight deposit rate fell 10bps to 1.15%. Analyst believe the USDCNH is unlikely to move back above Aug. 15 high within next couple of weeks, especially with trade talks with the US once again on the table, as Beijing if unwilling to antagonize the US with another sharp currency devaluation.

In his Reuters interview, Trump also accused China of manipulating its currency and said there was little hope of progress in the ongoing trade dispute between the two countries in talks due this week.

The dollar’s weakness took the pressure off many emerging market currencies, that have struggled in recent weeks as worries over Turkey precipitated a sell-off across the globe. The Thai Baht led Asian currencies higher following BOT governor’s hawkish tone. Other Emerging currencies, including the South African rand, Mexican peso, Hungarian forint, Polish zloty and Indian rupee, were all higher by 0.2 to 0.8 percent against the dollar. Turkey’s lira bucked the trend, however, and extended its declines to a third day; the country’s markets remain closed for most of this week. The Russian ruble also slumped due to potential further sanctions and resumption of FX purchases from CBR.

Commodities that are priced in dollars and so benefit from any weakness were also higher across the board. Base metals prices rose, with London copper climbing for a second day and crossing the $6,000-a-tonne mark, while spot gold rose 0.28 percent to $1,193. Brent crude oil rose 0.12 percent to $72.35 per barrel. Industrial and precious metals rallied, led by zinc, nickel and silver.

Treasuries gave back some of Monday’s gains and European bonds were mixed with peripheral debt outperforming.  Germany’s Bunds extended losses, snapping lower after the strong open in European cash equities triggers a risk-driven rally; the 10y bund yield at 0.30% blocks upside progress. Italy’s BTPs bull steepened as positive risk sentiment gained momentum. BTPs pare all the losses triggered by the recent sell-off of the Turkish lira as FTSE MIB leads European indexes higher. Bunds snapped.

In geopolitics, President Trump said he thought he had a deal with Turkey for Pastor Brunson’s release and that he helped Israel to free a Turkish citizen for the pastor’s release. Trump said he would consider lifting Russian sanctions if Moscow took steps to cooperate with US on issues such as Syria and Ukraine, while he also stated it is fine if Iranian President Rouhani wants to meet him but that he could not care less if not. Trump later added that it is likely will have a 2nd summit with North Korean leader Kim.

Australian PM Turnbull survived a Liberal Party leadership challenge by 48 to 35 votes, which was brought on by Australian Home Affairs Minister Dutton who later stepped down. This followed reports that PM Turnbull abandoned his energy policy and conceded the legislation could not pass parliament given the coalition’s 1-seat majority and opposition from within the Liberal Party led by former PM Abbott, which reports had noted casted large doubts over Turnbull’s future as party leader and PM.

Investors are waiting to see if Fed Chair Jerome Powell will respond to Trump and offer more clues on monetary policy at the Jackson Hole conference of central bankers later this week. Upcoming trade talks between China and the U.S. will also be closely watched. In pre-market trading, the Tesla roller-coaster continued with the auto stock gaining after its a recent plunge.

J.M. Smucker, Kohl’s, Medtronic, and TJX are among companies reporting earnings; there are no economic reports or Fed speakers of note.

Market Snapshot

• S&P 500 futures up 0.2% to 2,863.00
• STOXX Europe 600 up 0.3% to 384.18
• MXAP up 0.4% to 163.53
• MXAPJ up 0.7% to 530.49
• Nikkei up 0.09% to 22,219.73
• Topix down 0.4% to 1,685.42
• Hang Seng Index up 0.6% to 27,752.79
• Shanghai Composite up 1.3% to 2,733.83
• Sensex down 0.05% to 38,258.65
• Australia S&P/ASX 200 down 1% to 6,284.38
• Kospi up 1% to 2,270.06
• German 10Y yield rose 1.2 bps to 0.314%
• Euro up 0.3% to $1.1521
• Italian 10Y yield fell 10.5 bps to 2.743%
• Spanish 10Y yield fell 4.6 bps to 1.344%
• Brent futures unchanged at $72.21/bbl
• Gold spot up 0.5% to $1,190.48
• U.S. Dollar Index down 0.4% to 95.54

Top Overnight news from Bloomberg

• President Donald Trump said he expected Jerome Powell to be a cheap-money Fed chairman and lamented to wealthy Republican donors at a Hamptons fundraiser on Friday that his nominee instead had raised interest rates, according to three people present. He also accused China and the European Union of manipulating their currencies as he tries to wrestle concessions from two of the U.S.’s largest trade partners
• Trump said he won’t make any concessions to Turkey to secure the freedom of a detained Christian evangelical pastor at the center of the diplomatic dispute that has rocked the NATO ally’s economy
• China won’t use competitive currency devaluation or the foreign exchange rate as a tool to cope with trade frictions, according to a senior central bank official. “The yuan’s exchange rate is decided by the market,” Li Bo, director of the People’s Bank of China’s monetary policy department, said at a press conference in Beijing
• Norway’s $1 trillion wealth fund had a return of $20 billion in the second quarter, erasing losses for the year, even as the prospect of increased trade barriers and a weaker growth outlook in Europe, China and emerging markets had an adverse effect
• Microsoft Corp. warned that cyber-attackers linked to the Russian military are once again targeting American political groups, in a potential attempt to manipulate and disrupt the U.S. midterm elections in November
• Australia’s Prime Minister Malcolm Turnbull survived a leadership vote on Tuesday, but may be challenged again amid growing unease among party colleagues about the government’s slumping poll ratings. Turnbull defeated Home Affairs Minister Peter Dutton by 48 votes to 35 in a ballot on Tuesday. Dutton resigned from the cabinet
• Reserve Bank of Australia sketched out a scenario where faster global growth and U.S. stimulus withdrawal push the Aussie dollar lower and underpin a stronger domestic outlook
• The Bank of Japan is likely to face trillions of yen of losses once it begins decisively exiting its radical stimulus, meaning it needs to work toward reining in its balance sheet now. That’s according to Mitsuhiro Fukao, professor of economics at Musashino University in Tokyo and a former BOJ official

Asia-Pac markets eventually traded mostly higher taking the positive lead from Wall St where stocks edged a 3rd consecutive gain and the S&P 500 finished around 15 points from all-time highs. ASX 200 (- 1.0%) was the worst performer and was pressured by weakness in energy, financials and mining names with losses in industry giant BHP following disappointing earnings results. In addition, political uncertainty added to dampened tone in Australia after PM Turnbull survived a leadership challenge, although is still seen to be at risk and some have even suggested to be a dead man walking after 42% of the party voted against him. Elsewhere, Nikkei 225 (+0.1%) was initially dampened by a firmer currency but then gradually recovered, while Hang Seng (+0.6%) and Shanghai Comp. (+1.3%) traded higher as earnings optimism helped shrug-off early indecision from further liquidity efforts by the PBoC and Trump trade pessimism. Finally, 10yr JGBs were marginally lower and retreated back below 150.00 with prices subdued amid an improvement of risk tone in Tokyo, while a mixed 20yr auction also failed to spur demand. US President Trump said he has no time-frame for ending China trade dispute and does not anticipate much coming from the trade talks with China this week. US President Trump also accused China and Europe of currency manipulation and stated that when the US places tariffs on China, China artificially devalues its currency.

Top Asian News

• Chinese Shares Bounce for Second Day After State Support Seen
• HNA Units Lose $10 Billion in Market Value After Resumptions

European equities trade mostly higher (Eurostoxx 50 +0.7%) with the FTSE 100 (-0.3%) underperforming, weighed by a firmer sterling and heavyweight BHP reported a 37% fall in profits due to a write-down on its US onshore oil and gas assets. Energy and Telecom names are underperforming while IT names outperform. Looking at individual stocks, Aggreko (+4.7%) and Bayer (+2.5%) are faring well following broker upgrades. Atlantia (+3.4%) remains in focus, company shares are taking a breather after plunging over 9% yesterday.

Top European News

• The $11 Billion Reason Italy May Not Nationalize Autostrade
• Greek Bad Loans Are a Drag Even After Crisis Shrank Bank Sector
• U.K. Government Posts Biggest July Budget Surplus in 18 Years
• Brevan Howard Said to Cut Gym, Kitchen as London Office Shrinks

In FX, Trump’s latest tirade on the USD has given FX markets some much needed traction after yesterday’s somewhat contained session. In his latest attack on the firmer USD, Trump has once again shifted blame onto the ‘independent’ Fed Chair Powell but stating that he was ‘not thrilled’ with the FOMC for lifting rates, adding that the Fed should do more to support the economy. Subsequently, the DXY sits on a 95 handle in EU trade with the greenback having given back some key levels to its major peers. More specifically, EUR/USD has reclaimed 1.1500 to the upside and went as high as 1.1543 overnight before pulling back to just above 1.1500 where around EUR 646mln of option expiries reside; EZ-specific newsflow and data remains light. JPY has failed to benefit much from the softer USD with the move in USD/JPY below 110.00 short-lived as the pair now resides in close proximity to USD 1.6bln of expiries between 110.00-10.

Elsewhere, AUD was a key focus overnight after extending yesterday’s move above 0.7300, largely off the back of USD weakness with gains capped by domestic political uncertainty. As a reminder, Australian PM Turnbull survived a Liberal Party leadership challenge by 48 to 35 votes, which was brought on by Australian Home Affairs Minister Dutton who later stepped down. This followed reports that PM Turnbull abandoned his energy policy and conceded the legislation could not pass parliament given the coalition’s 1-seat majority and opposition from within the Liberal Party led by former PM Abbott, which reports had noted casted large doubts over Turnbull’s future as party leader and PM. RBA minutes overnight were a non-event. A ‘calmer’ start to the session for TRY with USD/TRY (only!) up 1.0% thus far after US President Trump yesterday criticised Turkey by stating that he thought he had a deal with Turkey for Pastor Brunson’s release. TRY will continue to remain sensitive to any developments regarding the Pastor with Trump no-doubt wanting to get a ‘win’ in the eyes of the US electorate by securing his  release without conditions. That said, questions remain over what long-term impact the release of the Pastor will have on the TRY given Turkey’s current account woes and central bank inertia.

In commodities, WTI (Unch) and Brent (Unch) trade without a firm direction, while concern grows over the potential impacts of the US-Sino trade disputes. US President Trump stated last night that he has no time frames for ending the China trade disputes. Traders are noting the rise in WTI is supported by the tightening outlook for fuel in the coming months. Of note: US offered 11mln barrels of sour crude from its Strategic Petroleum Reserve yesterday. This release of oil could offset some expected supply shortfalls as a result of US sanctions on Iran. Traders will be keeping an eye on the API weekly crude inventories today. Elsewhere, gold (+0.3%) is higher as the yellow metal moves with the dollar, while base metals benefit from the weaker dollar

Looking ahead to today’s schedule, there aren’t many substantive data releases. The only release of note in Europe is the July public finances data in the UK. The EU’s chief negotiator Barnier will meet with UK Brexit Secreatry Raab this afternoon to resume technical discussions, and headlines emerging from that meeting could move markets. The pound is trading within 0.67% of its weakest level since last June, though our strategists note that it does look quite oversold on technical levels.

US Event Calendar

• Nothing major scheduled

DB’s Jim reid concludes the overnight wrap

One of the more remarkable stories yesterday was the one which highlighted that Venezuelan TV have had to remove their version of “Who wants to be a millionaire?” from their screens due to hyperinflation making the show a little less dramatic than it once was. Indeed one million bolivars is now worth around 17US cents whereas at the start of the year the prize money was worth just over 100,000 USD.

Venezuela at the end of 2017 was ‘only’ the 51st largest economy in the world (IMF) so its woes are only a footnote on global markets at the moment but it’s worth highlighting that over the weekend they opted for one of the largest devaluations ever seen with a 95% fall in the Bolivar. The IMF’s previous forecast for one million percent yoy inflation this year might now be tested with this move. We say it’s little more than a footnote but it’s worth saying that at 51 it was only 4 places behind Portugal and 7 behind Finland. So not a tiny country but with gross external debt of around $47 billion, Venezuela’s relevance to global markets is dwarfed by countries like Turkey ($467 billion gross external debt) or even Portugal ($505 billion) which is similar in size. For further comparison with Turkey, at the end of 2017 the Turkish economy was 4 times as big and no. 17 on the global size rankings.

Staying with Turkey, while the Lira did extend losses yesterday (to close last night -1.06% weaker) the lack of any follow-through into wider markets meant it was a relatively non-eventful day. As a reminder Turkey is on holiday for the rest of the week which means we’re probably in for one of two things, either a much quieter week or one where by volatility spikes are the norm given potentially thin trading conditions. If you want a clear and succinct recap of the situation in Turkey and a primer on the likely path moving forward, our colleagues in EM published this useful Q&A yesterday.

The most interesting market story yesterday was one on Bloomberg suggesting that Mr Trump said at a Republican fundraiser that he expected Fed Chair Powell to be a cheap-money Fed chairman and was disappointed at recent rate rises. The comments mark another interesting divergence between him and his predecessors, and the dollar depreciated 0.26% versus the euro immediately following the story. Later in the evening, Reuters reported that Trump said that China and the EU are manipulating their currencies and that he was “not thrilled” with Fed Chair Powell raising interest rates (link) . The dollar weakened a little more in response to close the day -0.30%.

Over in Asia, Chinese authorities had boosted global equities yesterday when news media outlets (Bloomberg) reported that state funds had bought shares to stabilize the market. The Hang Seng and Shanghai Composite indexes rallied 1.41% and 1.11%, respectively late in the session. This morning in Asia, markets are broadly higher, with the Hang Seng (+0.48%), Shanghai Comp. (+1.43%) and Kospi (+0.93%) extending on yesterday’s gains while the Nikkei and futures on S&P are marginally down as we type. Meanwhile the US dollar has weakened further, as the Yuan is up c0.2% and EURUSD nudging pass 1.15 this morning.

The Asia session followed a firmer US close last night with the DOW (+0.35%) and S&P 500 (+0.24%) both up, with the latter now 16 points away from its’ record high. Prior to this, the Stoxx 600 had closed up +0.61% for its best day since August 3, while bond markets were generally stronger across the board, led by the peripherals. Ten-year Italian spreads to bunds rallied 10.4 basis points, their strongest single-day move since June. Spreads also tightened in Spain and Portugal by 5.6 and 5.8 basis points, respectively. In the US, 10-year Treasury yields fell 4 basis points to 2.821%, their lowest level since May.

Speaking of peripherals, it’s worth highlighting that yesterday was a milestone of sorts for Greece with the country ending its reliance on three separate bailout packages which started in 2010 and kept us up at night again for parts of  2015 when it looked like Greece might be on the brink of economic collapse. Greece’s 10y government bond now yields 4.329% which compares to the highs of over 19% only three years ago. The Greek equity market is down -55% in total return terms since the country agreed to its first bailout back in May 2010. Unsurprisingly the biggest fallers in that time have been the Banks.

Turning now to the latest Fed speak on rates and the yield curve. The Fed’s Bostic noted that risks are balanced yesterday, so his base case remains one more rate hike for 2018 and that “we’ve been on this gradual walk to get to a more neutral position and that is what we’re going to continue to do”. Notably he added that “I pledge to you I’ll not vote for anything that will knowingly invert the curve and I’m hopeful that as we move forward I won’t be faced with that”.

Back in Europe, the ECB’s Weidmann continues to believe that central banks  should have only one mandate (price stability), but it would be a mistake that if “monetary policy remain completely passive if financial imbalances were to build up”, in part as he believes that “in the long term, price stability and financial stability can complement each other…thus…central banks might be compelled to act on the build-up of financial imbalances despite having a single objective”.

Now turning to Italy, the Deputy Premier Salvini noted the country will resist international speculators as he said “we’ll resist the bond yield spread, speculation, credit downgrades, attacks…” without elaborating more. Notably ANSA reported that when asked whether Italy may breach the EU’s fiscal deficit limit of 3% of GDP, Mr Salvini noted he would not rule out “anything”. On the other side, the EU Economy Chief Moscovici said “…I’m prepared to have very solid discussions with the Italian government on the next budget”, although he added that “…there cannot be confrontation between Italy and Europe. That would be silly”.

Keeping with Italian risk, in credit, Michal in my team published a brief report “Can the ECB Sell the Atlantia Bonds Now? It’s Complicated.” In response to client questions, it is his quick take on the odds that the ECB sells the Atlantia bonds in the CSPP. He estimates the likely size of the ECB holdings of these bonds and compares it with previous instances of selling. He also analyses the incentives to sell at this point and argues that the central bank might not have any  effective “stop loss” option in this case. You can download the full report here.

Finally, there were relatively few data releases of note yesterday. German PPI inflation printed at 3.0% yoy as expected, slightly softer from its recent peak of 3.4% last year but much healthier than the outright PPI deflation seen from 2013-2016. Euro area construction output rose 2.6% yoy.

Looking ahead to today’s schedule, there aren’t many substantive data releases. The only release of note in Europe is the July public finances data in the UK. The EU’s chief negotiator Barnier will meet with UK Brexit Secreatry Raab this afternoon to resume technical discussions, and headlines emerging from that meeting could move markets. The pound is trading within 0.67% of its weakest level since last June, though our strategists note that it does look quite oversold on technical levels.

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