US stocks closed the week with new records in stark contrast to the performance at the start of the week when they closed in red territory. The dovish remarks during Jerome Powell’s congressional testimony saw increased optimism from investors. The S&P gained 0.46% to close above 3,000 for the first time while DOW gained 0.90% to set an all-time high for a second successive session. The NASDAQ also set a new record, closing 0.59% to 8,244.14 points. Treasury yields climbed over the week with the 10Y note posting a 6.2bps rise for the week, the highest since April, as expectations for a rate cut became entrenched. The notable rise for the benchmark note was despite a 1.6bps fall in the yield to 2.1219%.
Independent British think tank Resolution Foundation has added its voice to the growing fears about a UK recession saying the risk of a damaging recession is at its highest since 2007. The downturn, attributed to slowing global growth and Brexit uncertainty, may not be preventable, the Foundation notes, but policymakers can limit its damage by appropriate policy response. The Foundation also pointed out that normal policy tools to counter a downturn are “either spent or severely blunted”: interest rates are extremely low, public debt is significantly high at about 80% of national income and the effect of quantitative easing will likely be muted. The pound closed higher at $1.2521 while yield on 10Y UKTs closed unchanged at 0.8344%.
About €490 billion of investment-grade non-government bonds for European entities is at risk of falling into negative yields given the prevailing dovish tilt by banks. These bonds, yielding between 0 and 0.3% currently, would add to the already existing €470 billion of corporate debt that is already in negative yield. A drop in borrowing costs, possibly after a rate cut, would pull more bonds into the negative. This should see an even greater push for riskier assets as has been the case lately with the uptick in risky Italian notes. The euro closed higher at $1.1254 while yield on 10Y DBRs gained 1.5bps to -0.2122%.
Asian stocks opened on a low note in the aftermath of the weakest GDP data from China in some 27 years. Q2 GDP rose 6.2%, a modest figure by Chinese standards, down from 6.4% in Q1 resulting in a lowering of the annual growth target to between 6.0 and 6.5% for the year. This follows Friday’s release for June trade data which showed a decline in US exports by 7.8% while imports fell 31.4% YoY highlighting the impact of the trade war. Overally, imports declined 7.3% while exports fell 1.3% a sign of the slowdown globally. By afternoon trading the HANG SENG and CSI had made recovery trading 0.11% and 0.09% in the green while ASX further slumped to a -0.65% close.
The lira’s slump against the dollar continued after Turkey received its first major cargo of the S-400 missile defense system. Having begun the day on a low note on Friday, it fell as much as 1.8% as traders braced for the fallout with US officials having long promised sanctions should the purchase go through. A statement released by the Senate Committee on Armed Services on Friday urged President Trump to fully implement sanctions emphasizing that Turkey’s receipt of the S400s had put at risk the integrity of NATO as well as Turkey’s own security and economic prosperity. Trump had seemingly been sympathetic to Erdogan’s cause at the G20 and did not believe there would be any sanctions however. The lira closed weaker at 5.7212 to the dollar while TURKEY 47s were trading lower, in the high 80s.
Brazil’s pension bill is at risk of being watered down as lawmakers debated well into the night on Thursday on amendments to the bill. The debate was centred around making concessions for women and federal police which, if made part of the bill, will reduce projected savings of more than 900 million reais over a decade by 23 billion reais. The bill’s passage by a landslide margin was largely due to efforts of lower House Speaker Rodrigo Maia as he managed to unite 17 different parties in the lower House to back the bill; his influence will be key to ensure passage of the bill in a second vote without diluting too much of its intended action – significant pension savings. The real firmed to close at 3.7369 to the dollar while BRAZIL 47s were trading slightly higher in the high 108s.
Top ruble analyst Jaroslaw Kosaty is pessimistic about prospects for the ruble in the future. Having most accurately predicted the ruble’s rally in Q2, the currency strategist at PKO Bank Polski, is predicting a 9% fall against the dollar by year end. Agreeing with the Bank of Russia’s note that non-resident flows into OFZ bonds should soon fade, Kosaty pointed out that this will expose the currency to further rate reductions, the negative effects of which will prevail over Fed rate cuts. His forecast of 69 rubles per dollar at year end is significantly higher than the median estimate of 65 according to a Bloomberg survey. The ruble closed lower to the dollar at 62.9566 while RUSSIA 47s traded unchanged in the mid 111s.
The price of ZAMBIN 22s rose on the swearing in of new Finance Minister Bwalya Ng’andu to yield 19.9%, the lowest since mid-June. Ng’andu, who was the Bank of Zambia Deputy Governor, replaces Margaret Mwanakatwe who may have possibly fallen out with locals given an unclear economic plan. Ng’andu is known to welcome discussions with investors and the market will be watching how he will restructure the fiscus as elections are only two years away. The kwacha firmed on the news, gaining 2.5% to trade at 12.50 to the dollar.