The S&P and NASDAQ reached all-time highs on Wednesday as the market got over regulatory concerns facing big tech firms. The two rose 0.47% and 0.85% respectively while the DOW closed 0.29% lower weighed down by poor earnings by Caterpillar and Boeing; the giant aircraft manufacturer closed 3.1% down after it posted a huge loss in Q2 as a result of the grounding of its flagship 737 Max jet. Yield on 10Y USTs closed about 4bps lower at 2.0428%.
Boris Johnson began his tenure in 10 Downing Street with a massive clearout of Theresa May’s former cabinet as he declared war on “the doubters, the doomsters, the gloomsters”; a massive 15 senior ministers were sacked or resigned to leave room for only hardline Brexiteers. Of former Remainers, only Sajid Javid got a position at the top of the new government as he succeeded Philip Hammond as Chancellor while Dominic Raab got the Foreign Secretary post. Other former rivals in the race to lead the Tories, Andrea Leadsom and Michael Gove got the Business Secretary and Cabinet Office fixer posts respectively. Many Tory MPs believe Boris is heading for an early general election as he has gathered a team of campaigners led by Dominic Cummings, architect of the 2016 Vote Leave campaign, who is now chief adviser. The pound closed higher at $1.2484 while yield on 10Y UKTs slid to 0.677%.
The chances of a rate cut at today’s ECB meeting are steadily rising as traders were pricing in a 54% prospect of a 10bps cut on Thursday morning compared to a 40% cut on Wednesday afternoon. The odds of a cut were increased in the wake of weak PMI data released yesterday particularly in the bloc’s largest economy, Germany. German banks are however not too keen on rate cuts which have cut into their profits with a group of 51 German lenders having said that lenders cannot afford to pay negative interest rates on excess liquidity for much longer without passing on those additional costs to customers. A survey by Tagesgeldvergleich.net released last week showed that at least 22 German financial institutions are currently charging some customers for deposits, with the ECB rate being applied in most cases when deposits exceed a particular threshold. The euro closed slightly lower at 1.1140 to the dollar while yield on 10Y DBRs slid 2.5bps to -0.3803%.
Asian markets opened on the green taking cues from a largely positive session on Wall Street on Wednesday. The NIKKEI and ASX closed 0.22% and 0.61% higher respectively; the ASX particularly picked up as Reserve Bank of Australia Governor Philip Lowe said the central bank was prepared to provide additional stimulus despite having already cut rates twice since June. The CSI cemented early gains to close 0.48% higher while the HANG SENG was trading 0.19% up in the afternoon.
President Erdogan’s unorthodox theory that high interest rates cause inflation is set to be put to the test today as the CBRT meets for its monetary policy meeting. With the highest real rate as a result of a dovish turn in monetary policy and slowing inflation, the economy is ready for some monetary easing. Traders have largely priced in a 2.5% cut but with Erdogan having long called for a cut it remains to be seen whether new governor Murat Uysal will play to the market or to his president who is likely looking forward to a deeper cut. Interestingly, it is just over a year to the day when the lira began its meltdown last year after the central bank kept rates on hold on July 24 as the market expected a hike. The lira closed firmer at 5.7064 to the dollar while TURKEY 47s continued their rally to trade in the high 84s.
Latin America central banks are poised to join in the rate cut trend that is prevailing among global central banks. With inflation muted and top economies toying with recession, central banks may do well in following the lead of some of their emerging market peers in cutting interest rates. Brazil is expected to reduce costs next week for the first time in over a year and Mexico is expected to do the same with both economies having had slowdowns in inflation. The latest IMF report on Latin America’s two largest economies will add to the impetus as July’s World Economic Outlook cut growth forecasts for the year to 0.8% for Brazil and 0.9% for Mexico.
Russia’s Finance Ministry managed to sell 20 billion rubles in 2039 bonds in Wednesday’s OFZ auction. Foreign demand for the bonds was again significant; the latest central bank report showed non-resident holdings of OFZs rose by 97 billion rubles in June to increase the foreign share of total holdings to 30.8% up from 30% in May. The ruble closed slightly lower to the dollar at 63.2887 while RUSSIA 47s were up, trading in the high 112s.