US stocks closed mixed on Monday with the NASDAQ and S&P retreating from Friday’s record closes after declines in financials and communication sectors; the S&P was down 0.16% while the NASDAQ shed 0.44% on the day. The DOW however gained 0.11% on the day. Most of the interest was on the coming Fed rate decision with the market largely skewed towards a 25bps cut with the market placing the odds at 76% late Monday in New York. Yield on 10Y USTs closed lower at 2.065%.
The pound hit its lowest level since 2017 on Monday as markets became increasingly concerned that the new British government was going all in for a no-deal exit. It fell 1.4% to as low as $1.2207 before closing at $1.2219 on the day. This prompted Prime Minister Boris Johnson to do some damage control during his Scotland trip insisting a no-deal Brexit was a “million to one” possibility even as his cabinet seems to suggest otherwise. Michael Gove, the minister in charge of no-deal planning, said a no-deal was now the government’s working assumption while foreign secretary Dominic Raab said the EU had been “intransigent” in recent days giving further credence to the market’s fears. Yield on gilts in turn fell as investors flocked to the relative safety of government debt, with benchmark 10Y bonds closing at a yield of 0.6527%, 3bps lower than Friday’s close.
Reports suggest that the EU will this week take away some market access rights from five countries – Argentina, Australia, Brazil, Canada and Singapore – stating that these countries no longer regulate credit rating agencies as rigorously as the EU. These rights, known as equivalence provisions, made it possible for non-EU financial centres to serve European clients provided that they are subject to strong regulation. The move largely stems from the bloc’s frustration with agencies such as S&P and Moody’s which it essentially blames for deepening the Greece and Portugal sovereign debt crisis by downgrading at critical moments. Fears are London will be a major casualty of the move after Brexit as it will be dependent on these equivalence provisions to serve its EU clients. The euro closed slightly higher at $1.1145 while yield on 10Y DBRs closed lower at -0.3931%.
Asian markets gained in early trading ahead of the first round of renewed US-China trade talks since May. The odds of a significant breakthrough in the Shanghai talks are slim however with President Trump pessimistically remarking that he didn’t “know if they’re going to make a deal.” Major bourses maintained their gains throughout the day, trading higher in the afternoon with the ASX, CSI and HANG SENG trading 0.28%, 0.39% and 0.21% respectively. The NIKKEI had the most gains after the Bank of Japan announced that that it would leave its monetary policy unchanged and stuck to its guidance of extremely low rates through H1 2020 while promising further easing if necessary.
Turkey’s Treasury is considering an upwards revision of its rollover ratio – debt sales to repayments – to an average of between 100% and 110% in 2019. This comes as the government is set to exceed its targets on new debt and the budget deficit with the rollover ratio having been initially set at 93.5% while the deficit had been set at 1.8% of GDP. Fiscal strain is increasing amid economic slowdown and raised spending following back-to-back elections and forecasts are for a budget deficit of 2.8% of GDP. The law is set to be passed in the tail-end of the year according to people familiar with the matter. The lira closed firmer to the dollar at 5.6151 while TURKEY 47s traded about flat in the mid-85s.
Presidential candidate Alberto Fernandez’ utterances that he would stop paying interest on central bank notes if he wins this year’s elections have seen his campaign team rushing to do some damage control. Fernandez’ remarks had to be clarified by one of his top economic advisors Matias Kulfas who said the candidate was referring to lowering the Leliq rate not defaulting; this followed comments by IMF’s Alejandro Werner that the lender needs to understand better what Fernandez said and its correspondence with the fiscal framework he’s thinking of. Among his other comments, Fernandez also said that the peso was overvalued although would not commit to a figure he thought was fair value. The peso closed lower at 43.8279 to the dollar while ARGENT 47s were up trading in the high-73s.
Russia’s Economy Minister Maxim Oreshkin berated the central bank for its failure to rein in consumer lending, an uncharacteristic outburst from a member of President Putin’s government. Speaking in a radio interview, Oreshkin said that “the economy will definitely fall into recession” by 2021 if consumer lending goes unrestrained. The central bank has been the subject of his calls for curbing consumer lending and earlier in the year brushed off his calls, instead laying the blame for slow growth to lack of reforms to improve the investment environment. The bank actually argues that it is borrowing that is keeping economic growth in positive territory; the caveat though, according to Oreshkin’s data, is that for a third of borrowers debt payments take up more than 60% of their monthly income and have to borrow more to finance existing obligations. The ruble closed about flat at63.4437 to the dollar while RUSSIA 47s traded unchanged in the mid 112s.