Emerging currencies sold off sharply again overnight after Argentina's peso suffered its biggest 1-day decline in three years, with Turkey's lira, the South African rand and the Indian rupee all feeling the heat.
The U.S. dollar was under pressure starting Thursday as easing concerns over trade conflicts has some investors increasing their risk appetite, however, month-end rebalancing may limit the dollar's fall.
For North American investors, the current state of Canada-U.S. trade negotiations tops the agenda. Both negotiating teams expressed optimism Wednesday that a new NAFTA deal could be reached by Friday, although Canadian Prime Minister Justin Trudeau indicated that a number of "delicate" issues remained.
Elsewhere, sterling has been the big winner in the past 24 hours, finding support on hopes that Britain and the E.U. will agree on future trade ties before Brexit takes effect. The E.U. indicated Wednesday that it is prepared to offer Britain an "unprecedentedly close relationship, but that the bloc must prepare for a no-deal Brexit."
In equities, European shares were tracking a decline in Asian trading, as weakness in Chinese markets overnight overshadowed any optimism that a NAFTA deal could be struck by the end of the week.
With all this in mind, here are five things the global markets were talking about Thursday morning.
1. Equity Markets Largely See Red
In Japan, the Nikkei thrashed out small gains after touching a 3-month high overnight. Positive developments in global trade talks supported sentiment. Nevertheless, the session closed out with some month-end profit taking. The Nikkei and the broader Topic ended roughly flat.
Australian shares gave up early gains to finish largely unchanged. The benchmark S&P/ASX 200 index finished marginally lower, down 0.1 percent. On the economic front, reports on new building approvals and private capital expenditure painted a glum picture of the Australian economy. In South Korea, the Kospi index stock index ended flat, giving up early gains and tracked the declines in China.
In Hong Kong and China, fears of slower Chinese growth amid an escalating trade war with the U.S. are keeping investor sentiment fragile. The Hang Seng index fell 0.9 percent, while the China Enterprises Index dropped 1 percent. In China, the blue-chip CSI300 index fell 1 percent, and the Shanghai Composite Index also moved 1.1 percent lower.
In Europe, regional bourses traded lower across the board following weakness in Asia overnight. The FTSE remains an underperformer as sterling trades atop the key £1.30 level.
2. Oil Ralles On Declining U.S. inventories
Oil prices inched higher on Wednesday, extending Tuesday's solid gains on a fall in U.S. crude inventories and expected market disruptions to supply from Iran and Venezuela.
Brent crude oil futures are at $77.21 per barrel, up 7c from the close, while U.S. West Texas Intermediate (WTI) crude futures are up 14c at $69.65 a barrel.
EIA data yesterday showed that U.S. commercial crude inventories fell by 2.6 million barrels to 405.79 million barrels in the week ending August 24, while production was flat from last week's record 11 million bpd.
This week, the IEA warned of a tightening market towards the end of the year due to a combination of supply concerns. OPEC will discuss in December whether it can compensate for a sudden drop in Iranian oil supply after U.S. sanctions take effect in November. Iran's August crude oil exports are expected to drop to just over 2 million bpd — versus a peak of 3.1 million bpd in April — as importers adhere to U.S. pressure to cut imports.
Gold prices eased a tad as the dollar firmed on expectations of higher U.S interest rates — positive GDP data has boosted rate hike views — but the yellow metal continues to hold above the key support level of $1,200. Spot gold was down 0.4 percent, while U.S. gold futures were down 0.3 percent at +1,207.80 an ounce.
3. The Yield Curve Looks Familiar
For fixed income dealers a narrowing Treasury bond yield curve between the 2-year and 10-year bonds suggests a rising risk of recession.
The U.S.' bond spread is currently around 20 bps — it last traded here in 2005, three years before the crisis took hold and seven interest rate increases before the Fed Funds rate peaked. Curve inversion happened for the first time in January 2006, with four further rate hikes to follow. The 2007-2008 financial crisis was followed by a global economic downturn.
Elsewhere, Germany's 10-year Bund yield nudged up less than 1 bps to 0.41 percent, though still reaching the highest yield in more than three weeks. In the U.K., the 10-year Gilt yield has advanced 1.489 percent, hitting the highest yield in more than three months.
The spread of Italy's 10-year bonds over Germany's has declined 3 bps to 2.6937 percent — the smallest premium in more than a week.
4. Emerging Market Pairs Plunge
The Argentine peso has plummeted over 7 percent following a collapse in investor confidence in President Macri's government. The central bank has intervened to try and stabilize the peso and the IMF said it was studying Argentina's request to speed up disbursement of a $50 billion loan programme. The knock-on effect from the peso's decline is hurting the TRY, ZAR and INR.
USD/TRY has rallied 2.6 percent to $6.6342, bringing it closer toward its recent record high of $7.1310. Analysts continue to see more upside over the coming weeks — Turkish inflation data due next Monday is widely expected to show a big increase, given that the lira has weakened significantly recently. Last month, Turkish inflation stood at 15.85 percent year-on-year and the odds of a significant hike by the Central Bank of the Republic of Turkey (CBRT) next month are very low.
Sterling jumped on Wednesday after E.U. negotiator Michel Barnier said he is prepared to offer the U.K. a trade deal that has never been offered to a country outside the bloc. The market seemed to take this as a sign that an agreement between the two sides has a greater likelihood of being achieved.
5. New Zealand Business Confidence Weaker
Data overnight showed that New Zealand business confidence remained weak this month. The general business sentiment fell further to 50.3 percent — the lowest headline print in a decade — as firms' own activity expectations, which correspond more closely with GDP growth, remained unchanged for the month.
A large part of the fall in business sentiment reflects individual firms' discomfort with the new government's policies, especially the planned changes to labor laws. NZD fell as much as 1 percent to NZ$0.6645 after the release.
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