MNI US OPEN - Fitch Strips US of AAA Sovereign Credit Rating

NEWS

MNI BOE PREVIEW - AUGUST 2023: Reaction Function Questions

Has the MPC’s reaction function changed? That is the question we are asking ourselves as we head into the August meeting. At the June meeting we argued that we didn’t think a 50bp move was warranted. The MPC saw things differently, however, largely justifying its decision by pointing to wage growth and services inflation. The MNI Markets team still thinks that 25bp hikes are more justified by the current economic data. But we find it hard to make the argument that if 50bp was justified in June that it is not justified now.

US (BBG): US Stripped of AAA Rating by Fitch as Budget Deficits Swell

The US was stripped of its top-tier sovereign credit grade by Fitch Ratings, which criticized the country’s ballooning fiscal deficits and an “erosion of governance” that’s led to repeated debt limit clashes over the past two decades. The credit grader cut the US one level from AAA to AA+, echoing a move made more than a decade ago by S&P Global Ratings. Tax cuts and new spending initiatives coupled with multiple economic shocks have swelled budget deficits, Fitch said, while medium-term challenges related to rising entitlement costs remain largely unaddressed.

US (BBG): Biden Admin Officials Engaged With Fitch Ahead of Decision

Biden administration officials shared their disagreement with Fitch ahead of an announcement on Tuesday, officials tell reporters. An official says they expect no impact on borrowing costs and would be surprised if they saw a market reaction to this

US (BBG): Trump Indicted on Federal Charges in 2020 Election Probe

Donald Trump has been indicted in Washington on federal charges over his efforts to overturn the 2020 presidential election, the third politically explosive criminal prosecution of the former president as he makes his latest run for the White House. The charges from Special Counsel John “Jack” Smith’s office can carry penalties of as much as 20 years in prison, but Trump would likely face far less than the maximum penalties if convicted since he doesn’t have a criminal record.

US/EU (BBG): US-EU Steel Talks Inch Ahead as Time for a Deal Runs Short

The US and European Union are unlikely to finalize a legally binding agreement to govern trade in steel and aluminum this year, setting up a decision to either extend an October deadline or allow the return of tariffs on billions of dollars of transatlantic exports. Talks on the so-called Global Arrangement on Sustainable Steel and Aluminum have intensified in recent weeks and progress has been made in the key area of how to measure and tackle oversupply from nations including China, according to people familiar with the discussions.

MNI ECB REVIEW - JULY 2023: Shifting to Full Data Dependence

The July ECB meeting was short on surprises with a 25bp policy rate hike and a deliberate lack of guidance with respect to the September meeting both being widely expected. The decision to change remuneration on minimum reserves from the deposit facility rate to 0% was the only minor surprise in the initial decision announcement, but will not have a material impact on the transmission of monetary policy.

CHINA (MNI): Yuan Seen As High as 7.0 after PBOC, Politburo Moves

MNI (Beijing) The yuan is likely to strengthen over the rest of the year and could even breach 7.0 against the U.S. dollar as policymakers move to stabilise the currency and recent stimulus boosts sentiment, advisors and traders told MNI. The politburo meeting on July 24 and recent central bank moves have supported the yuan since it reached what is likely to be its weakest point this year at 7.28 to the dollar at the end of June, a policy advisor who asked for anonymity told MNI.

CHINA (BBG): China Puts Pressure on Local Governments in Pro-Growth Push

China is stepping up its policy support for the economy, pressuring local governments to speed up the sale of bonds to fund infrastructure spending. Regulators have told local authorities to use up this year’s quota of special purpose bonds by the end of next month, according to people familiar with the matter, and for the proceeds to be put to use by the end of October.

CHINA (MNI): China to Boost Property Demand in Tier One Cities

MNI (Beijing) Chinese local governments, particularly in first-tier cities, will step up efforts to support housing demand in coming months after the nation’s top decision-making body called for policy adjustments to support a sector now struggling with oversupply, advisors and analysts told MNI. The statement from the Politburo after its July meeting marked a change in attitude towards the property sector, which the body has called out previously for over-speculation.

JAPAN (MNI): BOJ to Conduct Policy in Balanced Manner - Uchida

Bank of Japan Deputy Governor Shinichi Uchida said on Wednesday that the BOJ will continue to conduct monetary policy in a balanced manner, while carefully monitoring volatility in financial markets, including foreign exchange rates and market functioning. “Foreign exchange-rate moves have a big impact on economy and prices, and the BOJ continues to stay in close contact with the government,” Uchida told reporters. He decline to comment on recent U.S. dollar, yen moves but noted it was extremely important that foreign exchange moves reflected economic and financial conditions "in a stable manner.”

JAPAN (MNI): Economic Growth Remains Far From 2% Target - Uchida

Uchida said on Wednesday there is still a long way to go before the BOJ can change its easy policy stance. “Adjustments are required in order to continue with monetary easing," Uchida said. "Patiently continuing with such easing is of the utmost importance for now and to this end the BOJ will conduct yield curve control with greater flexibility.”

MNI RBA REVIEW - AUGUST 2023: Holding Onto Employment Gains

The RBA left rates at 4.1% at its August meeting but retained its tightening bias, in line with our expectations. Its reasons for pausing for a second consecutive month were unchanged from July. Importantly it appears that the RBA’s forecasts are broadly unchanged from May. While “some further tightening of monetary policy may be required” it will now depend upon the “data and the evolving assessment of risks”, thus RBA decisions have become even more data dependent and contingent on risks to its forecasts.

TURKEY/RUSSIA (MNI): Putin, Erdogan May Discuss Grain Deal Today

Russian President Putin and Turkish President Erdogan will hold their first call since Russia withdrew from the Turkey/United Nations brokered Black Sea Grain initiative on July 17. Tass reports, citing a local source: "Turkey is not giving up on its efforts to resume the Black Sea Grain Initiative and has regular communication on this issue with the UN, Russia and Ukraine." Tass reports that the two leaders are also expected to set a time for an upcoming face-to-face meeting during the call. They may also discuss the creation of a gas hub in Turkey, suggested by Moscow in October last year.

RUSSIA (MNI): Russian Strike on Izmail Port Further Risks Grain Supplies

Overnight Russian drones hit sites in the port town of Izmail on the Danube river, close to the border with NATO and EU member Romania. Regional Governor Oleh Kiper stated that “Russian terrorists again were attacking ports, grain, global food security. The world has to react. When civilian ports are targets, when terrorists deliberately destroy even silos — this is a threat to everyone on all continents.” Izmail is one of the two ports in the Odesa region alongside Reni that is still able to export grain following the collapse of the Black Sea Grain Initiative in July following Russia's withdrawal.

CORPORATE (BBG): Superconductor Breakthrough Buzz Spurs China, Korea Tech Rally

Claims about a breakthrough in superconductor technology that could revolutionize the power, transportation and chip industries have sparked surges in some Korean and Chinese stocks even as scientists remain dubious. Small caps including Duksung Co., Sunam Co. and Shinsung Delta Tech Co. jumped by their 30% daily limits for a second-straight day in Seoul. In China, Jiangsu Fasten Co. and Henan Zhongfu Industry Co. climbed by their 10% limits for a second session.

COMMODITIES (BBG): Wheat Jumps as Ukraine Says Russia Strikes Odesa Region Port

Wheat and corn jumped after Ukraine said a Russian drone attack damaged a port facility in the Odesa region, adding to a spate of attacks aimed at crippling exports from the Black Sea and Danube river. Russian forces struck the southern part of the Odesa region overnight with drones, regional governor Oleh Kiper said in a Telegram statement. Some objects of port and industrial infrastructure caught fire, and a silo was damaged, according to the statement.

DATA

NEW ZEALAND DATA (MNI): NZ Unemployment Rises Above Expectations

New Zealand’s unemployment rate rose 20bp to 3.6% q/q in Q2 – 0.1pp above the Reserve Bank of New Zealand’s forecast, while salary and wage rates climbed 4.3% y/y, according to data released by Stats NZ. Employment, however, gained 1.25 y/y to 69.8% and 0.3% over the quarter, while the labour force participation rate grew 1.5% over the year, or 0.4 q/q, to 72.4%. In its May Monetary Policy Statement, the RBNZ forecasted unemployment to rise to 4.6% by the end of the year.

FPREX: USD Bounces Off Fitch Lows, Shrugging Off Ratings Action

• The greenback trades modestly firmer headed into NY hours, allowing the USD Index to retain participation in the uptrend off the July lows despite the ratings action from Fitch late yesterday, and the US losing another of its AAA ratings. Markets have generally adopted the view that the Fitch action is of less relevance than the S&P downgrade some years ago, with Treasury markets already content with the US being of mixed-grade investment ratings.
• JPY is comfortably the firmest currency in G10, rising against all others as equities hold their pullback off the week's best levels. The e-mini S&P is lower by a further 35 points or so, and has briefly shown below last week's lows.
• High beta currencies - namely the AUD and NZD - are the weakest performers so far, helping prompt AUD/USD print a new multi-month low of 0.6566. Next support undercuts at the May 31 lows of 0.6458.
• Focus ahead turns to the ADP employment change release and the Brazilian central bank rate decision.

BONDS: Divergence Across the 10-Year Space

• There have been some divergent moves across FI this morning. The short-end of the curve has generally richened across the board with 2-year UST and Schatz yields both around 5bp lower on the day at the time of writing. However, at the 10-year segment of the curve UST yields are pretty much flat on the day, gilt yields a couple of basis points higher and Bund yields 3bp lower.
• There's no real fundamental driver for the change in the 10-year gilt-Bund spread, although the moves could partly be in anticipation of tomorrow's MPC decision (markets continue to price around a 30% probability of a 50bp hike tomorrow).
• Elsewhere today the main data event will be the release of the ADP employment report (ahead of Friday's payrolls report).
• Bund futures are up 0.41 today at 132.63 with 10y Bund yields down -4.2bp at 2.512% and Schatz yields down -6.2bp at 2.986%.
• Gilt futures are down -0.27 today at 948.85 with 10y yields up 1.3bp at 4.408% and 2y yields down -2.8bp at 5.002%.
• TY1 futures are up 0-10+ today at 111-06+ with 10y UST yields down -0.6bp at 4.020% and 2y yields down -4.7bp at 4.857%.

EQUITIES: Eurostoxx 50 Futures Extend Pullback From Monday High

Eurostoxx 50 futures have found resistance at 4513.00, Monday’s high, and the contract has traded sharply lower. For now, the pullback is considered corrective. However, the move lower has exposed support at the 50-day EMA. The average intersects at 4371.40 and a clear break, if seen, would threaten recent bullish developments and expose 4331.00, the Jul 26 low and a key support. Key resistance and the bull trigger is at 4513.00. The E-mini S&P contract continues to trade below 4634.50, the Jul 27 high. The pullback from this level highlights a possible short-term bearish signal. Price has found resistance at the top of a bull channel drawn from the Mar 13 low - the channel top is at 4654.42 today. An extension lower would expose the 20-day EMA - at 4547.38 and a break of it would strengthen bearish conditions. Clearance of the channel top is required to resume the uptrend.

• Japan's NIKKEI closed lower by 768.89 pts or -2.3% at 32707.69 and the TOPIX ended 35.6 pts lower or -1.52% at 2301.76.
• Elsewhere, in China the SHANGHAI closed lower by 29.259 pts or -0.89% at 3261.69 and the HANG SENG ended 493.74 pts lower or -2.47% at 19517.38.
• Across Europe, Germany's DAX trades lower by 275.1 pts or -1.69% at 15966.86, FTSE 100 lower by 141.51 pts or -1.85% at 7524.85, CAC 40 down 114.64 pts or -1.55% at 7292.83 and Euro Stoxx 50 down 75.24 pts or -1.71% at 4333.03.
• Dow Jones mini down 279 pts or -0.78% at 35480, S&P 500 mini down 46.25 pts or -1.01% at 4555, NASDAQ mini down 215 pts or -1.36% at 15601.5.

COMMODITIES: Uptrend in WTI Futures Remains Intact

The uptrend in WTI futures remains intact and the contract continues to appreciate. The break above $77.15 last week, the Jul 13 high, confirmed a resumption of the current bull cycle and this has resulted in a breach of key resistance at $81.44, the high on Apr 12 / 13. This development strengthens bullish conditions and signals scope for a climb towards $83.59, the Jul 11 2022 high. Initial key short-term support lies at $73.78, the Jul 17 low. Gold traded sharply lower last Thursday and a bearish threat remains present. Yesterday’s move lower reinforces this warning. The move down has resulted in a break of the 50-day EMA - at $1951.7. A continuation lower would expose support at $1924.5, the Jul 11 low. Clearance of this level would open the key support at $1893.1, the Jun 29 low. Key resistance is at $1987.5, the Jul 20 high. A break would reinstate a bullish theme.

• WTI Crude up $0.45 or +0.55% at $81.79
• Natural Gas down $0.01 or -0.23% at $2.554
• Gold spot up $6.54 or +0.34% at $1950.62
• Copper down $3.75 or -0.96% at $387.05
• Silver up $0.05 or +0.2% at $24.344
• Platinum down $2.41 or -0.26% at $931.05