The first business day of September was marked by the US Labor Holiday. Though US markets were closed, several developments will help shape the investment climate.
1. Japan: A recent surge in capital expenditures will boost expectations for an upward revision to Q2 GDP, which will be released on September 9 in Tokyo. Recall that Japan's economy contracted by 0.2% in Q1, but rebounded in Q2. The revisions may almost double the initial estimate of Q2 GDP of 0.5%. Capital expenditures jumped 12.8% in Q2, nearly twice expectations and follow a 3.4% increase in Q1. It is the strongest quarterly increase since 2007. Separately, the Manufacturing PMI was unchanged at 52.5%. The 10-year JGB edged higher and the closing yield, just below 12 bp, is the highest in almost a month. The Nikkei, which has been testing a cap near 23,000, pulled back by nearly 0.7%, the largest loss in about two weeks. Across the region, share prices fell, and the MSCI Asia Pacific Index excluding Japan fell two-thirds of a percent. It was the third day of losses. The dollar was mostly confined to a15 tick range on either side of JPY115.
2. China: The Shanghai Composite slipped almost 0.2% to extend its downdraft for a fifth consecutive session. The Caixin Manufacturing PMI eased to 50.6 from 50.8 in July. It was a slightly larger than expected decline. Of note, export orders were below the 50 boom/bust level for the fifth consecutive month, even though there was a little improvement to 48.8 from 48.4. The yuan edged higher to extend the pre-weekend gains, but it is well within August's range. The yuan's stability was aided, we think, as short-term yuan rates (3m SHIBOR) steadied and turned higher. However, Monday was the third consecutive session that it eased.
3. Turkey: The sharp depreciation of the lira is boosting prices in Turkey more than economists expected. The CPI jumped 2.3% in August for a 17.9% year-over-year rate. It was 15.85%. The Bloomberg median forecast was 17.6%. The central bank meets on September 13. Although orthodoxy dictates that Turkey lift interest rates (key one-week repo rate is at 17.75%), no interest rate can compensate investors for the currency risk, as Argentina aptly demonstrates. Moreover, as Turkey's PMI indicates, policymakers and investors should be prepared for an economic contraction. The August Manufacturing PMI fell to 46.4 from 49.0, matching the multi-year low seen in May. It has not been above 50 since March. The central bank threatened to take fresh action and the lira recouped around half of its earlier losses, though still finished off around 1.5% ( ~TRY6.63). Turkey's 10-year yield fell a little more than 60 bp to 19.89%.
4. UK: Sterling was the weakest of the major currencies as the creeping optimism about Brexit fizzled and the Manufacturing PMI fell more than expected. Sterling lost about 0.7% against the US dollar to give back fully the gains scored in the middle of last week. It tested the 20-day moving average near $1.2850, which also corresponds to a 50% retracement of the bounce from the year's low set on August 15, after pushing briefly through $1.3040 last week. The euro retraced 61.8% of the retreat from the GBP91.00 approached last week. A move above GBP90.40 would signal a resumption of the uptrend. EU negotiator Barnier reiterated his opposition to May's Chequers exit plan, and at the same time, political analyses make it seem highly unlikely that it could pass Parliament's muster either. Once again, the perceived risk of a no-deal Brexit increased and sterling fell. Separately, the August manufacturing PMI fell to 52.8 from 53.8, which was revised from 54.0. It is the lowest in two years. It has fallen every month but May since last November. Sterling's weakness underpinned the FTSE 100, which rose nearly 1% to recover from a four-month low seen before the weekend. The only sector that did not rise was real estate. Meanwhile, the 10-year yield eased a couple of basis to 1.40%.
5. EMU: The Eurozone August Manufacturing PMI was unchanged from the flash reading at 54.6, which is the lowest since November 2016. The forward-looking new orders component eased to 53.0 from 53.2 in July, its lowest since October 2016. Of note, Germany was revised down from the flash (55.9 from 56.1), which means that this week's factory orders and industrial production data will be more closely scrutinized for confirmation that Europe's biggest economy is out of its slump. The French reading was also shaved (53.5 from 53.7). Spain's reading was a tad better than July at 53.0 (vs. 52.9). Italy's manufacturing PMI fell to 50.1 from 51.5. Investors had been demanding an increasing premium to hold Italian bonds, and at the same time, the economy is weakening. At the same time, the government is attempting to finalize a draft 2019 budget to submit to the EU. Some calmer rhetoric on Monday helped Italian bonds trade higher, with the yield on the benchmark 10-year bond easing seven basis points, and narrowing the spread over Germany by a touch more. The Italian bank shares index rose from the lows for the year recorded before the weekend and advanced 1.35%. The euro traded in a narrow range. It held the pre-weekend low ($1.1585) and could not resurface above $1.1630.
6. Argentina: The dollar pulled back about 4.3% before the weekend and recouped it all on Monday vs the peso. The government announced intentions to impose a tax on exports as part of the push for a balanced budget by 2020, a year earlier than the previous goal. Also, plans to streamline the government by eliminating half the cabinet ministries were unveiled. Apparently, the measures are meant to influence the negotiations with the IMF (September 4). Argentina seeks quicker payments from $50 bln program. Exporter shares were under pressure, and the Merval fell 1.5%, after rallying 16.4% last week.