Morning Briefing Yen yields Rio retreats HSBC hikes

The focus on the Asia-Pacific region was tighter than usual on Wednesday morning with earnings from two FTSE big caps whose businesses are centred there and, naturally, the continuing saga of the yen.
Over-promising and under-delivering has cost Japan Prime Minister Shinzo Abe and the Bank of Japan dearly in terms of a currency that is squeezing exporters more, even after both have provided hard details of moves to cool its advance. As it stands, the yen has risen some 4% against the dollar in seven days. It is pausing on Wednesday after Tokyo approved 13.5 trillion yen ($132bn) in fiscal measures. That is the true level of direct government stimulus contained within broader fiscal announcements over the last few days that gave the impression of de facto ‘helicopter’ money amounting to a much higher figure. Who thinks the yen will rest for long? The rate against the dollar was last at 101.32. The yen again teased the 100 handle on Tuesday for the first time since 11th July.

Global markets at online time:

Name	Last	Pct.Chng	Net Chng	Close
S&P FUTURES	2147.75	-0.23	-5	2152.75
DJ INDU AVG (TUE CLOSE)	18313.77	-0.49	-90.74	18404.51
BRENT CRUDE FUTURES	41.97	0.41	0.17	41.8
Australian Dollar	0.7588	-0.28	-0.0021	0.7609
Canadian Dollar	1.312	0.08	0.0011	1.3109
Swiss Franc	0.9679	0.44	0.0042	0.9637
Euro/SwissFranc	1.0841	0.18	0.002	1.0821
Euro/Yen	113.22	0	0	113.22
XETRA DAX	10141.7	-0.03	-2.64	10144.34
NIKKEI 225 INDEX	16083.11	-1.88	-308.34	16391.45
S&P 500 (TUE CLOSE)	2157.03	0	0	2157.03
FTSE 100 INDEX	6629.89	-0.23	-15.51	6645.4
Dollar/Yen	101.1	0.22	0.22	100.88
Pound/Dollar	1.3346	-0.07	-0.0009	1.3355
Euro/Pound	0.8389	-0.15	-0.0013	0.8402
10Y BUND	100.382	0.11	0.11	100.272
Euro/Dollar	1.1198	-0.24	-0.0027	1.1225
GOLD (SPOT)	1364	0.06	0.8	1363.2

What’s eating the FTSE? Well partly, increasing momentum of the pound (weakening the FTSE’s main currency, which is of course the dollar). Sterling has barrelled past the weakest services sector readings seen since 2009. Our reaction to Markit’s latest Purchasing Managers’ Index, this time on the services sector, is more aligned with the immediate response of sterling foreign exchange traders than with the data provider’s. IHS Markit stated that a Bank of England rate cut on Thursday is “a foregone conclusion”. The market hasn’t ‘got the memo yet’ as the pound against the dollar jumped 39 pips immediately after the data release.
To be sure, the drop across the board seen in Markit’s all-sector index, which was also updated this morning, is indeed unprecedented. But Markit goes no further than saying that it sees increased chances of a mild recession, adding that it is too early to tell if the weak economic sentiment currently being reported will last. We also note increasing scepticism among forecasters that are as reputable as Markit, for example NIESR, that a BoE cut this week is necessary. Furthermore, we read the continued fight back by sterling (now up 4.4% since 6^th July) as a sign of Britain’s recovering economic tone since the referendum. Short term rates are still pricing a BoE cut and the latest surveys of economists by Bloomberg and Reuters suggest most forecasters still expect one too. However both traded rates and economists have become less certain, if not absolutely uncertain, in recent weeks.
Iron ore giant Rio Tinto is weighing a little on the FTSE too, albeit slightly. It’s holding on to its dividend policy, perhaps by the skin of its teeth, after underlying first-half earnings dropped almost 50% year-year to $1.56bn, giving its worst interim profits in 12 years. Conversely, its fellow Asia-Pacific gargantuan, HSBC has now apparently fully accepted that its own ‘progressive’ dividend policy was no longer sustainable; and its share price shot up as much as 4%. News of HSBC’s $2.5bn ($0.12c a share) buyback is doing its job and offsetting the impact on sentiment from backsliding on key targets. The c.£4bn profit fall to $9.7bn was no worse than reasonable forecasts, and regulatory capital inched up to 12.1%. That means even an ‘unprogressive’ dividend policy is likely to remain viable into 2017.
Meanwhile, European banks are keeping the DAX and other indices on the bloc aloft on Wednesday. But it is of course all relative after STOXX’s index for the sector tanked 30% in the year to date, the biggest fall by any major equity index in the world. Are banks a leading indicator? It’s worth noting that some of the most eye-catching moves this week have been in sovereign bond markets. Sudden yield spikes have stoked speculation that several years of bond price advances might finally be ending. Japanese bonds steadied on Wednesday but are still nursing their worst sell-off in over three years.
Eyes on the US ISM Non-Manufacturing Index, especially the employment component, for clues about Friday’s non-farm payrolls, and particularly after the factory-sector ISM on Monday revealed a slight fall in jobs. With oil prices at 3-month lows, eyes also on the EIA release at 3.30pm BST. An inventory build of 1.7 million barrels of crude is expected. It will be the 4^th build out of 5 readings since 29^th July.

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