Futures Levitate Because Any Re-escalation Is Simply Pent Up De-escalation

A quick reminder of how geopolitics governs markets: on Friday, the market plunged 0.005% over fears Ukraine and Russia may be about to go at it all out after a fake report Ukraine shelled a Russian military convoy. On Monday, the same “market” soared just under 1% as the news that had caused the “crash” was refuted. That has been the dominant rinse, repeat theme for the past month and will continue to be well after Yellen’s Friday speech at Jackson Hole (although one does wonder why she is not speaking on Wednesday when the symposium begins). Not surprisingly, with only modest re-escalation news overnight (that Russia is preparing further retaliatory sanctions against the West), which is simply “pent up de-escalation” in the eyes of Keynesian algos, futures are again up a solid 0.2% and rising, and the way the rampy USDJPY is being manipulated before its pre-market blast off, we may well see the S&P hit 1980, if not a new all time high before 9:30am, let alone during today’s cash session. In any event, whatever you do,don’t you dare suggest that algos should care one bit about Ferguson and its implications for US society.

Taking a closer look at the geopolitical stories, as DB summarizes, no bad news is certainly viewed as good news for now. Following the four-way diplomatic talks in Berlin on Sunday, Russian Foreign Minister Sergei Lavrov yesterday told the press that the talks have failed to produce positive results in establishing a ceasefire and (starting) a political process. According to Reuters, Lavrov accused Ukraine for changing their demands over what it would take to establish a truce between government troops and pro-Russian insurgents. The good news though is that some progress was made on allowing the delivery of Russian humanitarian aid to eastern Ukraine. Lavrov said that “all questions” regarding the humanitarian convoy had been removed and agreement had been reached with Ukraine and the International Committee of the Red Cross (ICRC). Bloomberg news overnight said that the ICRC expects to work out the details of a safe-passage plan for the convoy into Ukraine “soon”. The four-way talk is expected to resume again sometime this week but we don’t have specific timing on that yet. Despite the ongoing volatility, it is interesting to see the strong performance in Russian equities over the past week. The MICEX index has rallied every single day for the past 7 trading sessions and is currently about 7% off its early August lows.  One wonders which Russian oligarchs are selling into the latest liftathon.

European equity markets trade strongly, with the benchmark DAX outperforming as Bayer (+2.0%) benefit from a UBS upgrade and ThyssenKrupp (+1.8%) gain on a bullish outlook provided by the CEO. Nonetheless, the materials sector underperforms as BHP Billiton (-4.0%) trade poorly after their earnings update. BHP Billiton are to spin-off coal, nickel, aluminium, manganese and silver assets into a new Australian and South African listed company. Nonetheless, BHP Billiton failed to disclose a new share buyback and their financial metrics remained weaker.

Looking ahead, inflation readings from the UK and the US will be the notable releases to watch. We will also get July housing starts and building permits from the US today, which are both expected to rebound strongly after a disappointing month in June. We might be back to geopolitical watch mode again today as we build up towards Jackson Hole this Friday.

Bulletin Headline Summary

• European equities take confidence from the strong Wall Street close, however T-notes erase overnight weakness on weak UK CPI and reports of the Kremlin preparing further retaliatory sanctions against the West in the event of stricter controls on Russian trade
• Markets await any further clarity on the Russian aid convoy’s safe passage into eastern Ukraine after Ukraine/Russia tensions ebbed lower yesterday on a series of negotiations held between the countries counterparties
• Treasuries gain amid rally in core euro-zone bonds on U.K. inflation data, expectations for dovish Yellen at Fed’s Jackson Hole conference; German 10Y holds below 1.00% level.
  U.K. inflation fell to 1.6% in July from 1.9% in June, more than forecast, giving Bank of England room to keep its key interest rate at a record low; GBP fell to four-month low vs USD
• Pimco has been buying some of the higher-rated high-yield bonds dumped by speculative-grade debt managers amid the recent exodus from funds
• Fed Chair Yellen is likely to avoid taking more hawkish stance at this week’s Jackson Hole symposium, based on published research
• The Fed now owns almost a third of MBS outstanding. One rarely discussed consequence: Money managers are being pushed to add more of the securities than they otherwise might because the benchmark debt indexes that they’re judged against fail to exclude the Fed’s sizable holdings,  according to Citigroup Inc. analysts
• Australia’s central bank said the nation’s economic outlook remains uncertain because of the conflicting forces at play and reiterated that interest rates are set to remain on hold
• A former Rabobank Groep senior trader pleaded guilty in New York to conspiring to manipulate a benchmark interest rate tied to trillions of dollars of securities to benefit his trading positions, the U.S. said
• The biggest overhaul to the $19t credit derivatives market in more than a decade will seek to solve flaws that have stopped some contracts paying out as buyers anticipated
• The Red Cross is close to working out the details of a safe- passage plan for a Russian aid convoy intended for war-torn southeastern Ukraine, while four-way talks on a halt to the fighting reached an impasse in Berlin.
• Obama said the U.S. will continue “limited” airstrikes against Islamic State militants, which have stopped their advance on the city of Erbil and helped Iraqi and Kurdish forces recapture a key dam at Mosul
• Police fired stun grenades and tear gas at protesters in a St. Louis suburb rocked by violence after police shot and killed an unarmed black teen 10 days ago
• Obama is dispatching Attorney General Eric Holder to the St. Louis suburb in a show of commitment to an aggressive inquiry into the shooting of an unarmed black teenager by a local police officer
• Orphans whose families were killed by Ebola are becoming a tragic legacy of the deadly outbreak in West Africa, say relief organizations struggling to care for the children who may themselves be infected
• Sovereign yields mostly lower. Euro Stoxx Banks +0.6%. Asian and European equities higher, U.S. stock futures gain. WTI crude, gold and copper higher
• US CPI expected to decline further, keeping the focus on Fed chair Yellen’s appearance at Jackson Hole this Friday