US MARKET WRAP – Trump’s Hard Lines On NAFTA & The Wall Dent Risk

Overnight comments from US President Donald Trump weighed on risk assets today. The President reiterated that a Mexican border wall will be built, even if a government shutdown occurs as a direct result of the action. He also revived his threat to pull the US out of NAFTA, stating that “we’ll end up probably terminating NAFTA at some point.” A soft US new home sales print also did little to support risk sentiment. We also heard from Fed voter Kaplan, who reiterated that the tight US labour market calls for the removal of some accommodation and that balance sheet run off should begin soon. He also stressed that he hasn't committed to raising interest rates again this year (in his previous address he noted that he needed to see more positive signs for inflation before committing to further hikes).

The USD was lower against the EUR, as the single-currency garnered support from a strong manufacturing PMI release and moved back to highs late on as the ECB's Hansson noted that the EUR's appreciation thus far is “not a big change.” The single currency also shrugged off a New York think tank report which suggested that instead of tapering purchases from January, currency pressures mean that the ECB is now more likely to extend asset purchases at a much-reduced volume from January, while removing its residual easing bias. The JPY and CHF benefitted from risk off flows. GBP continued to underperform owing to Brexit inspired jitters, while the NZD gave up ground following the kiwi pre-election economic and fiscal update, which pointed to lower growth than was previously expected, alongside smaller future surpluses.

US stocks were lower amid risk aversion following Trump’s overnight comments. The S&P 500 closed down 0.35% at 2,444.02, the NASDAQ closed down 0.37% at 5,851.78 and the Dow closed down 0.40% at 21,811.41.

US Treasuries caught a bid, with some modest steepening apparent as government shutdown worry put a bottom on US 2-year yields, while FOMC voter Kaplan offered little new on the monetary policy front in a moderated Q&A session. US Sep’17 10y T-note futures settled at 126.29+, up 11+ ticks.

Oil ended the day higher with WTI crude futures settling at USD 48.41/bbl, up USD 0.58. The weekly DoE inventory data was the main driver, with the headline draw, dip in Cushing inventories and larger then expected draw in gasoline stocks outweighing the uptick in US production. Crude was also supported by Libya’s largest oilfield remaining offline, despite reports to the contrary being circulated on Tuesday.

23 Aug 2017 - 21:00- Fixed IncomeData- Source: RANsquawk