A century has passed us by
Since T+1 rules did apply
But starting today
That is the new way
So, what does this new rule imply?
 
For buyers, they’ll need to have cash
At hand, else their trades will all crash
While sellers get paid
Next day and can trade
Or else have their cash in a flash
 
The problem is those overseas
Are likely to feel quite a squeeze
‘Cause getting the bucks
May soon be the crux
Of trading, and cause much unease

 

Today is, in fact, quite momentous as North American equity markets (US, Canada and Mexico) are all converting to T+1 settlement.  This means that if you buy a stock today in your Fidelity (or other) account, you need to pay for it tomorrow.  Since 2017, that timeline was two business days, and prior to that it was three business days (1987-2017) and five business days (1929-1987).  Obviously, technology played an important part in the process as the electronification of trading and back-office systems allowed more information to be processed more quickly and removed the need to physically deliver share certificates.

Now, while this is an interesting historical fact, the importance of the change comes from the potential impact on the foreign exchange markets.  In the US equity market (which remember represents nearly 70% of global equity market values), most traders have cash or access to funding in their accounts and so this is of limited consequence.  But, for foreign investors, it is a much bigger deal.  

Consider a European fund manager who is investing throughout a given day and then is reconciling their position at the end of the day to determine how many dollars they need to settle the transactions.  Prior to today, they could find out, and execute the FX trade to buy those dollars any time during the next day with full confidence the funds would flow on a timely basis.  However, starting today, their timeline to determine the balances due and execute the transactions will be reduced to a matter of hours.  And not just any hours, but probably the worst hours to transact FX during the 24-hour session.  Given that equity markets in the US close at 4:00pm, and most bank trading desks leave around 5:00pm, the prime time for those executions is going to be in the twilight of the FX market, when the global day rolls over and only Wellington, NZ banks are even awake.  Liquidity during this time period is notoriously limited and the opportunity for outsized moves is significant.

None of this is likely to have an impact today, necessarily, but it could well have an impact as soon as Thursday or Friday when the month comes to an end and there are significant equity rebalancing flows.  In fact, thinking it through, Friday afternoons that happen to be month ends, like this week, are going to be subject to the most stress as there is no market and Sunday evening is going to potentially be subject to a lot of same-day FX settlement, which is not the strongest suit for that market.  

I bring this up for two reasons; first, it is well worth understanding and may impact market characteristics going forward, and second, there is absolutely nothing else happening today!  There has been almost no new information in the macroeconomic sense since Friday’s Michigan Sentiment numbers were released as yesterday brought only modestly softer than anticipated German Ifo results.  At the same time, with the ECB slated to meet next week, the plethora of ECB speakers have clearly agreed that there will be a 25-basis point cut next week, but there is still a lot of uncertainty as to when the next cut may arrive.  Meanwhile, Fed speakers will not shut up at all, but continue to promulgate the same message they have been pushing forward, higher for longer until they have confidence inflation is going to achieve their target.  Arguably, that makes Friday quite interesting as the PCE data will be released.

So, with nothing else of note, let’s take a quick run through the overnight session.  Quiet continues to be the best descriptor of things with Japanese shares virtually unchanged although Chinese shares fell (CSI 300 -0.7%) despite ongoing talk of further government support for the property market there.  Elsewhere in the region, markets were mixed with an equal number of gainers (Taiwan, Indonesia, Singapore) and laggards (India, Australia, New Zealand) with most of the rest very little changed.  It was not very exciting!  In Europe, while the screen is red, other than the CAC in Paris (-0.6%) the movement has been extremely limited.  Meanwhile, US futures are currently basically unchanged ahead of the open.

Bond markets, too, have been quiet overall with Treasury yields unchanged since Friday, and European sovereigns mostly edging higher by between 1bp and 2bps.  The exceptions here are the UK (-3bps) despite (because of?) a better-than-expected Retail Sales print. In Asia, while JGB yields did not move overnight, yesterday they did trade to a new high of 1.02%, although the impact on the yen remains di minimus.

In the commodity markets, oil has bounced from last week’s lows after Israel’s recent military activities in Rafah have some concerned that an escalation in that conflict is on its way and may include other parties.  Meanwhile, gold and silver prices, both of which rallied sharply yesterday, are consolidating those gains and remain well above the trading bottoms put in last week.  Copper, too, is rebounding although there is a lot of discussion in the market about how it has been massively overbought by speculators and has further to decline.  Regardless of the short-term trading implications, I believe there is no question that the long-term view here must be very bullish as there simply is not going to be enough supply for all the demands coming our way, especially given the still strong view amongst many that the energy transition must happen ASAP.

Finally, the dollar is a touch softer this morning, but only a touch.  While the greenback has been pretty steadily declining all month, the entire movement has been less than 2%, at least based on the DXY.  As to USDJPY, it remains in a very tight range between 156.50 and 157.00 lately as traders clearly remain comfortable running short positions, but the rush to add to those positions has faded. As to the other currency that continues to be questioned, the CNY continues to edge lower a few basis points each day, as the PBOC weakens its value in the daily fixing by a similar amount.  Nothing has changed my view that the renminbi will drift lower, but it is clear that the PBOC is going to control it all the way.

On the data front, it is a very quiet start to the week, but things get interesting toward the end.

Today	Case-Shiller Home Prices	7.3%
	Consumer Confidence	95.9
Wednesday	Fed’s beige Book
Thursday	Initial Claims	218K
	Continuing Claims	1800K
	Q1 GDP	1.3%
Friday	Personal Income	0.3%
	Personal Spending	0.3%
	PCE	0.3% (2.7% Y/Y)
	Core PCE	0.3% (2.8% Y/Y)
	Chicago PMI

In addition to this, we hear from seven more Fed speakers over nine venues this week and unless PCE collapses, and only one speaker comes after the release, it seems highly unlikely that they will change their tune.  Recall, the Minutes last week were seen as far more hawkish than Powell’s press conference immediately following the meeting, and that confused the soft-landing crowd.  As of this morning, the Fed funds futures market is pricing in about a 50% probability of a cut in September and a total of just 34bps of cuts now for the full year.

My view remains that the Fed is unlikely to cut anytime soon as the data will not give them confidence their inflation target is in view.  With that in mind, I foresee the best opportunity for a surprise as more aggressive rate cuts elsewhere in the world which will support the dollar.  Just not today.

Good luck

Adf