Nervousness Lingers Over Fed Minutes Amid Thai Turmoil, Yuan Weakening

So Wednesday is interesting thus far.

There’s trouble in Thailand where the aging king combined with generalized angst about the prospects for another taper tantrum have thrown the baht for a decisive loop:

Meanwhile, Thai stocks fell as much as 6% and are down more than 7% since last week. “The only thing that has been holding the country together is the king; the different sides all agree on one thing and that’s the king,” Tareck Horchani, deputy head of sales trading at Saxo Capital Markets in Singapore told WSJ.

While this might seem inconsequential to the average American investor/trader, you have to keep the context in mind. This isn’t the best timing. What you don’t want, if the Fed does hike in December, is preexisting turmoil in any of the major EMs. If you get that scenario, you might well see a repeat of the taper tantrum and here we go all over again.

Switching gears, Deutsche Bank is out raising more money at near junk bond yields which - pardon us - but is probably appropriate given the risk involved. Here’s Citi’s quick take:

“Whilst this is clearly not a sustainable funding level for DB, we think there are two possible explanations. Firstly, we think part of this is DB showing it can access the market and secondly, it may well be DB raising the cash ready to settle its fine with the DoJ (expected to be in the $5-6bn range). Overall, we think both of these possible explanations have a mildly possible read for DB.”

So, would you like to help pay off the fine that Deutsche Bank now owes for screwing the public on shoddy mortgage deals? Yes? Well here’s your chance. So that’s $4.5 billion in debt they’ve sold since last week. "If they are able to take $4.5 billion out, this shows there is clearly demand for the name if there is adequate compensation," one source told Reuters. That of course is self-evident. There’s almost always adequate demand if there’s adequate compensation. We could probably sell $4.5 billion in debt if we offered a 20% coupon.

Anyway, back to the US where we’ll get the Fed minutes today - that should be interesting. Here’s Citi’s Steven Englander with more on that:

“Most continued to see the risks to real activity and unemployment as nearly balanced, &

A few participants pointed out that since January when the steep drop in energy prices ended, core PCE prices had risen at an annual rate of 1.7 percent & Payroll employment had been increasing steadily. Underutilization of labor resources had diminished along a number of dimensions: The unemployment rate had fallen to a level close to most participants estimates of its longer-run normal rate & Most participants continued to anticipate that, based on  based their assessment of current economic conditions and their outlook for economic activity, the labor market, and inflation, the conditions for policy firming had been met or would likely be met by the end of the year.”

“This all would be pretty hawkish sounding and that was the way the above quotes were received when the September 2015 Minutes were released a year ago. Neither just before nor just after those Minutes were released was the December 2015 hiking probability more than about 50%. Last year the 70% plateau was reached only after a booming November NFP number. Pricing is now around 70% for the Dec 2016 meeting and Fed Vice-Chair Fischer has already said that the September decision was close.”

“Bottom line it doesn’t look to me that there is much room to be more hawkish given all that has been said and what is now priced in, unless the Minutes open the door to a faster 2017 pace of hikes, which is unlikely. The baseline is very likely to be the dovish December hike.”

And here’s the take from Bloomberg’s Mark Cudmore:

“Today’s release of September’s FOMC minutes comes at a bad time for fragile markets and will intensify risk-aversion. Based on the rhetoric from Fed officials in the days following the Sept. 21 decision, the minutes will emphasize that the committee are keen to raise rates, and that all meetings are live -– including November.  In the short term, it’ll be irrelevant that a November hike is extremely unlikely in practice. Not just because of the presidential election, but also because of this month’s mounting market stress and the fact that the recent data pick-up will be insufficient to justify a hike so soon. What matters is that the sound bites will put November back in play as a possibility and that will provide the hawkish spin to today’s minutes.”

Got it. Of course if the Fed does hike at all and we do mean - any time - they’d better be careful because the PBoC is way ahead of them and just fired another warning shot overnight, weakening the yuan fixing for the sixth day in a row beyond 6.70:

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