S&P futures are again modestly in the green as European shares hold steady ahead of a meeting of the Catalan regional parliament and a possible declaration of independence by Catalan leader Puigdemont, while Asian shares rise a the second day. The dollar declined for the 3rd day, its losses accelerating across the board amid growing concerns that Trump's tax reform is once again dead following the Corker spat and a rejection from Paul Ryan, with the move gaining traction after China set the yuan’s fixing stronger for the first time in seven days. Monday’s sell-off in Turkish assets seemed to have little follow-through, with emerging-market currencies all trading higher and Treasuries steady. Traders are also waiting for minutes from the Federal Reserve’s last meeting, which may provide more details on the path of interest rates and balance sheet tapering.
“The weak dollar is a cue for investors that the U.S. Fed will not be aggressive in raising interest rates and this supports the outlook for a strong equities market," said Cristina Ulang, head of research at First Metro Investment Corp. in Manila. “We will see a U.S. rate increase in December but it’s not going to be sharp since we aren’t seeing runaway U.S. economic growth."
Asia stocks advanced as traders in Japan and South Korea returned from holidays, pushing the regional benchmark to a three-week high amid a broad weakness in the dollar. The MSCI Asia Pacific Index gained 0.7% to 164.49, its highest close since Sept. 20. The biggest boost came from Samsung Electronics which also helped South Korea’s Kospi advance 1.6%. In Japan, the Topix rose to its highest close in more than a decade, driven by a string of positive economic data both at home and abroad. The Asia-wide gauge has rallied 22 percent so far this year, on course for its best performance since 2009. It’s still trading at the biggest discount to the S&P 500 Index in 15 years in terms of price-to-book.
All eyes are on Europe however, and Spain in particular, where Catalan lawmakers will meet today to consider a declaration of independence that risks an ironclad backlash from Madrid. Attention will focus on the form of words used by Catalan President Carles Puigdemont, who is due to address the parliament in Barcelona at 6 p.m. The IBEX fell alongside most national gauges across Europe. The common currency gained for a third day. It is Spain’s biggest political crisis since an attempted military coup in 1981. Madrid’s IBEX stocks index drooped 0.5 percent early on and it is now down almost 9 percent since May, though a sharp rise in the euro has also taken a toll.
“We have not witnessed any relevant statement or signal by the separatists that would hint at a change of strategy ahead of today’s discussion in the Catalonian parliament,” economists at Barclays wrote. “Consequently, at this point, it seems likely that Catalan President Carles Puigdemont remains on track to announce a unilateral declaration of independence as early as today.”
“Rather than a full universal declaration of independence, we may see a ‘symbolic statement’ from the Catalan government,” said Fabio Balboni, economist at HSBC Bank Plc. “Signs of disagreement are starting to emerge within the regional government, with more moderate members fearing the consequences of a further step towards independence, given the lack of support from the EU, and moves by some banks and firms to leave Catalonia.”
Despite the Spain jitters, The euro remained resilient, rising to a one-week high as data showed German exports had surged in August. Traders were also still upbeat on the currency after one of the European Central Bank’s German policymakers called for an end to its stimulus.
Elsewhere, Turkey’s lira recouped some of yesterdays losses even as the U.S. signaled the crisis between the two countries could drag on. Gold rose as the greenback weakened, and West Texas oil held gains near $50 a barrel before U.S. government data forecast to show crude inventories extended declines for a third week. Japan’s Topix index closed at the highest since July 2007 and Korean stocks staged a catch-up rally after a week-long holiday.
Turkey also got some help from a weaker dollar which was down for a third straight day. The dollar index, which tracks the greenback against six major rivals, dropped 0.2 percent to 93.533 and away from Friday’s almost 3-month peak. It gave the Turkish lira a breather having been sent sprawling to a nine-month low on Monday after the United States and Turkey scaled back visa services.
Meanwhile, Mexico’s peso hovered at its weakest in more than four months, ahead of the latest round of talks over the North American Free Trade Agreement (NAFTA) on Wednesday.
Over in Asia, the offshore Chinese yuan rate surged to its strongest levels in more than two-weeks. The central bank had also set a firmer-than-expected official rate, suggesting authorities are keen to keep the currency in check ahead of next week’s key national leadership meeting.
In commodities, Crude oil prices edged slightly higher, supported by OPEC comments signaling the possibility of continued action to restore market balance in the long-term. But gains were seen as limited as oil production platforms in the Gulf of Mexico started returning to service after the latest U.S. hurricane forced the shutdown of more than 90 percent of crude output in the area. Brent crude inched up 1 cent to $55.80 a barrel. U.S. crude added 2 cents to $49.60. Gold prices hit their highest in more than a week, though gains were capped as expectations of another U.S. interest rate hike this year limited appetite. Spot gold added 0.2 percent to $1,286.52 an ounce
Rate markets were largely unchanged, with the yield on 10-year Treasuries declined one basis point to 2.35 percent. Germany’s 10-year yield dipped one basis point to 0.44 percent, the lowest in two weeks. Britain’s 10-year yield was unchanged at 1.357 percent, the lowest in a week.
Traders are awaiting the start of the earnings season this week, with several major banks due to report, as well as Wednesday’s minutes from the Federal Reserve’s last meeting. Canadian stocks reopen after a holiday. Investors also await speeches by Fed Presidents and the minutes from the most recent Federal Reserve meeting due Wednesday. Economic data include NFIB small-business optimism. No major earnings scheduled.
Market Snapshot
- E-Mini futures on S&P 500, Dow and Nasdaq 100 each up 0.2%
- VIX Index down 1.7% at 10.15
- STOXX Europe 600 down 0.2% to 389.47
- MSCI Asia up 0.7% to 164.49
- MSCI Asia ex Japan up 0.7% to 542.58
- Nikkei up 0.6% to 20,823.51
- Topix up 0.5% to 1,695.14
- Hang Seng Index up 0.6% to 28,490.83
- Shanghai Composite up 0.3% to 3,382.99
- Sensex up 0.3% to 31,929.41
- Australia S&P/ASX 200 down 0.02% to 5,738.11
- Kospi up 1.6% to 2,433.81
- German 10Y yield fell 0.4 bps to 0.44%
- Euro up 0.4% to $1.1785
- Brent Futures up 0.4% to $56.01/bbl
- Italian 10Y yield fell 3.3 bps to 1.82%
- Spanish 10Y yield unchanged at 1.677%
- Gold spot up 0.4% to $1,289.21
- U.S. Dollar Index down 0.3% to 93.39
Top Overnight News
- Catalan President Carles Puigdemont is due to address regional lawmakers around noon New York time on the outcome of the Oct. 1 referendum that has been ruled illegal by the Spanish courts
- Minneapolis Fed President Neel Kashkari, a known dove and a candidate in running for the next Fed Chair, delivers opening remarks at a conference
- Allies of President Donald Trump say they fear his feud with Republican Senator Bob Corker risks unraveling the White House tax overhaul effort and that another major legislative failure could hobble the administration for the rest of his term
- The U.S. Ambassador to Turkey issued a video statement saying he “can’t predict” how long the latest crisis between the two countries will last
- Trump may travel to the demilitarized zone separating North and South Korea as part of his first visit to South Korea in Nov., Yonhap News reported, citing an unidentified military official; Trump is expected to send a “significant message” to North Korea during the trip, Yonhap said
- Spanish police are ready to arrest Catalan President Carles Puigdemont immediately if he declares independence in the regional parliament, two people familiar with the matter said; Puigdemont has called a press conference at 1pm in Barcelona
- New Zealand First Party leader to delay his public announcement about the result of talks to form a new government until Friday: NZ Herald
- German exports rose 3.1% m/m in August, beating an estimate 1.1% rise
- Banks in Europe have sold about 33 billion euros ($39 billion) of a new type of bank bond they’re calling “senior non-preferred”; the label allows underwriters to market the notes to managers of funds that can only hold senior debt, even though the securities can be forced by regulators to take losses in a crisis
- U.K. industrial output rose 1.6% y/y in Aug. vs est. 0.9%, while the trade deficit widened to GBP14.2B vs est. GBP11.2B
- Canadian Prime Minister Justin Trudeau will discuss international
security and trade during a meeting with President Donald Trump - Canadian housing data: Median estimate forecasts a drop; still, momentum for a strong housing market will still be strong
Asia equity markets were mixed after a cautious tone in the US, although the KOSPI (+1.8%) surged as it took its turn to play catch up from a 10-day closure. ASX 200 (-0.3%) was indecisive with weakness in energy names offset by strength in gold miners, while Nikkei 225 (+0.5%) found support from a weaker currency following dovish comments from BoJ Governor Kuroda. Hang Seng (+0.6%) and Shanghai Comp. (-0.3%) were subdued with profit taking seen in the mainland after yesterday’s outperformance. Finally, 10yr JGBs were flat with demand dampened amid a positive risk tone in Japan and a reserved BoJ Rinban announcement for just JPY 605bln of JGBs. BoJ Governor Kuroda said Japan's economy is expanding moderately and expects CPI to pick up pace towards 2% goal, while Kuroda added the BoJ is to expand the monetary base until inflation overshoots target.
Top Asian News
- Japan-Wide Scandal Erupts Over Steelmaker’s Falsified Data
- Bank Indonesia to Keep Inflation Focus Despite Aggressive Easing
- Japan Stocks to Watch: Fujitsu, Honda, Retailers, Rohm, Toyota
- Bank Indonesia to Keep Inflation Focus After Aggressive Cuts
- Chinese Firms List at Fastest Pace Since Market Opened in 1990
- PBOC Chief Quotes Phantom of the Opera in Push for Market Reform
All anticipation is on the upcoming speech from the Catalonian leader, expected at 12:00 London Time, where there overwhelming consensus is that he will officially announce the referendum result. The IBEX underperforms, yet largely in-line with the periphery European bourses, as the FTSE MIB trades close to 1% down close, with the nation clearly seeing the largest reaction to the ECB’s plan to rein in bad loans. Not the best results in terms of UK and German auctions, and the respective 10 year debt futures are acknowledging the signs of indigestion or simply tepid demand accordingly. Specifically, covers were relatively light and for the DMO the tail was lengthy, while the Buba retained around 20% of its inflation linker. Pre-issuance Eurex low holding in, for now, but Liffe setting a marginal new base and it could be a sell into dips market until or unless something changes to provide fresh leads.
Top European News
- Famous Brands Plunges Most in 14 Years on Gourmet Burgers Blow
- U.K. Utilities Heading for Price War to Protect Market Share
- What to Watch for If Catalan Leader Says ‘Independence’ Today
- Italy Industrial Output Rises Above Estimate, Boosting Outlook
- Mirabaud Says Brokerage Business Targets Break-Even This Year
In currencies, the highlight data of the day came from the UK, as sterling was initially propped up by the higher than expected Manufacturing data. Cable tested 1.32 following the data, however, clearly running into offers around this key level. UK Manufacturing Output MM (Aug) 0.4% vs. Exp. 0.2% (Prev. 0.5%, Rev. 0.4%) Manufacturing Output YY (Aug) 2.8% vs. Exp. 1.9% (Prev. 1.9%, Rev. 2.7%) Goods Trade Balance GBP (Aug) 14.24B vs. Exp. -11.20B (Prev. -11.58B, Rev. -12.83B) Goods Trade Bal. Non-EU (Aug) -5.83B vs. Exp. -3.60B (Prev. -3.84B, Rev. -5.34B). The Norwegian Krone took a hit in early European trade, as the nation’s CPI report missed across the board, albeit marginally so. EUR/NOK broke out the week’s early range and spiked through Friday’s highs.
In commodities, gold has continued to recover following the bounce seen ahead of 1260.00, drawing support from global uncertainty, alongside a softer USD. However, the increased expectations of another hike from the Fed, and the tightening likely to move into 2018, upside could be curved. Oil markets have also continued to recover from last week’s lows ahead of 49.00, which is evident of pending bids. WTI trades near session highs, looking to break back through 50.00/bbl, seemingly strengthened by comments from Barkindo stating that growth in US shale had slowed compared to the first half of 2017 and growth in global demand may show further upward revisions, giving the supply cut effort tailwind.
Looking at the day ahead, the only reading due in the US is the September NFIB small business optimism print. Onto other events, The Fed’s Kashkari is scheduled to speak at a regional economic conference. The IMF and World Bank annual meetings also start today and run through to Saturday.
US Event Calendar
- 6am: NFIB Small Business Optimism 103, est. 105, prior 105.3
- 10am: Fed’s Kashkari Speaks at Regional Economic Conference
- 8pm: Fed’s Kaplan Speaks at Stanford Institute
- Oct. 10-Oct. 15: Annual Meetings of the IMF and the World Bank
DB's Jim Reid concludes the overnight wrap
Markets were given their own lullaby yesterday with the US on partial hols thus resulting in a quiet session. It was actually a landmark day though as it marked 10 years since the pre-GFC peak in the S&P 500. At periodic intervals throughout this year we’ve marked such 10 year crisis related anniversaries with a quick performance review of the major asset classes from our regular monthly’s performance review. We repeat this today for this latest anniversary with the graph and the 10yr performance table today.
To summarise in dollar terms, the S&P 500 (+102%) actually tops our list of 38 global assets even though this point 10 years ago was the local peak. This is followed by US HY (+85%) and 6 of the top 8 in dollar terms are credit assets. Gold (+74%) breaks up the top 8. 26 of the 38 assets are in positive total return territory since this point and 12 are in negative territory led by Greek equities (-85%), European Banks (-54%) with other major underperformers including Portuguese equities (-39%), Oil (-38%), FTSE-MIB (-34%), Bovespa (-33%), Russian Micex (-30%), Shanghai Comp (-18%) and the IBEX (-2%). So although US equities and credit markets have shrugged off the impact of the crisis and have prospered, deep scars still remain especially for the European periphery and some EM equities (all dollar adjusted).
Turning to Catalonia, Spanish markets slightly rebounded on Monday (IBEX +0.50%, 10y bonds -3bp) following increased pressure over the weekend on the Catalan authorities to avoid declaring independence. We should have more clarity today as Catalan President Puigdemont is expected to address the regional Parliament in Barcelona (Tuesday, 6pm local time). Back on Monday, Spanish newswire Efe reported Puigdemont plans to declare independence, but is also likely to insist Catalonia wishes to negotiate with the Spanish government with the help of external mediators. Elsewhere, as per Bloomberg, Catalan secessionists have tried to urge the Spanish opposition Socialists to form a coalition to oust Spanish PM Rajoy, which they have since refused. A member of the Socialists’ executive board (Carmen Calvo) said her party is focused on ensuring that the Spanish Constitution is observed.
Over to Brexit, the UK government has published White papers or contingency plans for leaving EU without a new Brexit deal. In the papers, the UK will set up its own customs regime where it will set its own tariffs, quotas and classification of goods, broadly in line with WTO requirements. However, the FT noted that British officials admit these contingency plans are at early stages and the government has not really invested in staff and systems to build a new customs system yet. Following up, PM May spoke yesterday, noting “it is our responsibility as a government to prepare for every eventuality” and that these white papers “support that work”, which sets out “steps to minimise disruptions for businesses and travellers”. Further, she noted that re the Brexit talks the “ball is in their court”. However, the EU commission spokesman responded “the ball is entirely in the UK court for the rest to happen”. In view of the stalemate, we note that the fifth round of Brexit talks are currently underway and will conclude this Thursday.
This morning in Asia, markets are trading marginally higher as we type. The Kospi is up +1.93% after markets reopened following a 10 day break. Elsewhere, the Nikkei (+0.34%) and ASX 200 (+0.06%) are up slightly, while the Hang Seng (-0.06%) and Shanghai Comp. (-0.25%) are slightly lower.
Turning to Turkey, the Lira/USD fell to a 6 month low (Lira -2.46%; equities -2.73%) yesterday after the US and then Turkey suspended Visa services for citizens seeking to visit the other country over the weekend. While the White House has remained silent, the U S ambassador to Turkey went onto YouTube to say “we hope (the situation) will not last long, but…we can’t predict how long it will take to resolve this matter”. Later on Monday, Turkey’s Erdogan spoke during a news conference, noting “the implementation of such decision (suspending Visa services) by the US ambassador is very saddening. Turkey is a state of law, not a tribal state”. As a reminder, Turkey represents c1% of the MSCI emerging market index, c23% of its government debt is held by foreigners (highest since Aug. 2015) and c37k US citizens travelled to Turkey in 2016.
Onto market performance yesterday now. US bourses softened on limited news flow and trading, with the S&P 500 (-0.18%), Dow (-0.06%) and Nasdaq (-0.16%) all slightly down on light volumes. Within the S&P, marginal gains in the energy and utilities sectors were more than offset by losses from healthcare and industrial names. Conversely, European markets were modestly higher, aided by a rebound in Spain's IBEX (+0.50%) and a solid IP reading from Germany. Across the region, the Stoxx 600 and DAX both rose c0.2% while the FTSE dipped 0.20%. The VIX has halted its trend of 8th consecutive days of being below 10, rising 0.68 to 10.33, likely reflecting increased geopolitical tensions. The record stretch was 10 days in July this year.
Bond markets were slightly firmer, with core European 10y bond yields down modestly, with Bunds (-1.6bp), OATs (-1.7bp) and Gilts (-0.6bp) all rallying. Elsewhere, peripherals slightly outperformed with Spanish and Italian 10y yields both down 3.4bp. At the 2y part of the curve, changes were more modest, with Bunds (-0.4bp) and OATs (-0.3bp) slightly down while Gilts were unchanged. Most key currencies were little changed with the US dollar index down 0.13% while the Euro gained 0.09%. Notably, Sterling had a solid day (+0.58%), partly due to a positive data revision to the UK labour cost figure (likely a better measure of pay growth). The Office of National Statistics conceded an error in its 2Q growth in unit labour costs, as it should be 2.4% yoy rather than 1.6% as reported on Friday. In commodities, WTI oil rose 0.59%, following reports that Saudi Arabia plans to make further cut to its crude supplies in November. Elsewhere, precious metals (Gold +0.58%; Silver +0.79%) were slightly higher, while other base metals were mixed, but little changed (Copper -0.27%; Zinc -0.13%; Aluminium +0.99%).
Away from the markets, ECB Executive Board member Sabine Lautenschlaeger said “we should begin reducing our bond purchases next year” and exit QE as soon as possible, but noted that “it is important that we really move towards the exit – step by step, but steadily and in a clear direction”. On inflation, she noted “looking to the future, we can be confident that inflation will return to our objective”.
Staying in Europe, some words of caution from politicians and central bankers. The ECB policy maker Klass Knot said it feels “increasingly uncomfortable” to have low volatility in markets while there are risks in the global economy. Elsewhere, in his departing interview with the FT as Germany’s longest servicing finance minister, Schaeuble warned that investors are “concerned about the increased risks arising from the accumulation of more and more liquidity and the growth in public and private debt, “I myself am concerned about this, too”.
Over in Japan, with only 12 days till the election, the latest polls suggests the challenger – Tokyo governor Koike’s new Party of Hope may be losing steam. According to a small survey by Yomiuri newspaper over the weekend, 13% of respondents said they will vote for her party, down from 19% a week ago. Notably, support for Abe’s LDP is at 32% and 27% of respondents are still undecided. Staying in Asia, China’s long serving People’s Bank of China Governor Zhou Xiaochuan reiterated calls for further opening up of China’s financial sector, as per Bloomberg. He said “we could take bigger steps to increase the market access for financial institutions and the opening up of the financial market”. The interview is perhaps conveniently timed before the Chinese Community Party meets tomorrow for a final time before the big party congress later in the month (potentially 18th October).
The latest ECB CSPP numbers were out yesterday. The average daily run rate last week was €356mn (vs. €349mn average since the CSPP started). This is at the low end of the recent range but the CSPP/PSPP ratio is still notably above the pre-taper ratio. The current week saw the ratio at 12.9% and is above the 11.6% seen before the taper (vs. 16.6%, 14.8%, 19.2%, 13.6% in the last few weeks). So still strong evidence that the ECB is tapering PSPP more than CSPP. It’ll be interesting to see what happens after the expected additional taper likely to be announced in just over two weeks.
Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In Germany, August IP was materially above expectations at 2.6% mom (vs. 0.9% expected) and 4.7% yoy (vs. 2.9%). Notably this stronger month follows two consecutive months of decline, so annualised growth over the quarter is c3.4% saar for total production. Our German team needs a strong Sep. IP and retail sales to get to their expected 0.6% qoq increase in 3Q GDP, although positive sentiment indicators makes them optimistic that we are getting there. Elsewhere, the Eurozone’s October Sentix investor confidence index slightly beat at 29.7 (vs. 28.5 expected) to a new post-GFC high, while France’s business industry confidence was a tad softer at 104 (vs. 105 expected).
Looking at the day ahead, it’s a fairly busy day, particularly in Europe. The most significant releases in Europe include the August industrial production prints for France (1.5% yoy expected), Italy (2.9% yoy expected) and the UK (0.9% yoy expected) along with August trade data for Germany and the UK. The only reading due in the US is the September NFIB small business optimism print. Onto other events, The Fed’s Kashkari is scheduled to speak at a regional economic conference. The IMF and World Bank annual meetings also start today and run through to Saturday.