In a weekend of little macro newsflow facilitated by the release of the latest Star Wars sequel, the biggest political and economic event was the Spanish general election which confirmed the end of the PP-PSOE political duopoly at national level, with Rajoy's leading block losing the absolute majority it had enjoyed since the last elections while rewarding the anti-austerity Podemos and the liberal Ciudadanos party, who between them took 109 seats in the 350-member parliament. As a result no clear governing majority emerged.
But the main surprise was the extent of the underperformance of liberal-reformist Citizens relative to opinion polls. This changes the post-election scenarios – a center-right coalition cannot reach a majority – and injects even greater political uncertainty. This is unlikely to be a positive development for markets.
“The [Spanish] election outcome failed to provide us a clear picture of who will take power,” said Anders Moller Lumholtz, chief analyst with Danske Bank in Copenhagen. “It is likely to take time before we get clarity, and uncertainty is not a friend of the market. ECB QE buying could cushion some of the knee-jerk reaction, but as Monday is the last day before the QE goes on pause we probably shouldn’t expect much effect from that side.”
As a result, there was some early underperformance in SPGBs and initial equity weakness across European stocks, which however was promptly offset and at last check the Stoxx 600 was up 0.4% to 363, even as China's Shanghai Composite surged +1.8% with sentiment supported by the PBoC injecting CNY100 billion of funds into the interbank market, and US equity futures were up nearly 1% after Friday's oversold drubbing.
In other key news, the commodity slide continues with Brent Oil dropping to a fresh 11-year low as futures fell as much as 2.2% in London after a 2.8% drop last week.
This is where markets are right now:
- S&P 500 futures up 0.9% to 2011
- Stoxx 600 up 0.4% to 363
- FTSE 100 up 0.6% to 6091
- DAX up 1.5% to 10762
- German 10Yr yield up 1bp to 0.56%
- Italian 10Yr yield up 2bps to 1.59%
- Spanish 10Yr yield up 9bps to 1.79%
- MSCI Asia Pacific up less than 0.1% to 130
- Nikkei 225 down 0.4% to 18916
- Hang Seng up 0.2% to 21792
- Shanghai Composite up 1.8% to 3642
- US 10-yr yield up 1bp to 2.21%
- Dollar Index up 0.07% to 98.77
- WTI Crude futures down 0.8% to $34.45
- Brent Futures down 0.7% to $36.61
- Gold spot up 0.6% to $1,072
- Silver spot up 1% to $14.24
A closer look at regional markets shows Asian stocks trading mixed as stocks shrugged off Friday's lacklustre close on Wall St. Nikkei 225 (-0.4%) underperformed albeit off worst levels amid JPY weakness, which pared earlier Toshiba led losses, while gains in energy name WorleyParsons, offset the healthcare sector pressure in the ASX 200 (+0.10%). Shanghai Comp. (+1.8%) traded higher with sentiment supported following reports that regulators approved the first cross-border mutual funds and the PBoC injecting CNY 100 bln of funds into the interbank market. JGBs finished marginally lower with trade lacking any significant price direction ahead of the holiday season, while the BoJ were in the market to purchase JPY 1.08trl in government bonds. Elsewhere, USD/CNH fell after the PBoC firmed the reference for the 1st time in 11 days. Finally, heading into the European open, JPY saw a bout of weakness as risk sentiment picked up.
Top Asian News:
- Yuan Crunch Spurs Banks to Hoard Abroad as China Curbs Outflows: Lenders from H.K. to London sell certificates of deposit
- Kuroda Sparks a Bond-Market Rally and Keeps His Powder Dry, Too: 2-year JGB yield falls to record
- Stevens Gets Aussie Christmas Wish as Westpac Sees Jawboning End: RBA Governor declines to nominate weaker level for currency
- Rajan’s 2015 Rate Cuts Offer No Cheer for Bonds Battered by Modi: Record govt borrowing plan, Fed rate bets capped gains
- Packer Quits Crown Board, Raising Expectations of Offer: Standing aside gives him freedom to mount bid
- Toshiba Sees Record $4.5 Billion Loss, Plans More Job Cuts: Plans up to 6,800 job cuts in segment for TVs, PCs, appliances
- Taiwan’s Nov. Export Orders Fall 6.3% Y/y; Est. -5.3%
- BOJ: Japan Output Gap Shrank to -0.44% in 3Q from -0.67% in 2Q
The week has kicked off with much of the focus in Europe on the Spanish elections and, as such, has seen notable underperformance in Spanish asset classes . The Spanish election results failed to provide an outright majority, with the Spanish Popular party likely set to try and form a coalition. However, this remains a particularly difficult task with the second place Socialist party seemingly unwilling to enter such a deal. In terms of the market fall out, the IBEX resides in firm negative territory (-1.70%), while Euro Stoxx (+0.80%) resides in the green to pare some of the losses seen on Friday.
In line with the underperformance in the IBEX, the SP/GE spread is wider by 8.7bps this morning, while the 10yr yield resides near November highs. Bunds have pared opening losses to now trade flat with analysts suggesting that the initial move lower in German paper was amid thin volumes and no significant fundamental factors that would warrant testing notable support levels to the downside. Elsewhere in fixed income markets, Gilts marginally outperform their
Top European News:
- Banks to Face Tough Loss-Absorbing Requirement: Europe’s largest banks may need to build up more loss-absorbing capacity under EU rules, Single Resolution Board President Elke Koenig says
- Syngenta Advances After ChemChina Said to Improve Takeover Offer: ChemChina offered to buy 70% of Syngenta now, with option to acquire remaining 30% later, according to people familiar.
- TeliaSonera to Exit Nepal in $1 Billion Ncell Sale to Axiata: Co. sold its stake in Nepalese phone carrier Ncell to Axiata Group for more than $1b in move to retrench in core mkts
- French Grocer Casino Rejects Block’s Claims as Quarrel Escalates: “Casino strongly rejects all arguments put forward by Muddy Waters Capital,” co. said earlier today.
- Santander Buys Portugal’s Banif for $163m Amid Resolution: Acquisition is chairman Ana Botin’s first since taking over last year
- Germany Nov. PPI -2.5% y/y vs survey -2.4%
- Netherlands Nov. housing price index +3.8% y/y
FX markets have seen a relatively subdued start to the week, with touted light volumes due to Christmas seeing relatively limited price action. However the European session has seen the USD move higher gradually, with EUR and GBP paring their modest overnight gains against the greenback. BoE's Weale said that further downward pressure on inflation and a 'pause' in wage growth means there is less urgency for the BoE to raise rates. UK interest rates could stay low for even longer because of David Cameron's referendum timetable, economists have warned. The in-out referendum looks likely to be held in June or September — close to when the BoE, is expected to start raising rates.
Fed's Powell (voter, hawk) stated that the Fed rate lift-off should be seen as a vote of confidence in the economy and that gradual small hikes would be the correct action to take, but also added a return to zero is possible if conditions change. Fed's Williams (voter, hawk) said that every meeting is live in regards to a possible rate increase and that he expects 4 further hikes in 2016 which is inline with what Fed members forecast. Fed's Lacker (voter, hawk) stated that public thinking should be that a rate increase could occur at any meeting and that he is in favour of decreasing the Fed's balance sheet ASAP.
In commodities, Brent continued to see weakness in early European trade, however now trades off 11 year lows reached overnight and has been gradually grinding higher towards the North American crossover . WTI has also continued its recent trend of weakness however is currently trading off recently-reached 6 year lows. Gold trades higher (USD + 6.20) amid no new fundamental news following last weeks Fed hike in line with a relatively flat USD Index (+0.10%). Elsewhere, copper prices held Friday's highs amid prospects of further output cuts from Chinese smelters, while Dalian iron ore futures rallied around 4% alongside a continued recovery in steel prices.
There is no tier 1 data scheduled for release today ASIA
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Top Global News
- Spain Uncertainty Looms as Rajoy Has First Shot at Governing: PM Mariano Rajoy’s People’s Party lost 1/3 of its seats while still beating out Socialists to take most votes, earning first shot at forging a govt
- Panasonic to Pay $1.5b for U.S. Fridge Maker Hussmann: Co. buying U.S.-based maker of refrigeration systems to bolster housing operations, move further away from consumer electronics
- Nomura Said to Seek Stake in American Century for $1b: Nomura plans to pay ~$1b for stake of ~40% in U.S. money manager American Century Investments, according to people familiar
- Shire to Offer GBP8b Cash in Baxalta Bid: Sunday Times: As much as 40% of offer may be cash after little progress made on all-share bid made 5 months ago
- Goldman Fund Said Buying $750m of Debt for Petco Takeover: Fund agreeing to buy bonds that will help finance deal for Petco Animal Supplies by CVC Capital, Canada Pension Plan Investment Board, according to a person familiar.
- ‘Star Wars’ collected $238m in U.S. and Canadian ticket sales, topping $208.8m hauled in by Universal Studios’ “Jurassic World” in June, market researcher Rentrak says
- Brent Oil Slides to 11-Yr Low as Producers Seen Worsening Glut: Futures fell as much as 2.2% in London after a 2.8% drop last week.
- Amazon Said to Mull Leasing Planes to Control Delivery Chain: Co. considering leasing 20 Boeing Co. 767 freighter jets to help gain more control over delivery methods, costs, according to a person familiar.
- China Loses Another Economic Indicator as Minxin Suspends PMI: Publishers of China Minxin PMI said they will stop updating that gauge to make “major adjustment” to their calculations
- FIFA Panel Bans Blatter, Platini From Soccer for 8 Years: Blatter was fined CHF50,000, Platini fine CHF80,000, adjudicatory chamber of FIFA’s Ethics Committee said earlier
Bulletin Headline Summary from Bloomberg and RanSquawk
- The week has kicked off with much of the focus in Europe on the Spanish elections and, as such, has seen notable underperformance in Spanish asset classes
- FX markets have seen a relatively subdued start to the week, with touted light volumes in the run up to Christmas
- No tier 1 data scheduled for release today
- Treasuries little changed, curve flattens in quiet trading, as Christmas holiday and year-end approaches; Brent crude tumbled to lowest level in 11 years while Spanish bonds slid after an indecisive election.
- Spanish voters rewarded the anti-austerity Podemos and the liberal Ciudadanos party, who between them took 109 seats in the 350-member parliament, no clear governing majority emerged
- Germany said too early for Merkel for call Rajoy as standard practice is to congratulate election victors after new government is in place and that’s not the case yet in Spain, German government spokeswoman Christiane Wirtz said
- China’s leaders intend to boost the deficit and make monetary policy more “flexible,” according to a statement from a meeting of top economic policy makers, in a sign the government is preparing more stimulus
- Publishers of the China Minxin PMI said they will stop updating the gauge to make a "major adjustment’’ to their calculations, dealing a second setback in recent months to investors looking for an early read on the economy
- The offshore yuan climbed for a second day, after the PBOC raised its fixing for the onshore currency for the first time in two weeks
- Sovereign 10Y bond yields higher. Asian stocks mostly higher, European stocks and U.S. equity-index futures gain. Crude oil lower, gold and copper gain
US Event Calendar
- 8:30am: Chicago Fed Nat Activity Index, Nov., est. 0.2 (prior -0.04)
- 11:00am: U.S. to announce plans for auction of 4W bills
- 11:30am: U.S. to sell $28b 3M bills, $26b 6M bills
DB's Jim Reid concludes the overnight and weekend event wrap
As our in-house expert Marco Stringa pointed out in his overnight note, the Spanish general election confirmed the end of the PP-PSOE political duopoly at national level. But the main surprise was the extent of the underperformance of liberal-reformist Citizens relative to opinion polls. This changes the post-election scenarios – a centre-right coalition cannot reach a majority – and injects even greater political uncertainty. This is unlikely to be a positive development for markets. Overall the main risk remains political impasse due to the unprecedentedly fragmented parliament. Even if a new government is formed the DB economics team here doubt it would last the full legislature. The note provides a timetable and the mechanics of government formation. Avoiding chronic politically uncertainty will become increasingly important.
Asian markets are a bit of a mixed bag this morning with the Nikkei (-3.1%) largely following the US lead on Friday but equities in Greater China generally doing better. Japanese markets are weaker in response to some confusing signaling from the BoJ on Friday after initial hope it would herald in fresh easing. The BoJ issued a statement saying it would start buying longer dated JGBs and would buy an additional JPY300bn of equities a year however Kuroda later said that these changes were no more than a technicality and does not represent additional easing.
Back to China, the Shanghai Composite (+1.4%) and Hang Seng (+0.27%) are up on the day as we type. The Shanghai Composite is up at a 3 week high led by property developers and consumer related stocks. It is an old theme but SOE reforms in China seem to be a renewed focus overnight. Asian credit spreads are weak with the iTraxx index 3bp wider on the day and IG corporate cash spreads also modestly wider across the board.
Recapping Friday’s session briefly now. The fall in US equities coincided what was again another bad day for commodities. Brent and WTI were down -0.49% and -0.63%, respectively. For the record the pair are down by another -1.44% and -0.58% overnight as we go to print. Brent is now trading at an 11-year low for the first time this cycle. The decline in S&P 500 on Friday was pretty broad based with all ten major sector groups finishing the day in the red. Losses were led by Financials (-2.5%), IT (-2.0%) and Consumer staples (-1.8%). Credit spreads also drifted wider with CDX IG and HY index +1bp and +6bp wider, respectively.
Looking at this week’s holiday shortened calendar now. Of note in the European session this morning will be the latest German PPI and Euro area consumer confidence data. In the US this afternoon the November Chicago Fed national activity index reading is the sole release there. Turning to Tuesday the early interest out of Asia will be China’s conference board leading economic index for November. In the UK we’ll get the latest public sector net borrowing data out of the UK along with German and UK consumer confidence data. In the US the main interest will be on the third reading for Q3 GDP (expected to be revised down to +1.9% from +2.1%), while also expected are existing home sales for November and the December Richmond Fed manufacturing activity print. Wednesday kicks off in Japan with the BoJ minutes from the November meeting. In France we get the final Q3 GDP print and consumer spending report. We’ll also see the third Q3 GDP read for the UK. In the US the main focus will be on the preliminary November prints for durable and capital goods orders (both expected to weaken) while the November PCE core and deflator readings will also be important to watch out for as well as personal income and spending. November new home sales data is also due along with the final December University of Michigan consumer sentiment print. There’s no data of note in Asia or Europe on Thursday, while initial jobless claims are expected in the US. We close the week on Friday with a bumper set of data in Japan including CPI, the jobless rate, PPI, leading index and housing starts.