Yesterday we joked that with the US House of Representatives set to vote for the GOP tax bill on Tuesday, markets would "price in" the same tax legislation they have been pricing in every day for the past year, all over again...
Get ready for US markets to price in tax reform all over again in just a few short hours
— zerohedge (@zerohedge) December 19, 2017
... and sure enough, that's precisely the narrative being spun this morning to explain why US futures and global stocks are once again, drumroll, higher. To wit, from Bloomberg: "European stocks struggled to build on Monday’s jump as the common currency advanced, while U.S. equity futures edged higher as the prospects for tax cuts in the world’s largest economy continued to buoy sentiment." Of course, US equity futures have been doing that precisely that every single day for weeks and months on end, but now that Congressional passage finally appears imminent, it may finally be time to stop buying the endless rumor and sell the news. As a reminder, on Monday Republican Senator Susan Collins of Maine said she’ll back the GOP tax bill, a move that all but clinches the votes necessary to pass the legislation. Both the House and Senate plan to vote by Wednesday on final legislation before sending it to the president.
As markets grind toward the end of a stellar year for global stocks, the biggest focus for investors still chasing gains is the progress of U.S. tax reform, which is inching toward a denouement. The House is scheduled to vote Tuesday on the tax bill following a floor debate that morning. It then goes to the Senate, where Republican leaders intend to bring it up as soon as they get it. “It will help sustain a very strong year of earnings growth for U.S. and for global equities,” said Timothy Graf, State Street Bank & Trust head of macro strategy EMEA., speaking on Bloomberg TV. “It will keep sentiment robust.”
“The dollar is not excited about tax reform,” said Saxo Bank’s head of FX strategy John Hardy. “It could just year-end effects but maybe people are just weighing the negatives. Maybe it won’t boost growth that much... and maybe it is going to blow a hole in the fiscal deficit.”
Aside from the US, Europe's Stoxx 600 index was also modestly in the green near a six-week high "as U.S. lawmakers move closer to passing a tax overhaul legislation" and as gains for airline shares and retailers offset a decline in utilities. Britain’s FTSE and Germany’s DAX both edged 0.1-0.2 percent higher and though France’s CAC wobbled bond yields edged up and the euro and the pound made some ground in the FX market. Individual movers include Old Mutual (+4.2%) in the wake of offloading their UK wealth unit for USD 800mln as well as ongoing optimism following Ramaphosa’s appointment as head of the South African ANC; a nation which the company holds exposure to. Elsewhere, Dialog Semiconductors (+5.7%) have been supported by news that Tsinghua Unigroup have increased their holding in the Co. to 9%. The region’s core bonds declined.
In the latest Brexit developments, EU's Barnier said that the UK cannot have a special deal for the City. Barnier also stated the UK could not stop Brexit unilaterally and must follow all rules and regulations of the EU during the transition period, including new laws passed after the UK has left. The same article also reported that UK Brexit Secretary Davis is to warn the EU that it cannot cherry-pick during Brexit trade deal discussions and that services cannot be separated from goods.
Germany reported another stellar IFO print which however did not reach an all time high this time, and dipped modestly for the overall Business Climate read:
- German Ifo Business Climate (Dec) 117.2 vs. Exp. 117.5 (Prev. 117.5, Rev. 117.6)
- Ifo Current Conditions (Dec) 125.4 vs. Exp. 124.7 (Prev. 124.4, Rev. 124.5)
- Ifo Expectations (Dec) 109.5 vs. Exp. 110.7 (Prev. 111.0)
Earlier, the MSCI Asia Pacific Index climbs a second day, following a record close for the S&P 500 Index amid, what else, "growing certainty the U.S. tax bill will be passed." Benchmarks in Japan and South Korea falling as stocks in Sydney, Hong Kong and China climbed. Stocks rose in Hong Kong for a second day on Tuesday, as technology shares including Tencent Holdings Ltd. and AAC Technologies Holdings Inc. gained. Hang Seng (+0.9%) and Shanghai Comp. (+0.6%) conformed to the overall risk appetite which the PBoC also facilitated with its continued liquidity efforts. The Chinese central bank strengthened its daily reference rate by 0.1% and injected a net 20 billion yuan. The RBA showed increased confidence the economy will strengthen further next year; Prime Minister Malcolm Turnbull announced a new Cabinet team. Australian 10-year yields rise three basis points;
Australia's ASX 200 (+0.5%) traded positive as mining stocks remained firm on the back of recent gains in copper and iron ore, while upside in Nikkei 225 (Unch) was restricted after the prior day’s JPY strength and as several construction names underperformed after prosecutors conducted raids related to collusion in maglev train bids.
In global macro, the major currencies remained in all-too-familiar ranges, with the dollar under minimal pressure a second day on profit-taking rather than fresh positioning. The Bloomberg Dollar Spot Index slipped for a second day as investors took money off the table before the House and the Senate vote on the U.S. tax bill. The index has now given back all of its gains from Friday. Major currencies stayed within recent ranges, with only short-term investors actively participating and macro as well as real-money accounts sidelined as the holiday season approaches, according to traders in Europe and London. The dollar pares earlier losses seen at the start of the European session, reining in EUR/USD’s ascent above 1.1800. Sterling retreated as Brexit efforts rumbled on. The South Africa’s rand slipped after reaching its strongest level since March after Cyril Ramaphosa won the ruling African National Congress party’s leadership contest.
FX trading has been slow with volatility in the yen and Aussie slumping to three-year lows in thin pre-Christmas markets. Additioanlly, implied volatilities in the front-end of currency pairs dropped further, hitting fresh year-to-date lows, as central banks continued to soak up volatility.
Speaking of crashing FX vol, Bloomberg writes overnight that a measure of expected volatility in dollar-yen slid to the lowest in more than three years as trading volumes declined before year-end and accommodative central bank policies suppressed currency swings. Volatility in the pair dropped for the eighth time in nine days, while a measure of global foreign-exchange volatility slumped to the least since October 2014 on Monday. The dollar was little changed even after U.S. lawmakers moved closer to enacting tax cuts. New Zealand’s dollar rose as a report showed business confidence improved. “Central banks have killed FX vol after they compressed interest/equities earlier in the year,” said Simon Pianfetti, senior manager in the market solutions department at SMBC Trust Bank Ltd. in Tokyo. “Central banks have been more influential recently than in the past. Still, it’s very difficult to be long vol even at the current distress levels.”
Meanwhile, better volumes were observed behind the latest leg lower in Bunds and Gilts, which has pushed the 10 year EU debt futures to 163.07 and 125.39 respectively (-33 and -19 ticks from previous Eurex and Liffe settlements respectively). No obvious catalyst for the renewed selling interest, but the overall tone for core bonds is bearish amidst ongoing optimism about US tax reform proposals passing more stages of approval in time for President Trump to sign the bill before year end. Moreover, one of the arch ECB hawks, Hansson, has been speaking about potential QE guidance tweaking around the halfway stage of 2018 to signal another downscale, so bears maybe seizing on his comments.
WTI crude holds above $57/barrel; gold pulls back from day highs amid tight ranges while industrial metals extend losses in London trading. WTI and Brent crude futures have modestly extended their recovery from recent declines with WTI reclaiming USD 57/bbl. Energy newsflow remains light other than comments from an Ineos spokesman that repair options for the Forties pipeline are still being assessed with the timeline for repairs remaining at 2-4 weeks from Dec 11th. In metals markets, gold is marginally higher albeit off best-levels while copper saw mild profit taking overnight after recent advances and Chinese iron ore futures remain supported by demand from steel producers. Shell have reported flaring at their 404k bpd Pernis refinery in Rotterdam, related to a restart of units following maintenance. Of note, this is the largest refinery in Europe.
Bitcoin was 6% lower at $17,867 on the Coinbase exchange after roaring to a record above $19,000 overnight. A South Korean cryptocurrency exchange said on Tuesday it is shutting down and is filing for bankruptcy after it was hacked for the second time this year, highlighting concerns about the security around virtual currencies. The exchange, called Youbit, had been hacked once before in April when nearly 4,000 bitcoins were stolen in a cyber attack that the country’s spy agency linked to North Korea, according to a South Korean newspaper report on Saturday.
Bulletin Headline Summary
- European equities struggling to find any firm direction with newsflow fairly quiet
- Focus on house vote on tax reforms
- Looking ahead, highlights include, US Building Permit and Housing Starts and Fed’s Kashkari
Market Snapshot
- S&P 500 futures up 0.1% to 2,697.25
- VIX Index down 1.4% to 9.40
- STOXX Europe 600 up 0.2% to 393.32
- MSCI Asia Pacific up 0.2% to 171.98
- MSCI Asia Pacific ex Japan up 0.5% to 559.49
- Nikkei down 0.2% to 22,868.00
- Topix down 0.2% to 1,815.18
- Hang Seng Index up 0.7% to 29,253.66
- Shanghai Composite up 0.9% to 3,296.54
- Sensex up 0.6% to 33,813.25
- Australia S&P/ASX 200 up 0.5% to 6,071.79
- Kospi down 0.1% to 2,478.53
- German 10Y yield rose 0.3 bps to 0.312%
- Euro up 0.1% to $1.1798
- Brent Futures up 0.2% to $63.56/bbl
- Italian 10Y yield fell 1.0 bps to 1.537%
- Spanish 10Y yield fell 0.8 bps to 1.428%
- Brent Futures up 0.2% to $63.56/bbl
- Gold spot up 0.06% to $1,263.05
- U.S. Dollar Index down 0.07% to 93.63
Top Overnight News from Bloomberg
- Congressional Republicans kicked off the final leg of their six-week
legislative sprint to overhaul the U.S. tax code. The House is scheduled
to vote Tuesday on the tax bill and Senate leaders intend to bring the
measure up as soon as they get it - EU Chief Negotiator Michel Barnier stressed a hardline trade position, ruling out a special carve-out for the U.K. financial services industry, just as U.K. PM May’s key ministers were starting to unite behind a Brexit policy that may soothe rifts in her Cabinet
- More upheaval looks set to emerge as Spain heads into an election in the rebel region of Catalonia. While the aim was to halt separatists, it’s going to be tough to discern any real winner from Thursday’s vote following a campaign riddled with mutual suspicion and infighting
- German business confidence unexpectedly weakened in December, while remaining close to its record, in a sign of nerves over the outlook for Europe’s largest economy. The Ifo Institute’s gauge of business sentiment declined to 117.2 in December from a revised 117.6 the previous month
- This year’s real money investors’ shift into the euro from the dollar could remain in place, according to Bastien Drut, a strategist at Amundi Asset Management. Overall accommodative monetary policy stance should “keep investors’ risk appetites upbeat and favor the continuation of flows into European equities, thus offering the euro an additional tailwind”
- M&G Investments is still buying Italian debt, but hedging the risk of a political upset through credit default swaps, as it tries to capitalize from the improving euro-area economy while protecting investments from risk events
- Two of Australia’s largest asset managers are at odds about whether their nation’s currency will break below 70 U.S. cents.
- McDermott to Buy Chicago Bridge in $6 Billion Construction Deal
- NxStage Down; DealReporter Says FTC Eyeing Home-Care ‘Monopoly’
- Belgium’s Greenyard in Advanced Talks to Buy Dole Food
- Apple Replaces India Sales Chief as Business Sags
- Chrysler Diesel Cheating Case Dropped by 46 Truck Owners
- Time Investors Sue Over Proposed Acquisition by Meredith
Asia equity markets were mostly positive as the region followed suit from US, where all major indices extended on record highs and the Nasdaq briefly broke above 7,000 for the 1st time ever. The current Santa rally continued to be spurred by tax reform hopes, with the GOP now seen to have secured enough votes for passage after Republican Senators Lee and Collins jumped on board and declared to vote for the tax bill. ASX 200 (+0.5%) traded positive as mining stocks remained firm on the back of recent gains in copper and iron ore, while upside in Nikkei 225 (Unch) was restricted after the prior day’s JPY strength and as several construction names underperformed after prosecutors conducted raids related to collusion in maglev train bids. Hang Seng (+0.9%) and Shanghai Comp. (+0.6%) conformed to the overall risk appetite which the PBoC also facilitated with its continued liquidity efforts. Finally, 10yr JGBs were flat amid an indecisive risk tone in Japan and weaker demand in the enhanced liquidity auction for super-long JGBs, while participants were also tentative ahead to the BoJ 2-day policy meeting beginning tomorrow after reports the bank could succumb to pressure from dovish dissenter Kataoka and tweak its language. PBoC injected CNY 50bln via 7-day, CNY 30bln via 14-day and CNY 20bln via 28-day reverse repos. PBoC set CNY mid-point at 6.6098 (Prev. 6.6162).
Top Asian News
- HNA Units’ Bondholders Lack Protection From Parent’s Woes
- FountainVest, Ontario Teachers Invest in Gym Chain Pure
- Hong Kong Stocks Advance for Second Day as AAC, Tencent Climb
- Duterte Orders Auction of Remaining Telecom Frequencies
- Japan Approves Deployment of New Land-Based Missile Shield
European equities trade with little in the way of firm direction as markets continue to wind down for Christmas and macro newsflow remains light for the region. In terms of sector specific movers and shakers, energy and IT names are the only sectors in the red with moves particularly broad-based. Individual movers include Old Mutual (+4.2%) in the wake of offloading their UK wealth unit for USD 800mln as well as ongoing optimism following Ramaphosa’s appointment as head of the South African ANC; a nation which the company holds exposure to. Elsewhere, Dialog Semiconductors (+5.7%) have been supported by news that Tsinghua Unigroup have increased their holding in the Co. to 9%.
Top European News
- Expect More European Bank M&A, Citi Says; Lists Possible Targets
- Dialog Semi Climbs as Tsinghua Raises Stake to 9%
- U.K.’s Love for Coffee Shows No Sign of Ending as Cafes Grow
Better volumes behind the latest leg lower in Bunds and Gilts, which has pushed the 10 year EU debt futures to 163.07 and 125.39 respectively (-33 and -19 ticks from previous Eurex and Liffe settlements respectively). No obvious catalyst for the renewed selling interest, but the overall tone for core bonds is bearish amidst ongoing optimism about US tax reform proposals passing more stages of approval in time for President Trump to sign the bill before year end. Moreover, one of the arch ECB hawks, Hansson, has been speaking about potential QE guidance tweaking around the halfway stage of 2018 to signal another downscale, so bears maybe seizing on his comments.
In FX, the DXY continues to hover just above 93.500, and nearer recent range lows despite firmer US Treasuries yields and broadly risk-on sentiment ahead of the House vote on tax reforms. EUR has seen very little adverse reaction to Germany’s latest Ifo survey showing sub-forecast prints in 2 of the 3 components, though Eur/Usd is testing bids/support at 1.1800 again, and a near 900 mn option expiry at 1.1775 could come into play if the big figure fails to hold. AUD and NZD are just keeping ahead of their G10 peers and close to highs vs the Greenback, around 0.7675 and 0.7000 respectively. GBP and JPY both a tad softer vs the USD, with Cable unable to maintain ground above 1.3400 amidst ongoing Brexit trade deal bartering (EU and UK both maintaining tough lines on preferences for terms), and USD/JPY in even tighter bounds within the mid-112.00 area where a decent near 900 mn expiry resides (112.50).
In commodities, WTI and Brent crude futures have modestly extended their recovery from recent declines with WTI reclaiming USD 57/bbl. Energy newsflow remains light other than comments from an Ineos spokesman that repair options for the Forties pipeline are still being assessed with the timeline for repairs remaining at 2-4 weeks from Dec 11th. In metals markets, gold is marginally higher albeit off best-levels while copper saw mild profit taking overnight after recent advances and Chinese iron ore futures remain supported by demand from steel producers.Shell have reported flaring at their 404k bpd Pernis refinery in Rotterdam, related to a restart of units following maintenance. Of note, this is the largest refinery in Europe.
Looking at the day ahead, politics is likely to be the main focus with a potential US House vote on the tax legislation and UK PM Theresa May due to sit down with her Cabinet to hash out further Brexit details. The data calendar is fairly light with November housing starts and building permits data in the US due.
US Event Calendar
- 8:30am: Housing Starts, est. 1.25m, prior 1.29m; MoM, est. -3.1%, prior 13.7%
- 8:30am: Building Permits, est. 1.27m, prior 1.3m; MoM, est. -3.5%, prior 5.9%
- 8:30am: Current Account Balance, est. $116.2b deficit, prior $123.1b deficit
DB's Jim Reid concludes the overnight wrap
Thankfully it’s likely to be quieter in markets, with yesterday seeing a wind down in activity even if markets were very strong after the US tax reform boost on Friday. On that, US equities all rose to fresh highs (S&P +0.54%; Dow +0.57%) and the Nasdaq broke through 7,000 intraday before finishing at 6,994.8 (+0.84%). The improved prospects of tax reforms lifted most sectors in the S&P, with gains led by mining, telcos and financial stocks while utilities fell 1.16%. European markets rebounded and played a bit of catch up with all bourses closing higher. The Stoxx 600 was up the most (+1.15%) since July, with all sectors in the green and gains led by real estate, mining and tech stocks. Across the region, the DAX jumped 1.59%, the CAC rose 1.33% while the FTSE was the relative laggard, up 0.62%.
Back onto US tax reforms, Republican Senator Collins has now committed to a yes vote, leaving only one undecided Senator (Mr Flake of Arizona). Her support likely provides enough votes for the passage of the bill through the Senate. Looking ahead, the full House will vote on the tax bill today, with a Senate vote potentially as early as tomorrow.
Staying in the US, in President Trump’s official national strategy document, he did not single out China as a strategic competitor, instead the tone was more conciliatory where he noted that China seeks “to challenge American influence, values and wealth” and alluded to unfair trade practices. This morning in Asia, markets are trading modestly higher. The Hang Seng and China’s CSI 300 are both up c0.9%, while Nikkei (-0.15%) and Kospi (-0.11%) are slightly down as we type.
Now briefly recapping other markets performance from yesterday. Core European bond yields were little changed (Bunds 10y +0.7bp; Gilts -0.4bp) while UST 10y rose 3.9bp after the tax developments. Turning to currencies, the US dollar index weakened 0.25%, while the Euro and Sterling gained 0.27% and 0.45% respectively, with the latter partly supported by PM May’s comments over a desire for a bespoke trade deal after Brexit. Over in South Africa, the ZARUSD rallied 2.76% after Cyril Ramaphosa was elected the head of the ruling party, potentially putting him in line to succeed Jacob Zuma as President.
In commodities, WTI oil was broadly flat while precious metals rose c0.4%. Elsewhere, key LME metals all traded higher (Copper +1.37%; Zinc +0.56%, Nickel +3.81%), while Iron ore jumped 3.7% as China’s anti-pollution drive continued to tightened the supply of higher grade ore.
Away from the markets now and onto central bankers speak. The Fed’s Kashkari, one of the dissenters on the December rate hike, reiterated his dovish views. He noted “the yield curve has flattened significantly, potentially signalling an increasing risk of a recession” and that the Fed “should not increase rates further until we are much more confident that inflation is returning to our target”. Further he added, the 2% inflation should be treated as “a ceiling, not a target”. On tax reforms, he has now incorporated it into his economic forecasts, but the expected impacts on supply and demand “do not appear large enough to change my expected path for monetary policy”.
The Fed’s Williams noted the Fed is likely to hike rates three times in 2018 and two to three times in 2019. Elsewhere, the ECB’s Liikanen noted the strong economic recovery across Europe and reduction in economic slack supports confidence that “inflation will converge towards target in due course”, but an “ample degree” of monetary stimulus is still required. On QE, he noted asset purchases can continue ‘after September 2018” if inflation does not appear to be accelerating.
Back onto Bitcoins. Following the French Finance Minister Le Maire’s calls for joint regulation of Bitcoins yesterday, Germany’s Finance Ministry seems to support the idea too, noting “it makes sense to discuss the speculative risks of virtual currencies and their impact on financial system at international level”. Elsewhere, German’s Merkel wants coalition talks with the SPD to conclude by the middle of January and formal negotiations to take place “very quickly”, in part not to interfere with the ambitious timetable for reforming the EU.
Finally, the latest ECB holdings were released yesterday. Net CSPP purchases last week were €1.2bn and Net PSPP purchases €13.5bn. This left the CSPP/PSPP ratio at 8.8% last week (9.6% over last 4 weeks vs. 11.5% before QE was trimmed in April 2017). The reduced CSPP/PSSP ratio partly reflects the seasonal lull and likely noise in these numbers during December. Note that purchases will end this Thursday and restart back up from January. Overall, we still think the ECB will likely keep CSPP relatively unscathed as part of the taper process as the new year starts.
Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the December NAHB Housing Market Index was well above market at 74 (vs. 70 expected) – the highest since 1999. The NAHB’s Chief Economist noted he expects continued growth in single-family home construction in 2018, supported by low unemployment, favourable demographics and a tight supply of existing home inventory. Over in Europe, the final reading for the Euro area’s core November CPI was unrevised at 0.9% yoy (1.5% yoy for headline).
Elsewhere, the UK’s December CBI trends total orders was above market at 17 (vs. 15 expected) and remaining at last month’s 29 year high. In Asia, the BoJ’s 4Q Tankan survey indicated firms continue to expect inflation to remain below the BoJ’s target for the foreseeable future. Firms’ average inflation expectation for the year-ahead was 0.8% yoy (+0.1ppt from previous), but firms’ expectation for the 3 and 5-year-ahead horizon was unchanged at 1.1% yoy. Over in China, NBS reported that new home prices rose in 50 of 70 cities in November. According to Reuters, the average movement across all cities was an increase of 0.3% mom (vs. 0.3% previous), although annual inflation slowed to 5.1% yoy (vs. 5.4% previous).
Looking at the day ahead, politics is likely to be the main focus with a potential US House vote on the tax legislation and UK PM Theresa May due to sit down with her Cabinet to hash out further Brexit details. The data calendar is fairly light with the December IFO survey in Germany, Q3 labour costs for the Euro area and November housing starts and building permits data in the US due. The ECB’sHansson is also due to speak.