Quad-witching Friday has arrived, which means that alongside thin, pre-holiday liquidity and a jumpy market, we expect to see sharp, volatile moves for the rest of the day, the first of which was just noted in Europe, where stocks moved from session lows to highs in the span of minutes, in the process sending the Euro Stoxx 50 index 0.8% higher and turning it positive on the year as it reached its highest level since December 2015. The broader Stoxx 600 remains still down 1.8% on the year. Of Europe's indices, the IBEX, FTSE MIB, SMI are still down; while the FTSE 100, CAC 40 are up on the year and the German DAX just hit 2016 highs.
The dollar's post-Federal Reserve rally steadied on Friday and European shares traded near 11-month highs. Having soared yesterday to its highest level in 14 years, following the Fed's hawkish announcement, the dollar’s advance stalled as the dust settled on a new financial-market landscape created by the Federal Reserve’s shift to a tighter policy path. The greenback fell against the euro after touching the highest since 2003 on Thursday. The dollar index stood at 103.000 after hitting a 14-year high of 103.560 on Thursday, when it gained 1.2 percent to record its biggest daily percentage gain in nearly six months.
The yield on 10-year Treasuries dropped from the highest since 2014, snapping a six-day streak higher underpinned by the Fed’s more hawkish outlook for interest-rate increases next year. Gold trimmed its sixth weekly decline, and copper fell.
The relatively muted moves - so far - mark a step back after a dramatic week in which the U.S. central bank unveiled its outlook for an accelerated series of rate increases in 2017. That steeper path comes as Donald Trump prepares to unveil what the market expects will be a huge fiscal stimulus, that may fuel fast growth and inflation in the world’s biggest economy. Volumes are expected to thin in coming weeks as traders close positions before the December holiday season and end of the year.
“Today’s move is a minor correction,” said Lutz Karpowitz, a senior currency strategist at Commerzbank AG in Frankfurt. “We could easily head a bit lower until the end of the year, but all the arguments are on the dollar’s side. Interest rate expectations in the U.S. show the Fed has regained most of its credibility and the market is now convinced there will be an aggressive rate-hiking cycle.”
Asian stocks were tepid, with MSCI's broadest index of Asia-Pacific shares outside Japan down 0.1 percent, after falling 1.8 percent on Thursday. Japanese shares rose 0.7% after scaling a one-year peak on the export prospects from a weaker yen. World stocks as measured by the MSCI world equity index, which tracks shares in 46 countries, were up 0.1 percent.
Cited by Reuters, analysts and traders said that the European stock market's outlook remained broadly positive in the medium term, with major stock indexes seen setting fresh highs. "Stocks are continuing to get a boost from a weaker euro and the notion that the United States, the world's largest economy, will experience an uptick in growth once President-elect (Donald) Trump has started implementing his new policies," Markus Huber, trader at City of London Markets, said.
European infrastructure and commodities firms have been in demand on expectations that Trump's pledge to heavily invest in infrastructure projects would boost the sectors. European shares steadied in morning dealings, but were heading for a second straight week of gains, with the prospect of more mergers and acquisitions underpinning sentiment.
Actelion Ltd. jumped 9.5 percent, after people with knowledge of the matter said Sanofi is in talks to acquire the Swiss drugmaker. Rentokil Initial Plc rose 6.9 percent after forming a joint venture with Franz Haniel & Cie. for its workwear and hygiene businesses in central and eastern Europe.
In rates, yields on 10-year Treasury notes fell four basis points at 2.56 percent. The yield was still set for its steepest weekly increase in a month, and touched the highest level since September 2014 on Thursday. German’s 10-year yield fell six basis points to 0.31 percent, while that on two-year notes dropped to a record low as the European collateral shortage continues.
As previewed before, the expiration of futures and options on stocks and indexes Friday, known as quad-witching, may add to stock volatility and trading volume in European markets.
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Market Snapshot
- S&P 500 futures up 0.1% to 2261
- Dow futures up 0.1% to 19,836
- Stoxx Europe 600 up 0.2% to 359.3
- MSCI Asia Pacific up 0.3% to 136.01
- MSCI Asia Pacific up 0.2% to 136
- Nikkei 225 up 0.7% to 19401
- Hang Seng down 0.2% to 22021
- Shanghai Composite up 0.2% to 3123
- S&P/ASX 200 down 0.1% to 5533
- US 10Yr yield down 3 bps to 2.56%
- Dollar index down 0.2% to 102.82
- WTI oil futures down 0.6% to $50.58/bbl
- Gold spot up 0.5% to $1134.4/oz
Top Global News
- JPMorgan Draws IRS Whistle-Blower Complaint Over Pension Funds: Ex-employee says bank owes penalty for shirking fiduciary duty
- Republican Tax Reform Seen Shrinking U.S. Corporate Bond Market: Loss of interest tax deduction may damp debt financing
- Priceline Group Appoints 16-Year Company Veteran as New CEO: Glenn Fogel ran M&A, strategic planning for the travel giant
- Best-Performing Commodity’s Slump Seen Stalled by Cyclones: Contract prices rose to record $330/ton in 2011 after floods
- The Dow has recorded the biggest five- week jump to greet any new president since 1900
- Sanofi said to be in advanced talks to acquire Actelion in a deal for the Swiss drugmaker that could be announced as soon as next week
- Merck wins record $2.5b hepatitis C patent verdict against Gilead
- Issuance of CLOs in Europe next year may exceed this year’s record post-crisis volumes
- Oracle posted second-quarter sales that missed some analysts’ estimates following a steep decline in new software licenses
- Actavis faces fines for raising the cost of hydrocortisone tablets by more than 12,000 percent
- Paschi received regulatory approval to extend a debt-for- equity swap and avoid a state rescue
- Allianz, Europe’s largest insurer, said in talks with Generali as it weighs a bid for its French operations
Looking at regional markets, Asian stocks were mixed as the region failed to take the impetus from a positive US close, where financials were supported in the wake of the FOMC. ASX 200 (-0.1%) was dampened by weakness across commodity-related sectors, while Nikkei 225 (+0.7%) outperformed as exporters cheered USD/JPY's advance to 118.00. Hang Seng (-0.3%) and Shanghai Comp. (+0.2%) traded choppy as higher US rates and a weaker CNY fanned outflow concerns, although downside pressure was counterbalanced after the PBoC returned to a net weekly injection in its open market operations and conducted MLF operations. 10yr JGBs tracked losses in T-notes, with the 10yr Japanese yield rising closer towards 0.1% to print its highest since January. Furthermore, the amount of the BoJ's bond buying operation for today was rather uninspiring and there were also source reports that suggested the BoJ's focus next year may not be about whether to ease more, but on possibly raising its yield target.PBoC injected CNY 105bIn 7-day reverse repos, CNY 35b1n in 14-day reverse repos and CNY 40bIn in 28-day reverse repos, for a net weekly injection of CNY 250b1n vs. previous drain of CNY 535b1n last week. The PBoC set the mid-point at 6.9508 (Prey. 6.9289). PBoC conducted its Medium-term Lending Facility with a value of CNY 207b1n for 6-months and CNY 187b1n for 12-months.
In Europe, it has been a quiet Friday trade very apparent this morning. Equities trade flat this morning, with perhaps a few traders still recovering from their Christmas parties in a so far subdued session. On a sector specific breakdown, energy is the only sector trading in the green albeit modestly so, while Actelion have soared this morning after source reports suggested Sanofi are said to be in advanced talks to buy the Co., with a price of USD 275/shr currently being discussed. Also of note for equity traders, today sees quadruple witching. Fixed income markets have seen a grinding higher throughout the session so far, with bunds seeing a more bullish rebound than their US counterparts after the significant fall seen over the past few weeks. Despite the quiet morning, volatility may pick up throughout the session, with speakers in the form of ECB's Constancio and Fed's Lacker, as well as quadruple witching in equity markets.
Top European Stories
- Italy’s Monte Paschi Playbook Avoids EU Law’s Sick Bank Plan: Italy grappling with issues posed by individuals owning bonds
- Allianz Said to Consider Bid for Generali’s French Business: Generali unit would add over 11 billion euros in premiums
- Actavis Targeted by U.K. for Raising Drug Price by 12,000%: Company broke competition law by raising prices, CMA says
In currencies, the dollar slipped 0.4 percent to $1.0459 per euro as of 10:30 a.m. in London. It reached $1.0367 on Thursday, its strongest level since January 2003. The yen gained 0.2 percent to 117.99 per dollar, set for a slump in the week of 2.3 percent, its sixth straight weekly drop. The USD/JPY continue to reside at elevated levels, trading on a 118 handle at the moment, while despite all the talk of parity in EUFt/USD, the pair reside back above 1.0400 once again despite the brief break below seen yesterday. As is the case with other asset classes, price action has been particularly muted with traders beginning to wind down for the festive break.
Top Asian News
- China Plans Prudent, Neutral Monetary Policy as Growth Steadies: Preventing and controlling financial risk to avoid asset bubbles will be a priority, according to Xinhua News Agency
- Putin, Abe Agree to Develop Islands Disputed Since World War II: Officials to start detailed negotiations on the terms and format for economic cooperation on the islands
- China Growth Estimates Up as Leaders Mull 2017 Economic Plan: Economists raised 1Q growth estimates to 6.6% percent from 6.5% percent a month earlier, according to a Bloomberg survey
- China’s Finance Ministry Falls Short of Target at Bill Auction: First failure in 18 months comes amid bond market tumble
- Ex-BSI Banker Seah Gets Jail for Forgery Tied to 1MDB Case: Yvonne Seah Yew Foong convicted of forgery offenses, not reporting suspicious acts
In commodities, West Texas Intermediate crude fell 0.5 percent to $50.63, and gold for immediate delivery gained 0.5 percent to $1,134.45 an ounce. Copper headed for the biggest weekly drop since August after stockpiles tracked by the London Metal Exchange jumped the most since 1970 in the period. Gold remains in focus, with the yellow metal higher today after the significant softness seen yesterday, while energy related newsflow remains modest — with price action similarly trading in a tight range, with WTI futures around USD 51/bbl and Brent futures at USD 54/bbl.
Looking at the day ahead, in what is otherwise a very quiet end to the week for data the highlight will likely be the final November CPI revisions for the Euro area this morning. Aside from that we’ve also got trade data for the Euro area due along with the latest confidence indicators in France and CBI trends orders data in the UK. In the US the November housing starts and building permits data will be out where starts in particular are expected to decline following the surge in October. Away from the data the Fed’s Lacker is scheduled to speak this evening while the ECB’s Weidmann and Constancio speak this morning.
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US Event Calendar
- 8:30am: Housing Starts, Nov., est. 1.230m (prior 1.323m)
- 12:30pm: Fed’s Lacker speaks in Charlotte, N.C.
- 1pm: Baker Hughes rig count
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DB's Jim Reid concludes the overnight wrap with his final note of 2016 before heading out to the French Alps.
The last 48 hours having given us more confidence in our core view for 2017 of higher rates volatility with some large spikes up in yield likely ahead. While risk assets to a large degree reversed the post-FOMC weakness (S&P 500 +0.39%), 10y Treasury yields traded in an intraday high to low range of nearly 8bps, touching a high of 2.639% and a low of 2.564% before closing more or less in the middle at 2.597% and +2.6bps higher on the day. That takes the post-FOMC move to nearly +17bps higher in yield while there was a similar level of volatility at the short-end of the curve before 2y yields eventually settled little changed by the end of play at 1.275%.
Meanwhile, some focus has also turned back to emerging markets after another huge surge for the Greenback which saw the USD index close up +1.33% yesterday (and +2.20% post FOMC now). The MSCI EM index closed -1.62% following a -0.51% decline on Wednesday while the MSCI EM Currencies index was down -0.89% in yesterday’s session. It’s one market certainly worth keeping an eye on into year end.
Aside from that the other focus yesterday was the BoE policy meeting and US inflation data. Both ended up being a fairly non-event though. The BoE left current policy measures on hold although the interesting take away from the statement was the acknowledgement from the MPC that ‘the sterling exchange rate had appreciated and this would by itself point to less of an overshoot in inflation relative to the target in the medium term, though month-to-month volatility was to be expected as market participants’ view on the UK’s future relationship with the EU continued to evolve’. Meanwhile, headline CPI in the US printed bang on the money at +0.2% mom which helped to nudge up the YoY rate to +1.7% from +1.6%. The core also came in at +0.2% mom although the 2.1% yoy rate was left unchanged.
This morning in Asia it’s been a fairly quiet end to the week for markets. Bourses are generally flat to slightly firmer. The Nikkei (+0.56%), Hang Seng (+0.09%) and Kospi (+0.24%) are amongst those higher while markets in China and Australia are relatively unchanged. Sovereign bond markets are also fairly flat although 10y JGB yields did at one stage touch 0.10% which is the highest since January. One of the other big themes for 2017 is whether the BoJ's yield cap will be tested by the market. Meanwhile credit indices, at the margin, are slightly tighter in the region. As you might expect given these moves, it’s been a quiet morning for newsflow.
Moving on. With regards to the remainder of the data in the US yesterday, the latest manufacturing indicators were all generally supportive. The Philly Fed manufacturing index revealed a bumper 13.9pt rise to 21.5 (vs. 9.1 expected) in December which puts it at the highest level since 2014 while the Empire manufacturing reading rose 7.5pts to 9.0 (vs. 4.0 expected). The flash manufacturing PMI also printed at 54.2 which was a bit lower than expected but still up from the 54.1 reading last month. Elsewhere, initial jobless claims were reported as declining 4k to 254k last week while the latest NAHB housing market index print revealed a bumper 7pt rise to 70 (vs. 63 expected) which is the highest since July 2005. The prospect of the Trump presidency then clearly sending building sentiment through the roof.
Elsewhere we also got the December flash PMI’s in Europe. The composite reading for the Euro area came in unchanged at 53.9 for the month although the details were a bit more interesting with a decline in the services component (-0.7pts to 53.1) offset by an increase in the manufacturing reading (+1.2pts to 54.9). Regionally we saw a mild dip in Germany’s composite to 54.8 (from 55.0) although France did rise to 52.8 (from 51.4). Our European economists noted that the data implied an average decline of 0.6pts in the composite PMI’s of the periphery and that the data also point to GDP growth for the Euro area of just over +0.4% qoq in Q4.
Before we move onto today’s calendar, it’s worth noting that last night we got the announcement that Fed Chair Yellen will speak next Monday on the “state of the job market”. So that’s one final date for your diaries before the holiday season really rolls in.
Looking at the day ahead, in what is otherwise a very quiet end to the week for data the highlight will likely be the final November CPI revisions for the Euro area this morning. Aside from that we’ve also got trade data for the Euro area due along with the latest confidence indicators in France and CBI trends orders data in the UK. This afternoon in the US the November housing starts and building permits data will be out where starts in particular are expected to decline following the surge in October. Away from the data the Fed’s Lacker is scheduled to speak this evening while the ECB’s Weidmann and Constancio speak this morning.