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Spain Rebounds, Pound Tumbles In Quiet Session Ahead Of ECB Minutes, Fed Speakers

Global markets came off record highs, trading subdued, with US index futures unchanged as traders are unwilling to make major moves ahead of today's ECB minutes and tomorrow’s NFP release, and before speeches by central bankers including SF Fed President John Williams and the potential next Fed chair Jerome Powell, as well as ECB executive board members Peter Praet and Benoit Coeure. 

There was a modest relief rally in Spain, where the main IBEX 30 stock index traded up close to 1%, with banks across the region seeing some bullish performance as participants continue to guess whether or not Catalonia will declare independence next week as Economy Minister Luis de Guindos poured cold water on Catalonia’s bid for independence. A well-received Spanish bond auction, the first since the referendum and which saw the highest 10-year bid-to-cover ratio since February, added to the optimism. Other auctions out of France and the UK were well digested across markets. The Spanish-German spread posted its first tightening this month.

Asian stocks were mixed after a four-day rally, with markets in Hong Kong, China and South Korea all closed for holidays. The Topix dropped -0.1% with the Nikkei 225 little changed. The MSCI Asia Pacific Index was little changed at 162.93. On Wednesday, the S&P 500 Index posted a slight gain, still ending at a fresh record, after data showed American services industries climbed at the fastest pace in 12 years, while private jobs numbers met expectations. Japan’s Topix index dropped for the first time in three days, led by insurers and transportation companies. Qantas Airways Ltd. closed at the highest level in almost 10 years in Sydney after Goldman upgraded the stock. Other markets: Australia’s S&P/ASX 200 Index was little changed, and New Zealand’s NZX 50 up +0.3%. Straits Times Index +0.8%, Philippines PSEi Index -0.6%, Malaysia’s FTSE KLCI Index -0.1%, Jakarta Composite Index -0.8%, Thailand’s SET Index +0.3%. India’s S&P Sensex Index +0.1%, Nifty 50 little changed

European bourses traded subdued, with outperformance in the IBEX 30, recovering from the losses seen yesterday. The Spanish stock index trades up close to 1%, with banks across the region seeing some bullish performance as participants continue to guess whether or not Catalonia will declare independence next week. A rangebound tone is the theme across the remainder of European indices, as utilities outperform, evident of the lack of risk trade. In Spain, the prospect of secession has increased pressure on Prime Minister Mariano Rajoy while rattling markets. His next move could involve suspending the regional government and implementing direct rule from Madrid. Emerging-market stocks are showing signs of shrugging off declines from last month that were triggered by concern a stronger dollar would hurt developing nations’ currencies.

“The focus is of course upon the situation in Spain and Catalonia,” Dennis Gartman, editor of the Gartman Letter, wrote in his daily emailed report. “Although Catalonia’s Parliamentary President, Mr. Puigdemont, has not yet officially called for an independent Catalan nation, he may do so early next week, at which time 1.17 shall almost certainly be given” for the euro.

The Bloomberg Dollar Spot Index was little changed while Treasuries and stock futures were stuck in tight ranges as traders stayed on the sidelines before a series of U.S. data and speeches by four Fed members including Chair candidate Jerome Powell. The pound and Aussie led G-10 losses while the euro struggled to rise a third day before ECB publishes the account of its September meeting. Currency-market volumes remain muted, with liquidity being described as below average.

GBP has seen the majority of early price action, where sterling saw a 0.6% drop vs. the dollar. Concerns about PM May’s tenure crept into markets overnight and through the morning, following the UK press reports from The Telegraph and The Times. However, Downing Street later came out and said this was not an issue for discussion. Cable could look towards pre hawkish Carney levels around 1.3150.

AUD saw the majority of volatility overnight, as Australian retailers were hit by the worst sales decline in over four years. August’s retail sales came in at -0.6% (M/M) leading to sharp selling pressure in the Australian dollar. AUD lost ground against both its major counterparts yet still consolidates inside current trading ranges, AUD/USD’s 2016 high continues to behave as support for the pair, with AUD/NZD not wanting to look toward 1.09.

Looking ahead, highlights include ECB Minutes, US Trade Balance, Weekly Jobs, Factory orders and a slew of central bank speakers.

Market Snapshot

  • S&P 500 futures up 0.02% to 2,536.75
  • VIX Index down 1.7%, ending 2-day advance
  • STOXX Europe 600 down 0.1% to 389.84
  • MXAP up 0.05% to 162.93
  • MXAPJ up 0.1% to 537.54
  • Nikkei up 0.01% to 20,628.56
  • Topix down 0.1% to 1,682.49
  • Hang Seng Index up 0.7% to 28,379.18
  • Shanghai Composite up 0.3% to 3,348.94
  • Sensex up 0.1% to 31,702.87
  • Australia S&P/ASX 200 down 0.01% to 5,651.77
  • Kospi up 0.9% to 2,394.47
  • German 10Y yield rose 0.6 bps to 0.459%
  • Euro up 0.09% to $1.1770
  • Brent Futures up 0.6% to $56.13/bbl
  • Gold spot up 0.1% to $1,276.57
  • U.S. Dollar Index up 0.01% to 93.47
  • Italian 10Y yield rose 2.9 bps to 1.901%
  • Spanish 10Y yield unchanged at 1.785%

Top Overnight News

  • Crisis in Spain: Spanish Economy Minister Luis de Guindos ruled out any sort of mediated talks with separatist leaders and said Catalan banks have signaled they may move out of the region if the push for independence continues
  • Saudi King Salman bin Abdulaziz is beginning an historic first visit to Russia by a monarch of the Gulf kingdom as he seeks an understanding with President Vladimir Putin to extend an agreement curbing oil supplies
  • Saudi Aramco isn’t talking with any Russian companies about possible participation in its initial public offering, the head of the state oil producer said
  • Brevan Howard Asset Management LLP’s flagship hedge fund lost 0.9% in September, the sixth monthly decline this year, according to an investor letter seen by Bloomberg News. The Master Fund, which managed $6.8 billion at the end of August, was down 4.6 percent through September
  • Foreign buying of South African bonds rose to a six-month high in September, suggesting that the highest yields among emerging markets are proving irresistible despite political and economic risks
  • Ex-HSBC trader says boss ordered him to ‘ramp’ up the price of the pound, according to a recorded phone call that prosecutors say is real-time talk from a front-running scheme run by then HSBC’s head of foreign exchange cash trading in Europe
  • House and Senate Republicans will take their first concrete steps toward enacting planned tax cuts by advancing budget resolutions for fiscal 2018, lawmakers see more fights ahead on tax details
  • Saudi King Salman bin Abdulaziz is due to meet Russian President Vladimir Putin in Moscow to discuss the extension of an oil pact, to talk oil pact on ‘epochal’ Russia visit
  • Trump’s Short List for Fed Chair Features These Hawks and Doves
  • GOP Budget Kicks Off Effort on Tax Cuts. Now Comes the Hard Part
  • Spain’s de Guindos Says Catalonia’s Independence Push Is Doomed
  • Amazon Is Said to Test Own Delivery Service to Rival FedEx, UPS
  • Sempra Revises $9.45 Billion Oncor Deal to Win Over Texas
  • John Catsimatidis Mulls Buying Fairway Market: New York Post
  • Deckers Could Double With Asset Sales, Recapitalization: Marcato
  • Oil Trades Near $50 as U.S. Export Surge Revives Glut Concerns

Asia equity markets traded range-bound amid relatively light news flow and market closures in the region. Furthermore, the mundane tone precedes Friday’s key risk US jobs data and followed a similarly quiet US session where the major indices just about eked fresh record levels. ASX 200 (-0.1%) was kept afloat by strength in mining names and Nikkei 225 (+0.01%) traded indecisive alongside a slightly  choppy currency, while the absence of markets in China, Hong Kong and South Korea ensured price moves in the region were contained. 10yr JGBs were quiet overnight, but still edged minimal gains amid an indecisive tone in Japan, while 10yr inflation-indexed auction also failed to drive prices with the b/c and lowest accepted prices slightly below the prior results.

Top Asian News

  • Bond Bulls Relish India as Best Story Post September Selloff
  • Mastercard to Invest $750m-$800m in India in Next 4 Years: Banga
  • McDonald’s Japan Posts 22nd Cons. Monthly Same-Store Sales Rise
  • Japan’s Topix Dips as Technicals Signal Stocks May Be Overbought
  • Pimco Sees Chance Singapore’s MAS Surprises by Tightening
  • Amazon Opening Pop-Up Liquor Bar in Tokyo’s Ginza District

European bourses trade subdued, with outperformance in the IBEX 30, recovering from the losses seen yesterday. The Spanish stock index trades up close to 1%, with banks across the region seeing some bullish performance as participants continue to guess whether or not Catalonia will declare independence next week. A rangebound tone is the theme across the remainder of European indices, as utilities outperform, evident of the lack of risk trade. Much anticipation across asset classes today will be on the ECB meeting minutes, alongside a slew of upcoming Central Bank speech.  Auctions come out of Spain, France and the UK, with Spain’s auction being relatively well digested across markets. The Spanish 10y trades at 1.76% following the auction, helping a marginal lift across Europe, with both Bund and Gilt seeing a recent bid. Elsewhere, the French supply was comfortably digested, providing little in the way of fireworks while UK drew an impressive b/c of 2.36.

Top European News

  • Guindos Says Catalan Independence Would Be Illegal
  • First Spain Bond Auction After Vote to Test Investor Appetite
  • Siemens Exits Lighting With $1.4 Billion Sale of Osram Stake
  • WPP Escalates Takeover Battle Over Japanese Ad Agency ADK
  • Ex-HSBC Trader Says Boss Ordered Him to ‘Ramp’ Up Price of Pound
  • Airbus Defence & Space Is Said to Freeze Capex: Reuters
  • Deripaska’s En+ Group Plans Biggest Russian IPO Since 2013
  • Milan IPOs Booming as Investors Hunt for Made-in-Italy Assets

In currencies, morning trade has been slow, with many investors awaiting tomorrows NFP and today’s ECB minutes. GBP has seen the majority of early price action, where sterling saw a 0.6% drop vs. the dollar. Concerns about PM May’s tenure crept into markets overnight and through the morning, following the UK press reports from The Telegraph and The Times. However, Downing Street later came out and said this was not an issue for discussion. Cable could look towards pre hawkish Carney levels around 1.3150. EUR/USD was range-bound through Asian trade, consolidating between 1.1750 – 1.1760. Subdued trade is likely to continue through the early European hours, as anticipation is likely to lie on the upcoming ECB meeting minutes later in the session. With EUR 4bln worth of option expiries due tomorrow, volatility could be due in EUR/USD, with the 1.1750 – 1.1780 range to behave as immediate resistance. Monday’s EUR/USD low continues to behave as support, with a break of these levels set to see a push toward the 50% Fibonacci ahead of 1.16. AUD saw the majority of volatility overnight, as Australian retailers were hit by the worst sales decline in over four years. August’s retail sales came in at -0.6% (M/M) leading to sharp selling pressure in the Australian dollar. AUD lost ground against both its major counterparts yet still consolidates inside current trading ranges, AUD/USD’s 2016 high continues to behave as support for the pair, with AUD/NZD not wanting to look toward 1.09.

In commodities, an early bid has been seen in oil markets, as oil traders focus on today’s dialog between Saudi and Russia which remains optimistic regarding oil market stability. This also comes in the context of yesterday’s comments from Russian President Putin, stating that a deal between OPEC and rival oil producers to reduce production could be extended to the end of 2018. Precious metals have followed Asian trade, seeing largely sideward price action throughout European trade. Risk fears have dampened across markets, with October’s trade struggling to find any real direction, with many likely awaiting the aforementioned ECB minutes and Central Bank speech.

Looking at the day ahead, it’s quite a busy day for central bank speakers, including the potential next Fed governor (Powell). There will be a range of data including: August factory orders (1% expected), the trade balance, final reading of durable and capital goods along with the weekly initial jobless claims and continuing claims. Onto other events, the ECB will publish the September meeting minutes. Following on, the ECB’s Praet and Coeure chair a panel in Frankfurt and the ECB’s governing council members Liikanen and Jazbec will speak. In the UK, BOE’s MaCafferty speaks in London and Chief economist Haldane will speak on “Central banks engagement with society”. Over in the US, there will be four Fed speakers, including: Jerome Powell, John Williams, Patrick Harker, and Esther George, although none are scheduled to speak directly on monetary policy.

US Event Calendar

  • 7:30am: Challenger Job Cuts YoY, prior 5.1%
  • 8:30am: Initial Jobless Claims, est. 265,000, prior 272,000; Continuing Claims, est. 1.95m, prior 1.93m
  • 8:30am: Trade Balance, est. $42.7b deficit, prior $43.7b deficit
  • 9:10am: Fed’s Powell Speaks on Treasury Markets and the TMPG
  • 9:15am: Fed’s Williams Speaks at Community Banking Conference
  • 9:45am: Bloomberg Consumer Comfort, prior 51.6
  • 10am: Factory Orders, est. 1.0%, prior -3.3%; Factory Orders Ex Trans, prior 0.5%
  • 10am: Durable Goods Orders, est. 1.7%, prior 1.7%; Durables Ex Transportation, prior 0.2%
  • 10am: Cap Goods Orders Nondef Ex Air, prior 0.9%; Cap Goods Ship Nondef Ex Air, prior 0.7%
  • 10am: Fed’s Harker Speaks at Workforce Conference
  • 4:30pm: Fed’s George Speaks at Workforce Conference

DB's Jim Reid concludes the overnight wrap

Hello from a sweltering Phoenix. Back in wet autumnal London in time for tomorrow’s EMR. I had a FaceTime conversation with my exhausted wife yesterday and I don’t think she appreciated seeing blue  skies and evidence of a golf course in the distance on the screen. On escaping the madness at home I actually had time to read the paper yesterday and it’s a fascinating snap shot of modern life that  there was a story suggesting that songwriters are now packing everything into the first 30 seconds of modern songs to ensure that the listeners aren't bored enough to press skip. Apparently the first 30 seconds of the most globally downloaded song of the year “Despacito” is basically an executive summary of the whole song. As well as the short attention span it’s also because Spotify only pays artists if songs are streamed for longer than around 30 seconds.

So in order to keep your attention (if it’s not been lost already) here is what you need to know today in as few words as possible. “S&P new record, Spanish assets slump, core bond yields down then up (US ISM 12yr high), UK PM May has bad cold, spluttered, faced a stage invasion and suffered bits falling off the stage for her big speech, Tillerson staying, hurricanes weakened ADP, Puerto Rico debt plunges with ECB minutes and US durables due today".

If like me you're rather partial to slow long intros hopefully you'll read on. Indeed one wonders whether in the current era of instant gratification epic slow intro songs like “Where the streets have no name”, “Hotel California”, “Billie Jean”, “Money for nothing”, “Bat out of hell”, “One” (Metallica), “Shine on you crazy diamond”, “The year of the cat”, “Layla”, “Superstition” or “Paradise City” would get made!! If anyone has a candidate for a global smash with a long intro in recent years I'd love to hear it as I can't think of one. So after donning my 'Slash' wig we'll start the long version of the EMR.

Despite global politics doing its best to shake things up, it still feels like there is not much stopping risk appetite at the moment as the S&P 500 notched up yet another record high last night having edged up +0.12% to close up for the 7th successive session. That is the longest run since May 17 and it’s worth highlighting that going back to September 11th, the index has now risen 15 times in 18 sessions. The index has already jumped to a +0.73% head start in October and as we noted in our Macro Bites on Tuesday, should October be a positive return month then we will have entered new ground with 10 consecutive positive total return months to start a year - the first time in at least 90 years. Markets appeared to get a bit of a boost from the news that Secretary of State Rex Tillerson is to continue in his role, while also quashing any concerns about him ever considering leaving. Prior to this, in Europe the Stoxx 600 finally snapped its long run of gains (9 days) after falling -0.08%, although in fairness that closing move hid a larger drop midway through the day. Meanwhile it was another roundabout day of moves for bonds, but Treasuries last night ending flat even with decent data, while in Europe as you’ll see shortly it was another day of underperformance for Spanish assets.

This morning in Asia, markets are mixed but little changed (ASX 200 +0.16%; Nikkei -0.07%) as we type, but most other markets (Chinese bourses, Hang Seng and Kospi) are closed today. Elsewhere, the US and South Korea have agreed to amend their free-trade deal, but have provided no details on what has changed.

As noted above, it was another day of big moves for Spanish assets. The IBEX closed -2.85% last night, led by real estate (-4.60%) and financials. Taking a step back, the index is now down -4.01% in the last 3 sessions and now at the lowest level since March 17. The 10y Spanish bond yields also jumped 5.6bp yesterday and is now 16bp higher this week and to the highest since March 21st. The Spain-Bund spread is also out to 132bp (widest in 5 months). The moves appeared to reflect the King’s comments on Tuesday night, while last night Catalan President Carlos Puigdemont delivered a live TV address in which he gave a somewhat mixed message, albeit marginally  conciliatory. He did not directly mention the declaration of independence, but said “we’ll show our best face in coming days when our institutions apply the results of the referendum”. Further, he is open to a remediation process with the Spanish government. That said, the government responded later on, noting if Puigdemont wants to negotiate “he knows perfectly what he has to do beforehand”.

The political turmoil and subsequent sell-off for Spanish assets is in stark contrast to the latest data in the country though. Following a bumper September manufacturing PMI print on Monday, the Spanish services PMI yesterday came in at a much better than expected 56.7 (vs. 55.5) which marked an increase of 0.7pts from August. That left the composite at 56.4 and up 1.1pts from the month prior. Meanwhile the Euro area services PMI was revised up 0.2pts to 55.8, which is the highest since May. At the country level, there was no change for Germany (55.6) and a small 0.1pt decline for France (57.0). However, the biggest disappointment was Italy which printed at a well below consensus 53.2 (vs. 55.0 expected). The UK (53.6 vs. 53.2) was ever so slightly above market. It’s worth highlighting that our European economists noted yesterday following the data, the PMIs present upside risk relative to their +0.6 qoq GDP forecast for the Euro area, most of all in Spain. However its worth also caveating that the survey data was a bit too optimistic for GDP in H1 and also that the hard retail sales data were particularly soft yesterday (-0.5% mom vs. +0.3% expected).

Spain isn't the only Government suffering at the moment although its woes pale into insignificance with that of Puerto Rico. After returning from his trip to the US territory, President Trump went onto “The Sean Hannity show” and suggested that the government’s debt should be wiped clean to help the island to recover from Hurricane Maria. He said “we are going to work something out….you know they owe a lot of money to your friends on Wall Street. We’re gonna have to wipe that out”. Notably, the Puerto Rico government had filed for bankruptcy protection back in May and has c$74bln of municipal debt. Following his comments, the benchmark 2035 bond fell from 44c/$ to as low as 30c/ $ intraday, before recovering to 38c/$ after Trump’s Budget director Mick Mulvaney said we should not take Mr Trump’s comments too literally. Further, Governor Ricardo Rossello also prefers to resolve its debt via bankruptcy, noting “as far as the comments made about wiping the debt clean, that is  the opinion of the president. Puerto Rico is already involved on a judicial front”.

Staying in the Americas, the main focus data-wise in the US was the September ADP employment change reading which came in bang on the money at 135k. It is the lowest reading since October 2016, however obviously reflects the impact from the two hurricanes last month. It’s worth noting that the details revealed that small business hiring was -7k which compares to a 3-month trailing average of  49k in August. As a read through, the 3-month rolling average for non-farm payrolls is 185k so the current 80k consensus for NFP on Friday might appear a little conservative based on these numbers. With regards to the other US data yesterday, the ISM non-manufacturing print also turned a few heads yesterday after surging to 59.8 (vs. 55.5 expected) from 55.3 in August. That is the highest since August 2005. The employment component also nudged higher (56.8 from 56.2) which also perhaps lowers expectations of a big downward miss for NFP on Friday.

Back to the latest political developments. In Manchester yesterday the Conservative Party Conference concluded with PM Theresa May’s speech. It might be better remembered though for a number of disruptions – some of which were funnier than others - including a prankster handing May a P45 form (given to those who lose their jobs in the UK), the PM battling coughing bouts,and also falling slogan letters on the sign behind her. As someone that gives a lot of speeches I couldn’t help feel for her yesterday. The crux of the speech focused on May’s strong defence of free market capitalism and also her pledge to put a cap on energy prices (a little contradictory) – with a bill due to be published next week - and a pledge to build more social housing. With regards to Brexit, PM May didn’t add much new at all, instead reassuring the audience that a deal will be met that works for the UK and Europe.

Quickly recapping other market performance yesterday. Core bond yields were little changed (UST 10y flat; Bunds -0.8bp), but Gilts (+2.6bp) and Italy (+3bp) underperformed. Currencies were broadly flat, with the US dollar index softening 0.12%, while the Euro (+0.13%) and Sterling (+0.08%) marginally strengthened versus the Greenback. Elsewhere, precious metals were little changed (Gold+0.25%;  Silver -0.31%), but LME base metals (Zinc +1.16%; Aluminium +1.64%; Copper +0.02%) were modestly higher.

Moving along, Russia’s Putin spoke at the Russian energy conference and praised Mr Trump as a strong character but noted he has “zero personal relationship” with him. On North Korea, Putin noted both sides should “lower the rhetoric”, otherwise it could lead to a “very dangerous dead end”. Elsewhere he said Russia is open to extending the oil production agreement with OPEC through 2018, although it seems to have had little impact as WTI oil dipped 0.87% yesterday to $49.98/bbl (first time below $50 in two weeks). This compares to the acceptable pricing level ($55-$60) as noted by OPEC Secretary-General Barkindo yesterday.

Away from the markets, the Fed’s Fischer who leaves office this month noted “I still believe we’ll have higher inflation”, while conceding that we may have to wait “longer than you expected to wait”, but “if it’s a very basic force, namely increasing employment, increasing wages, (then inflation) will show up”. Over in Japan, with two weeks to go before the election on 22 October, polls are suggesting Tokyo Governor Koike’s new party of Hope is unlikely to win, but there are mixed messages as to the potential hit she could inflict on PM Abe. According to the Kyodo news poll on late Sunday, c15% of respondents were planning to vote for her party, but another poll by NHK on Monday found only 5% would vote for her, although c40% of respondents remained on the sidelines and said they didn’t support any party.

Looking at the day ahead, it’s quite a busy day for central bank speakers, including the potential next Fed governor (Powell). Firstly, on the data front, the Markit retail PMIs across Europe and Germany’s construction PMI will be due. Over in the US, there will be a range of data including: August factory orders (1% expected), the trade balance, final reading of durable and capital goods along with the weekly initial jobless claims and continuing claims. Onto other events, the ECB will publish the September meeting minutes. Following on, the ECB’s Praet and Coeure chair a panel in Frankfurt and the ECB’s governing council members Liikanen and Jazbec will speak. In the UK, BOE’s MaCafferty speaks in London and Chief economist Haldane will speak on “Central banks engagement with society”. Over in the US, there will be four Fed speakers, including: Jerome Powell, John Williams, Patrick Harker, and Esther George, although none are scheduled to speak directly on monetary policy.