Yesterday's brief hiccup in what has been an otherwise relentless rally in global risk assets is all but forgotten this morning, as European and Asian stocks, and US equity futures, all rise in quiet trading ahead of tomorrow's FOMC meeting, with the Dow set to make a 16th consecutive post-election all time high.
Global shares rose on Tuesday, helped by gains in banks after Italy's largest lender unveiled a €13 billion euro share issue, while the dollar held steady before a Federal Reserve meeting expected to deliver higher interest rates. European bourses have been led higher this morning by consumer discretionary names after China reported a better than expected retail sales report. Meanwhile, focus has also been on Italy's largest bank, UniCredit, which announced a share sale plan of €13bn and to cut 14,000 jobs. UniCredit launched Italy's biggest share issue to clean up its balance sheet and boost profitability in the latest move to strengthen the Italian banking sector, which has been a major concern clouding the outlook for European stocks.
Meanwhile in the US, ongoing hopes for fiscal easing in the U.S. will drive growth, despite a report that the GOP may in fact block Trump's proposed tax cuts, is pushing investors into the stock market, while bonds yields have been climbing amid bets on higher U.S. interest rates. With the market assigning 100 percent odds to a Fed rate hike Wednesday, investors are focusing on the path for 2017, and see a two-in-three chance of additional tightening by June.
Aside from the well-known Trumpflation rally, markets are focused on the two-day Fed meeting which starts today and which is certain to conclude with only the second rise in U.S. interest rates since the global financial crisis. While a hike of 25 basis points in the Fed's target range of 0.25-0.50 percent is priced in, investors will be examining the Fed's statement and economic forecasts for any signs of how the central bank thinks Trump's election has affected the outlook for growth and inflation.
"The big question is what sort of pace can we expect from the Fed for next year?" said Kaneo Ogino, director at foreign exchange research firm Global-info Co in Tokyo.
“The market has already priced in a 25-basis-point rate hike this time, so now the focus is on the outlook,” says Toshihiko Matsuno, a senior strategist at SMBC Friend Securities Co. in Tokyo. “There are many investors who haven’t been able to completely jump on the current rally, and they’ve been waiting for the market to dip.”
The looming Fed decision meant little changes to the FX landscape, with the dollar barely moving against a basket of major currencies. The euro fell 0.1 percent to $1.0624 and the yen fell 0.2 percent to 115.24 per dollar. Sterling, however, rose 0.2 percent to $1.27, buoyed by comments from finance minister Philip Hammond that Britain should have a transition period to smooth its exit from the European Union.
Global shares, as measured by MSCI's all-country world index, rose 0.1 percent but held below Monday's 16-month high, touched as crude oil prices surged after the Organization of the Petroleum Exporting Countries and non-OPEC producers reached their first deal since 2001 to reduce output.
In Asia, MSCI's broadest index of Asia-Pacific shares outside Japan edged up 0.1 percent, while Japan's Nikkei stock index shrugged off losses as the yen pulled off its highs and ended 0.5 percent higher, while Chinese shares reversed earlier declines amid strong economic data. “The market has already priced in a 25 basis point rate hike this time, so now the focus is on the outlook,” says Toshihiko Matsuno, a senior strategist at SMBC Friend Securities Co. in Tokyo. “There are many investors who haven’t been able to completely jump on the current rally, and they’ve been waiting for the market to dip.”
In Europe, the Stoxx Europe 600 Index was led by a 23% surge in Mediaset SpA after Vivendi SA said it may buy a 20% stake in the broadcaster. UniCredit was the second-biggest gainer with a 7.4% advance. The broader index rose 0.7 percent as of 9:52 a.m. London time, with trading volume 30 percent higher than the 30-day average at this time of day. Banca Monte dei Paschi di Siena SpA climbed after a European Union official said the lender may be eligible for a precautionary recapitalization if efforts to plug the private sector fail.
European Eco Data update:
- (GE) Nov. CPI EU Harmonised MoM 0.0%; est. 0.0%
- (GE) Nov. CPI EU Harmonised YoY 0.7%; est. 0.7%
- (SP) Nov. CPI EU Harmonised MoM 0.2%; est. 0.2%, prior 0.2%
- (SP) Nov. CPI EU Harmonised YoY 0.7%; est. 0.5%, prior 0.5%
- (SW) Nov. CPI MoM 0.0%; est. 0.0%, prior 0.3%
- (SW) Nov. CPI YoY 1.4%; est. 1.4%, prior 1.2%
- (IT) Oct. Industrial Production MoM 0.0%; est. 0.2%, prior -0.8%
- (IT) Oct. Industrial Production WDA YoY 1.3%; est. 1.45%, prior 1.8%
- (UK) Nov. CPI MoM 0.2%; est. 0.2%, prior 0.1%
- (UK) Nov. CPI YoY 1.2%; est. 1.1%, prior 0.9%
- (UK) Nov. CPI Core YoY 1.4%; est. 1.3%, prior 1.2%
- (GE) Dec. ZEW Survey Current Situation 63.5; est. 59, prior 58.8
- (GE) Dec. ZEW Survey Expectations 13.8, est. 14, prior 13.8
- (EC) Dec. ZEW Survey Expectations 18.1, prior 15.8
S&P 500 Index futures advanced 0.3 percent after the main gauge ended last week at a record.
Brent crude rose 0.7% on Tuesday to $56.09 a barrel but traded well below Monday's high of $57.89.
Over in rates, Italian bonds gained for a second day, with the yield on 10-year bonds falling six basis points to 1.93% while German equivalents fell 4 bps to 0.37%. US 10Y yields dipped 1 basis point to 2.46% . The securities ended Monday little changed after rising by as much as six basis points to touch 2.53%, their highest level since September 2014.
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Market Wrap
- S&P 500 futures up 0.3% to 2257
- Stoxx 600 up 0.7% to 356
- FTSE 100 up 0.2% to 6906
- DAX up 0.7% to 11267
- German 10Yr yield down 3bps to 0.37%
- Italian 10Yr yield down 7bps to 1.93%
- Spanish 10Yr yield down 2bps to 1.48%
- S&P GSCI Index up 0.5% to 398.3
- MSCI Asia Pacific up 0.3% to 138
- Nikkei 225 up 0.5% to 19251
- Hang Seng up less than 0.1% to 22447
- Shanghai Composite up less than 0.1% to 3155
- S&P/ASX 200 down 0.3% to 5545
- US 10-yr yield down 1bp to 2.46%
- Dollar Index unchanged at 101.03
- WTI Crude futures up 0.4% to $53.03
- Brent Futures up 0.7% to $56.09
- Gold spot down 0.3% to $1,159
- Silver spot down 0.2% to $17.04
Global Headlines
- Trump Choice of Tillerson as Secretary of State Sets Up Fight: President-elect plans to announce his pick on Tuesday morning, lawmakers have questioned Tillerson’s relationship with Putin; Trump Says No Deals While in Office; Sons Will Run Company
- UniCredit Plans $13.8 Billion Stock Sale to Bolster Capital: UniCredit plans loan sales, won’t pay a dividend for 2016
- Boeing Slows 777 Wide-Body Output, Boosts Dividend by 30%: Planemaker tells employees it will have to cut some jobs
- Asahi to Buy SABMiller’s European Beers in $7.8 Billion Deal: Brewer to acquire Europe brands such as Czech Pilsner Urquell
- OPEC Deal Will Create Oil-Supply Deficit in First Half, IEA Says: Stockpiles to shrink by 600,000 barrels a day as producers cut
- Disney, Fox Win Bid to Shut Sanitized Streaming Service: VidAngel strips movies of nudity, profanity, violence for $1
- Lilly to Sell Insulin at 40% Discount to Cash-Paying Diabetics: Blink Health adds Lilly’s insulin with cheap access on-line
- Morgan Stanley Favors Metals as Trump May Spur American Phoenix: Zinc, nickel and aluminum listed as the top picks over bulks
- Airbnb Said to Buy Back $94 Million in Stock From Morgan Stanley: Startup makes its first major share buyback from investor
In Asia, equity markets traded subdued following a lacklustre lead from the US, where S&P 500 and NASDAQ 100 closed negative despite another record Dow close, with participants tentative ahead of the looming FOMC. The lack of conviction seeped into Asia which resulted into subdued trade in the ASX 200 (-0.3%), while Nikkei 225 (+0.5%) was indecisive alongside a pullback in USD/JPY which fluctuated around 115.00. Hang Seng (-0.1%) and Shanghai Comp (+0.1%) initially extended on yesterday's declines despite better than expected Industrial Production and Retail Sales data, as property names were pressured by weaker sales, while money market rates continued to climb and the PBoC also kept its liquidity injections reserved. However, Chinese markets then recovered in late trade. 10yr JGBs traded lower amid the absence of the BoJ in the market under its bond buying program, with underperformance in the super long-end resulting to a steeper curve. Today's 5yr JGB auction also failed to support despite printing the highest bid/cover in 6-months, as the average and lowest accepted prices both declined.
Top Asian News
- Muddy Waters Targets Japan Firm as Shorts Hit Tokyo, Hong Kong: Carson Block’s firm targets precision-motor maker Nidec
- Modi Turns to Old Tricks as Cash Experiment Hurts India GDP: Increases expenditure on rural jobs program he’d once mocked
- Duterte Says Mines Chief Lopez May Not Get Nod Amid Crackdown: Lopez has led checkup in Philippines, largest nickel shipper
In Europe, bourses have been led higher this morning by consumer discretionary names after China reported a better than expected retail sales report. While focus has also been on Italy's largest bank, UniCredit, which announced a share sale plan of EUR 13bIn and to cut 14,000 jobs. Elsewhere, MediaSet rose 25% in the wake of Vivendi further increasing their stake in the Co., consequently leading to speculation that a hostile takeover is imminent. Across the fixed income space, peripheral bonds outperform core debt amid the improved risk sentiment with the Italian-German 10yr spread narrowing to 158bps amid optimism over Italy's troubled lenders recap plans. Additionally, a pullback in yields has also provided a lift in fixed income markets with the German 10yr yield breaking below 0.4%.
Top European News
- Mediaset Surges Most in 20 Years as Vivendi Acquires Stake: Initial 3 percent stake may rise to as much as 20 percent
- SAS to Cut 1,000 Jobs as Fuel, Competition to Hamper Earnings: Airline looks at setting up operations outside Nordic region
- UBM Agrees to Buy Rival Allworld Exhibitions for $485 Million: Acquisition gives UBM events in 11 countries
In currencies, the yen weakened by 0.3 percent to 115.32 per dollar, following Monday’s 0.3 percent climb. The euro was little changed at $1.0634. The Bloomberg Dollar Spot Index, a gauge of the greenback against 10 major peers, steadied after sinking 0.6 percent last session, its steepest drop since September.
In commodities, all asset classes are in consolidation mode ahead of the FOMC meeting and announcement tomorrow afternoon, with the impact on the USD influential on all commodities, though not least of all Oil and Gold. Ongoing losses in Gold have been largely off the back of continued record highs being posted the S&P and Dow, while OPEC coordination continues to bolster WTI and Brent, but with tighter moves of late. Base metals are also buoyed, but struggling for fresh upside as highlighted by Copper stalling around USD2.70 mark.
Looking at the day ahead, this morning in Europe we kicked off in Germany with the final revisions to the November CPI, which came in at 0.8% Y/Y as expected. We also got the Q3 employment data for the Euro area, which rose 0.2%, below the 0.3% expected. It’s pretty quiet in the US with the only data due being the NFIB small business optimism reading for last month (expected to tick up to 96.7 from 94.9) and the November import price index reading. Away from the data the ECB’s Hansson and Nowotny are both scheduled to speak this morning.
US Event Calendar
- 6am: NFIB Small Business Optimism, Nov at 98.4, est. 96.7 (prior 94.9)
- 8:30am: Import Price Index m/m, Nov., est. -0.4% (prior 0.5%)
- 8:55am: Redbook weekly sales
- 4:30pm: API weekly oil inventories
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DB's Jim Reid concludes the overnight wrap
With the recent Donald Trump victory, the oil price rally and with the ECB announcing tapering last week (the first cut is the hardest to paraphrase the song) it feels increasingly likely that we'll get periodic rates market shocks in 2017. This fits in with view of higher rates and credit volatility and ranges from our 2017 outlook (https://goo.gl/d4d24S) 3 weeks ago. Giving us even more confidence on this was our US rate strategists' major forecast changes over the past weekend. The head of the team, Dominic Konstam, has been a fellow paid up member of the secular stagnation camp and generally had a lower yield forecast than the street in recent years. However he's now at the higher end after the forecast changes. He now expects the US 10y to trade at 2.75% by YE2016 (i.e. in 2 weeks) and comfortably above 3% in 2017 (YE2017: 3.10%; 2017 Q2 peak of 3.6%). The rationale is that the market is quickly looking through the Fed to the new government administration and the scope for higher inflation to come before stronger real growth. The new administration’s policies could certainly drive this view as both the Trump plan and the original Ryan plan (as detailed in a “Better Way”) involve a huge expenditure switching effort to boost exports at the expense of imports whilst encouraging domestic production - this may boost growth substantially in the medium term but should be more inflationary in the short run. Furthermore they expect Ricardian equivalence to hold initially in many respects, which is why inflation remains more of a concern than real growth early on. Thus the strategists’ outlook is less a story about normalizing the real neutral Funds rate but more about shifting inflation expectations to become rich to the Fed’s target. The forecast revision also reflects the team’s view that the market needs a much better risk/reward profile for a Fed that might end up looking to be behind the curve – so this won’t be about raising the dots but rather about the markets possibly front running the dots.
With all that said, it seems appropriate then that the last 24 hours in markets has largely been characterised by rising oil prices and a subsequent leg up in bond yields. WTI closed +2.58% last night and just below $53/bbl following the non-OPEC agreement news from the weekend (and also the positive Saudi comments) although in fairness it did close well off the peak level of $54.51/bbl early in the Asia session before the focus turned towards possible higher US supply. Brent was also up +2.02% and above $55/bbl although again a fair distance off the $57.89/bbl high mark. Bond yields peaked as the European session opened. 10y Treasury yields broke through 2.500% at one stage and touched an intraday high in yield of 2.526% (which was nearly 6bps higher on the day) before giving most of that up as oil faded into the close to end the day up just 0.4bps at 2.471%, albeit the highest since June 2015. A weak 3y Treasury auction – which attracted the lowest demand since 2009 – didn’t seem to help although a subsequent 10y auction saw demand bounce back from the seven year low set last month.
Elsewhere in Europe 10y Bund yields edged up 3.3bps to 0.393% and are now back to the highs last seen back in January. It’s amazing to think that yields are now back to within 23bps from where we started the year. Meanwhile, although energy shares got an unsurprising boost from that move higher for oil, the Santa Claus rally for equity markets finally hit a bit of a road bump yesterday. The S&P 500 closed -0.11% with weakness across financials and consumer discretionary names dragging the index lower while in Europe the Stoxx 600 (-0.46%) declined for the first time since December 2nd. Credit markets were a bit more mixed (weak in the US but slightly firmer in Europe) although it was another decent day for Italian bank sub spreads. Indeed spreads across the 4 banks in the iTraxx sub-fins index were on average 6bps tighter. As expected new Italy PM, Paolo Gentiloni, confirmed that Padoan will remain in his current post as finance minister.
To the latest in Asia now where the November activity indicators in China have been released this morning. The data has largely come in in-line to slightly better than expected. Industrial production has risen one-tenth to +6.2% yoy (vs. +6.1% expected). Retail sales were up a bumper eight-tenths to +10.8% yoy (vs. 10.2% expected) and fixed asset investment remained unchanged at +8.3% yoy, matching the consensus. That retail sales reading is in fact the highest this year. Despite the supportive data, Chinese bourses have continued to track lower this morning. The Shanghai Comp is currently -0.15% as the focus seemingly remains on the crackdown on insurers’ equity investments that we highlighted yesterday, along with concerns about recent volatility in money market rates. Elsewhere, the Hang Seng (-0.31%) and ASX (-0.32%) have also dipped lower, with just the Nikkei (+0.29%) and Kospi (+0.16%) in positive territory. Meanwhile oil is little changed and sovereign bond markets are generally mixed.Moving on. While we're still a few months away from the start of ECB tapering, it was interesting that yesterday we saw the announcement of the lowest full week of CSPP purchases since the end of August. They confirmed holdings at 9th December of €49.906bn. This implies net purchases settled last week of €1.663bn or an average daily run rate of €333m. The average daily run rate since the program started is €384m. The numbers will no doubt naturally fall again over the next 3 weeks with the holiday nearly upon us.
Before we look at today’s calendar, UK Chancellor Philip Hammond also spoke yesterday and confirmed that there is an emerging view amongst both businesses, regulators and politicians that a longer transition period to manage Britain’s exit from the EU will be needed. Indeed Hammond said that ‘the further we go into this discussion, the more likely it is that we will mutually conclude that we need a longer period to deliver’. Those comments align somewhat with Carney last week who said that it was ‘absolutely desirable’ for companies to be given time to adjust and ‘to restructure after the deal is agreed with the EU’. Hammond’s softer comments yesterday helped Sterling (+0.85%) to outperform.
Looking at the day ahead, this morning in Europe we kick off in Germany where the final revisions to the November CPI report will be made. Later this morning we turn over to the UK where the November inflation data docket gets released. Market expectations are running at +0.2% mom for headline consumer prices. Thereafter we’ll get the Q3 employment data for the Euro area before the focus turns to Germany with the December ZEW survey due to be released. It’s pretty quiet across the pond again this afternoon with the only data due in the US being the NFIB small business optimism reading for last month (expected to tick up to 96.7 from 94.9) and the November import price index reading. Away from the data the ECB’s Hansson and Nowotny are both scheduled to speak this morning.