Spanish stocks and the euro fell, while Spanish government bond yields hit their highest levels in over a month after Catalan secessionists delivered an unexpected blow to the government of Spanish PM Rajoy by winning the Catalan regional election. Meanwhile across the Atlantic, U.S. equity futures and the dollar rose on the last trading session before the Christmas holiday. The MSCI index of world stocks was flat.
Europe's Stoxx 600 Index traded sideways as Spain’s Ibex 35 underperformed, dropping as much as 1.6%. Spanish stocks dominated Europe's biggest fallers, confirming analyst expectations that any shake-out from the Catalonia vote would be mostly confined to Spain. Spain's bonds also fell along with peripheral European government debt, though bunds were little changed after a selloff this week drove yields to five-week highs. For those who missed it, Catalan separatist parties triumphed in regional elections, outperforming some polls and reigniting Spain’s political trauma. While the Euro has stabilized since, it suffered a mini flash crash in the illiquid aftermath of the Catalan election news, momentarily dipping to $1.1817 before trimming losses to last stand at $1.1853, down 0.2 percent.
“This is Groundhog Day, we have been here,” said Christopher Peel, chief investment officer at Tavistock Wealth. “I just don’t think the Spanish government can do anything other than come to the table now.” He added that thin liquidity due to the holidays could be accentuating what he called a kneejerk reaction on the IBEX. “Likely there’s some hedge funds leaning on it, but in terms of long-only money I don’t think there will be much movement now.”
The result also battered Spanish stocks, with Spain's IBEX falling as much as 1.1% as European bourses opened. Financial stocks were the biggest drag on stock indices across the region, with the euro zone banks index falling 0.8 percent. Investor concerns about the country were a distraction from economic data, with reports on consumer spending, wholesale prices and gross domestic product from France and the Netherlands underscoring the region’s health. Elsewhere in Europe the chaos was contained as Germany’s DAX edged down 0.1 percent, in line with France’s CAC 40.
Putting the move in context, Spanish stocks were Europe’s best-performing benchmark for much of the year, before October’s independence referendum sent the IBEX tumbling. It was last 9 percent down from its May peak.
Earlier, equities in Asia closed the week largely in the green, with Japan’s Topix Index reaching its highest level since 1991. Asia rejoiced to the news that Congress passed the stop-gap measure which would avert a shutdown and keep the government funded through to January 19th. Australia's ASX 200 (+0.2%) was higher as energy stocks tracked the outperformance seen in their US counterparts, while Nikkei 225 (+0.2%) was tepid as flows into the JPY restricted upside for equities. Elsewhere, Hang Seng (+0.7%) was positive and Shanghai Comp. (+0.1%) traded somewhat indecisive after the PBoC refrained from open market operations, which still resulted to a net liquidity injection of CNY 200bln for the week. Finally, 10yr JGBs were sideways amid a lack of drivers and an indecisive risk tone in Japan, while an uneventful enhanced liquidity auction for 10yr-30yr JGBs also kept price action tame. PBoC refrained from open markets operations today, for a weekly net injection of CNY 200bln vs. last week's CNY
Although Treasuries stabilized, they were set for the biggest weekly loss since September as investors contemplate prospects for continued growth and reduced central bank stimulus.
In addition to the fireworks in Spain, in the US, the House voted 231 vs.188 and Senate voted 66 vs. 32 to pass the stop-gap funding bill to keep government funded through to January 19th. Elsewhere, US Federal Judge dismissed lawsuit against President Trump regarding foreign payments to Trump-owned businesses, US President Trump's Deputy Chief of Staff Rick Dearborn and White House Economic Advisor Katz are said to resign, according to reports. Additionally, CNBC reported that Larry Lindsey is being considered for role of Fed Vice Chair and he is also said to be interested in exploring the job.
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The Bloomberg Dollar Spot Index edged higher and Treasuries steadied before a spate of U.S. economic data including the Fed’s preferred measure of inflation. The euro slipped after Spain’s pro-independence parties prevailed in the Catalan vote, but the currency was still on track for its first weekly advance against the greenback since November.
“As liquidity on the markets is likely to be quite thin already, surprisingly strong data might provide some decent support for USD into the year-end,” write analysts at Commerzbank, including Antje Praefcke, referring to Friday’s U.S. inflation data. "Inflation has remained weak despite a strengthening economy and labor market so until this puzzle is solved for the market, strong USD appreciation is unlikely.”
The DXY continues to languish below 93.500 after another brief knee-jerk above as Congress approved a further stop-gap funding extension. In truth, very little deviation in Usd/major pairs with the Index confined to a tight 93.555-340 range, though again the downside looks more attractive unless Friday’s data gives the Greenback a boost (PCE and durables the picks of a packed agenda). For GBP, UK GDP data has given Sterling some additional impetus with Q3 y/y growth was upgraded to 1.7% from 1.5% in the final release).
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Just as dramatic as the Spanish fireworks was the overnight crash in Bitcoin and the cryptocurrency space. Bitcoin fell as much as 21%, briefly sliding below $13,000 on Friday, last trading at $13,885. Bitcoin, which was at about $1,000 at the start of the year, had climbed to a record high of $19,666 on Sunday. But it has fallen each day since then, with losses accelerating on Friday. It fell to as low as $12,560 on Bitstamp. At 0700 ET it was trading at around $14,000 and was heading for its worst day in more than three months. The plunge resulted in bitcoin's worst week since April 2013, down about a third.
Other cryptocurrencies also tumbled, with bitcoin cash crashing 31 percent and ethereum losing 20 percent over the past 24 hours, according to coinmarketcap.com.
As Bloomberg notes, the losses represent a major test for the cryptocurrency industry and the blockchain technology that underpins it, which have rapidly entered the mainstream in recent weeks. Bears cast doubt on the value of the virtual assets, with UBS Group AG this week calling bitcoin the “biggest speculative bubble in history.” Bulls argue the technology is a game changer for the world of investment and finance. Both will be closely watching the outcome of the current selloff.
“The sharks are beginning to circle here, and the futures markets may give them a venue to strike,” said Ross Norman, chief executive officer of London-based bullion dealer Sharps Pixley Ltd., which offers gold in exchange for bitcoin. “Bitcoin’s been heavily driven by retail investors, but there’ll be some aggressive funds looking for the right opportunity to hammer this thing lower.”
Worse, traders who bought the currency on futures exchanges using collateral may start facing margin calls following the price decline. Two venues launched products in recent weeks that required hefty security, with Cboe needing 44 percent to clear contracts, and the CME 47 percent. “There’s no doubt people who got in on margin will face some pressure here,” Norman said by phone from London. “The volumes weren’t huge, so it won’t be a major price driver, but for those caught on the wrong side it will hurt.”
In commodities, U.S. crude futures CLc1 slipped 0.5 percent to $58.07 per barrel, an earlier rise losing steam as traders sold to adjust positions ahead of the year-end. [O/R]The contracts had reached a nine-day peak of $58.38 overnight as OPEC started working on plans for an exit strategy from its deal to cut crude supplies, fuelling hopes it would not end supply cuts abruptly. Brent was down 0.3 percent at $64.72 a barrel after closing Thursday at $64.90 a barrel, its highest since June 2015. The broader rise in commodities this week -- copper on the London Metal Exchange reached a two-month high on Thursday -- lifted the Australian dollar to $0.7718 AUD=D4, its highest since Nov. 2.
U.S. data Friday on spending, prices and capital-goods orders will provide further clues about the robustness of the world’s biggest economy.
Bulletin Headline Summary from RanSquawk
- US House voted 231 vs.188 and Senate voted 66 vs. 32 to pass the stop-gap funding bill to keep government funded through to January 19th
- The positive sentiment in the Asian session has failed to inspire European bourses with participants reacting to the fallout of the Catalonian elections
- Looking ahead, highlights include UK GDP, US Durables, PCE, Personal Income, Uni. Of Michigan (F)
Market Snapshot
- E-Mini futures on S&P 500 up 0.1%
- E-Mini futures on Dow Jones up 0.1%
- E-Mini futures on Nasdaq 100 up 0.1%
- VIX Index down 2.7% to 9.36
- U.S. Dollar Index up 0.08% to 93.35
- STOXX Europe 600 down 0.06% to 390.46
- MSCI Asia Pacific up 0.6% to 172.53
- MSCI Asia Pacific ex Japan up 0.7% to 562.35
- Nikkei up 0.2% to 22,902.76
- Topix up 0.4% to 1,829.08
- Hang Seng Index up 0.7% to 29,578.01
- Shanghai Composite down 0.09% to 3,297.06
- Sensex up 0.5% to 33,913.01
- Australia S&P/ASX 200 up 0.2% to 6,069.71
- Kospi up 0.4% to 2,440.54
- German 10Y yield fell 0.7 bps to 0.41%
- Euro down 0.2% to $1.1856
- Brent Futures down 0.2% to $64.77/bbl
- Italian 10Y yield fell 3.1 bps to 1.639%
- Spanish 10Y yield rose 2.1 bps to 1.488%
- Gold spot up 0.1% to $1,268.19
Top Overnight News from Bloomberg
- Pro-independence parties won back control of Catalonia in Thursday’s regional election as Spanish efforts to contain the separatist movement earned Prime Minister Mariano Rajoy a historic defeat
- o Congress Averts a Shutdown But Now Faces a Messy Start to 2018
- The U.S. Senate gave final approval Thursday night to a short-term extension of federal funding to keep the government running for three more weeks while shoving a raft of fiscal and policy fights into the new year
- A picture of inflation-squeezed consumers and Brexit-wary companies emerged in the U.K.’s latest overview of its economy; annual growth in the third quarter slowed to 1.7 percent, slightly higher than previously estimated but still the weakest pace in 4 1/2 years
- Prime Minister Theresa May said U.K. financial services should be optimistic about Britain’s trade talks with the European Union, despite EU Chief Negotiator Michel Barnier ruling out a special deal for the sector
- May left Warsaw on Thursday with the support of the Polish government for a generous settlement on services after Brexit and unity in fighting propaganda campaigns by Russia
- China has signaled it’s ready to back another round of United Nations sanctions that will slash exports of fuel to North Korea, according to people familiar with the matter
- Bitcoin sank as much as 21 percent on Friday, extending its loss from its intraday high this month toward 40 percent, as the crypto-world was swamped by a wave of selling
- DoubleLine Capital, headed by Jeffrey Gundlach, is embarking on a plan to originate and securitize mortgages, seeking to fill a niche that has traditionally belonged to banks and brokerage firms
Asia equity markets traded with a positive tone after the Christmas cheer returned on Wall Street where most majors finished with gains amid outperformance across energy and financials. Furthermore, Congress also added to the glee after-hours as both the House and Senate passed the stop-gap measure which would avert a shutdown and keep the government funded through to January 19th. ASX 200 (+0.2%) was higher as energy stocks tracked the outperformance seen in their US counterparts, while Nikkei 225 (+0.2%) was tepid as flows into the JPY restricted upside for equities. Elsewhere, Hang Seng (+0.7%) was positive and Shanghai Comp. (+0.1%) traded somewhat indecisive after the PBoC refrained from open market operations, which still resulted to a net liquidity injection of CNY 200bln for the week. Finally, 10yr JGBs were sideways amid a lack of drivers and an indecisive risk tone in Japan, while an uneventful enhanced liquidity auction for 10yr-30yr JGBs also kept price action tame. PBoC refrained from open markets operations today, for a weekly net injection of CNY 200bln vs. last week's CNY 80bln net injection.
Top Asian News
- Hong Kong Stocks Rise in Best Week Since Oct. as Developers Gain
- Japan Takes Step to Broaden ETF Market Beyond Bank of Japan
- Japan’s Topix Index Notches Biggest Weekly Gain in Two Months
- As Bali Losses Hit $1 Billion, President Visits to Calm Tourists
- Lotte Chairman Shin Gets Suspended Prison Term in Graft Trial
The positive sentiment in the Asian session has failed to inspire European bourses with participants reacting to the fallout of the Catalonian elections whereby, the Unionist Citizens (anti-independence) party won the most seats, although separatists groups collectively still retained a majority in Parliament and took 70 out of the 135-seat Parliament. In turn, the IBEX (-1.1%) has underperformed this morning with the losses led by Spanish banking names. In European rates, it’s been a slow grind and turnover remains painfully thin, but Bunds and Gilts have extended recovery gains all the same.
The 10 year benchmarks printed at 161.86 and 124.54 respectively, +15 and +17 ticks on the day vs -13 and flat at one stage since
the Eurex and Liffe opens. The core German/Eurozone debt future is still deriving a degree of safe-haven support from periphery
underperformance as although the main Spanish assets are off worst levels, results of the Catalan election showing a proper majority for the separatists has seed the regions CDS premium spike. Italian data up next, but for Bunds there may be some resistance/support in futures and cash terms around the 0.40% cash yield.
Top European News
- Catalan Separatists Win Regional Election in Blow to Rajoy
- GVC to Buy U.K. Bookmaker Ladbrokes Coral for Up to $5.4 Billion
- U.K. Economy Held Back by Inflation Squeeze, Brexit Wariness
- Europe’s Last Dictator Now Wants to Be Its Blockchain King
- Sistema Offers Rosneft Settlement as Putin Pushes Peace: RNS
- NetEnt Drops; DNB Cuts on Near-Term Growth Recovery Question
- Emerging-Market Carry Trade Not Over Yet, Says Credit Agricole
- Free Power on the Cards for German Factories This Christmas
- With Elections in Sight, Italian Consumers Grow Optimistic
In FX, The DXY continues to languish below 93.500 after another brief knee-jerk above as Congress approved a further stop-gap funding extension. In truth, very little deviation in Usd/major pairs with the Index confined to a tight 93.555-340 range, though again the downside looks more attractive unless Friday’s data gives the Greenback a boost (PCE and durables the picks of a packed agenda). For GBP, UK GDP data has given Sterling some additional impetus with Q3 y/y growth was upgraded to 1.7% from 1.5% in the final release). CAD/AUD/NZD all on the firmer side of flat vs their US counterpart, with the Loonie still buoyed by Thursday’s much better than expected Canadian data. Aud/Usd has finally breached strong upside chart levels just ahead and over the 0.7700 level, eyeing the next key resistance at 0.7733, but also wary of massive option expiry interest at the big figure (3.2 bn). Nzd/Usd reclaimed 0.7000+ status overnight and tripped some stops at 0.7025 before running into congestion between 0.7020-35.
In Commodities, WTI and Brent crude futures off slightly with the latter failing to make a break above USD 65/bbl, however losses have been curbed with WTI finding support at USD 58. Elsewhere, gold prices are slightly higher with the precious metal supported by FTQ (Flight-To-Quality) flow.
Looking at the day ahead, the main data of note is the November personal income and spending data and core PCE data in the US. Also due out in the US is the flash November durable and capital goods orders data, November new home sales and the final December University of Michigan consumer sentiment reading. In Europe we’ll receive final Q3 GDP revisions for France and the UK and January consumer confidence data for Germany.
US Event Calendar
- 8:30am: Personal Income, est. 0.4%, prior 0.4%; Personal Spending, est. 0.5%, prior 0.3%; Real Personal Spending, est. 0.2%, prior 0.1%
- PCE Deflator MoM, est. 0.3%, prior 0.1%; Deflator YoY, est. 1.8%, prior 1.6%; PCE Core MoM, est. 0.1%, prior 0.2%; PCE Core YoY, est. 1.5%, prior 1.4%
- 8:30am: Durable Goods Orders, est. 2.0%, prior -0.8%; Durables Ex Transportation, est. 0.5%, prior 0.9%
- Cap Goods Orders Nondef Ex Air, est. 0.5%, prior 0.3%; Cap Goods Ship Nondef Ex Air, est. 0.3%, prior 1.1%
- 10am: New Home Sales, est. 655,000, prior 685,000; MoM, est. -4.38%, prior 6.2%
- 10am: U. of Mich. Sentiment, est. 97.2, prior 96.8; Current Conditions, prior 115.9; Expectations, prior 84.6; 1 Yr Inflation, prior 2.8%; 5-10 Yr Inflation, prior 2.5%
- 11am: Kansas City Fed Manf. Activity, est. 15, prior 16
We conclude with the last daily wrap from DB's Jim reid
Here we are then. That’s it for another year from us. It’s fair to say that when I started this year I had little idea of the carnage that my life would go through over the next 12 months. A relaxing Xmas and NY in the Alps but with no snow led us to find other ways of passing the time and 8 months later we were blessed with identical twins but with a crazy amount of hard work, both before the birth as Trudi had severe long lasting morning sickness, and post the birth given their nocturnal feeding habits. So all I can do is blame global warming for our predicament. However deep down we can’t believe how lucky we have been to have had three children whilst both being nearly 42 when we had our first. Last year I did a comprehensive list of my favourite TV programs, films, albums and books of the year. However it’s fair to say that our downtime has been reallocated throughout 2017 so my lists would be small. There was always time made for GoT though and if you haven’t seen the following please make time to seek them out. Narcos, Curb Your Enthusiasm, Line of Duty, Stranger Things, Catastrophe, Fargo, The Good Fight and The Crown. I’m sure there are more I’ve enjoyed. However the three programs on most in our house over the last year have been ‘In The Night Garden’ for the first half then ‘The Clangers’ and now for the last two months ‘Paw Patrol’. The last of which Maisie is absolutely obsessed with at the moment.
So happy holidays and a Happy NY. Thanks to all for reading this year and thanks for all the interactions and support. Without readers we wouldn’t be writing, although perhaps at least I wouldn't have to go through the stress tomorrow of deciding between two equally extortionate and complicated kitchen designs. So swings and roundabouts. See you on the other side in 2018 (assuming we survive your MIFIDII cut!!).
Firstly over in the US, a partial government shutdown from Saturday has been averted. Both the House (231-188) and Senate (66-32) have voted in favour to extend the government funding until January 19. Notably, the waiver of automatic cuts to medicare programs in the bill could allow President Trump to sign the tax bill into law a bit earlier – as early as today rather than 3 January. Now turning to Catalonia’s regional election where there was record voter turnout of 82%. The separatist bloc surprised slightly on the upside with c48% of the votes (vs. c47% from prior polls) and claimed 70 seats out of 135. However, DB’s Marc de-Muizon noted the formation of a government could prove very difficult, in part as the three independentist parties did not join forces during the campaign and would now have to agree on a common leadership and political agenda. Further, another uncertainty is the situation of elected independentists that may not be able to turn up in the regional Parliament because they are in exile or in jail. Looking ahead, there is no deadline to elect a President of the regional government, only once an investiture vote has been triggered does the 2-month deadline to form a government starts ticking. If no government is voted in after that, new elections would occur within 40 to 60 days. This means that new regional elections could be occurring in Spring 2018.
This morning in Asia, the Euro is down 0.23% and equities are little changed. The Kospi (+0.57%), Hang Seng (+0.35%) and Nikkei (+0.09%) are all modestly up, while China’s CSI 300 (-0.20%) is down as we type. Treasuries are trading broadly flat.
In terms of what to look forward to on the last business day of the year we go out with lots on what should be the pivotal topic in 2018 - namely inflation. The Fed’s preferred PCE measure is published today and overall we still think we’re in the calm before the slightly stronger inflationary winds that are likely to come around Q2 onwards. Indeed DB expect core PCE inflation (0.1% mom vs 0.2% previously) to moderate slightly off of October’s strong print. A print in line with our forecast would still bring the year-on-year number up about 6bps from October’s 1.45%. The six month annualized change would show a similar increase over October, which would present solid evidence that inflation is showing signs of firming if not yet alarming the Fed.
Staying with inflation, if you’re a sceptic about wage inflation ever picking up it’s worth taking a look at DB’s Matt Luzzetti’s piece from yesterday. The team find evidence of a non-linear relationship between the unemployment rate and wage growth once the former falls below a certain low level using state level data. In other words, a one percentage point decline in the unemployment rate causes a sharper rise in wage growth when unemployment is, for example below 4%, rather than 7%. Under DB’s forecast, which anticipates that the national unemployment rate will near 3.5% by end-2018, wage growth should rise by about 0.5 - 0.6 percentage points over the next year. In contrast, a linear wage Phillips curve without any kinks would only imply a roughly 0.3 percentage point rise in wage inflation by 2019.
Staying on the inflation theme, Canada’s headline November inflation print was firmer than expected at 2.1% yoy (vs. 2.0% expected). More importantly, two of the three core measures followed by the Central bank were also higher than prior readings with the CPI core trim at 1.8% yoy (vs. 1.5% previous) and CPI core median at 1.9% (vs. 1.7% previous). Elsewhere, the October retail sales was well above expectations at 1.5% mom (vs. 0.3% expected). Following the above, the implied odds per Bloomberg of a Canadian rate hike in January lifted c13ppt to 60%.
Now recapping market performance from yesterday. US equities rebounded to near record highs, with the S&P 500 (+0.20%), Dow (+0.23%) and Nasdaq (+0.06%) all slightly higher. Within the S&P, gains were led by energy and financial stocks, with partial offsets from utilities and real estate names. Barring a material adverse change next week, the S&P is on track to achieve positive total returns for every month in 2017, marking the only time this has ever been achieved. European markets were all higher, with the Stoxx 600 up 0.60% after two prior days of losses, supported by mining and energy stocks. Across the region, the FTSE led the gains (+1.0%) followed by Spain’s IBEX (+0.95%) and the DAX (+0.62%).
Government bonds were mixed but little changed with UST 10y yields down 1.4bp while Bunds and Gilts both rose c1bp. Onto currencies, the US dollar index dipped 0.05% after the final reading of 3Q GDP was trimmed by 0.1ppt, while the Euro and Sterling edged up 0.03% and 0.07% respectively. In commodities, WTI oil rose 0.24%, while precious metals (Gold +0.08%; Silver -0.36%) and other base metals were little changed (Copper +0.39%; Zinc +0.20%; Aluminium +0.31%).
Away from the markets and turning back to yesterday’s BOJ decision, our Japanese economists noted policy member Kataoka was the only dissenter who voted against leaving the cash rate on hold, but there was no evidence that his suggestions were put forward as a formal proposal. In its economic assessment, the bank raised its view of private consumption and capital investment but lowered its evaluation of public investment. Its price assessment and risk factors were unchanged. Overall, our team expect the BoJ will maintain its current monetary policy stance throughout 2018.
Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. The US macro data was a bit mixed. The final reading for the 3Q GDP and core PCE was both revised 0.1ppt lower to 3.2% and 1.3% respectively. That said, the 3Q GDP annualised growth still grew at the fastest pace since March 2015, with the source of revision being weaker consumer spending and trade. The November Conference Board’s leading index was in line at 0.4% mom, lifting the 6-month annualized growth rate to 6.1% – highest since October 2014. The December Philly Fed index was above market at 26.2 (vs. 21 expected) but the November Chicago Fed index was lower than expectations at 0.15 (vs. 0.5) although still above trend. Elsewhere, the weekly continuing claims (1,932k vs. 1,898k expected) and initial jobless claims (245k vs. 233k expected) were both higher than expectations. Finally, the October FHFA House Price Index was slightly above at 0.5% (vs. 0.4% expected).
In Europe, the flash Euro area consumer confidence index rose to 0.5 (vs. 0.2 expected) and now to the highest level since 2001. In France, the December business confidence (112 vs. 111 expected) rose to a fresh decade high while manufacturing confidence (112 vs. 113 expected) was slightly below expectations. In the UK, the November private sector net borrowing (£8.7bln vs. £9.0bln expected) and public sector net borrowing (£8.1bln vs. £8.3bln expected) were both slightly less than expected. Elsewhere, the GfK consumer confidence declined to the lowest in four years at -13 (vs. -12 expected), marking a new post-Brexit vote low.
Looking at the day ahead, the main data of note is the November personal income and spending data and core PCE data in the US. Also due out in the US is the flash November durable and capital goods orders data, November new home sales and the final December University of Michigan consumer sentiment reading. In Europe we’ll receive final Q3 GDP revisions for France and the UK and January consumer confidence data for Germany.