The traditionally illiquid post-Thanksgiving week has started with a series of whipsaws across stocks and bonds, as European stocks turned positive after starting the day on the back foot, initially mirroring a slide in Chinese stocks and price action in U.S. equity futures as investors look to a possible - and absolutely critical - tax-plan vote in the Senate this week.
Bund futures retraced most of their earlier declines, pulling gilts higher in tandem. Meanwhile, the Dollar has extended losses in Europe after brief respite from selling in Asian trading, sending GBPUSD toward day highs aboive 1.33 and, paradoxically, the USD/ZAR hitting a one-month low, erasing all losses after S&P cut South Africa’s credit rating on Friday. In commodities, WTI crude pulls back from nearly two-year high of $59; nickel leads base metals lower in London trading. Oh and yes, Bitcoin hit another record high, just under $10,000.
Stocks in Europe erased early losses to edge higher, with defensive sectors including utilities, real estate, food and beverage, telecoms outperforming Monday, while cyclicals tech and basic resources dipped following a slump in industrial metal prices out of China. In terms of stock specifics, Julius Baer is the biggest faller in Europe, down as much as 5% after news that the CEO is to resign with immediate effect, subsequently fuelling worries that client assets could also depart. German Bunds fluctuated as Germany moved closer to a new government.
In Asia, stocks took a turn for the worse and failed to sustain the early momentum from last week’s Black Friday optimism in US, where the S&P 500 and Nasdaq posted fresh record levels. ASX 200 (+0.1%) was choppy after the 6,000 level provided resistance and Nikkei 225 (-0.3%) gave up opening gains and then some, as Japanese sentiment soured amid flows into JPY.
As noted earlier, in Asian trading, Shanghai shares fell 0.9% to a three-month low, having already been on a shaky footing due to a rout in the domestic bond market and fresh moves to reduce risks in the asset management industry that may bring a sea change for banks: the catalyst was a net-neutral PBoC liquidity operation in the backdrop of the recent bond market jitters, while Industrial Profits also slightly cooled.
“The Chinese stock market drop is reminiscent of the selloff that we saw in the summer of 2015, and that is causing some investors to become cautious going into the thin year-end markets,” said ING currency strategist Viraj Patel, in London.
Away from the main markets, bitcoin's exponential ascent showed no signs of abating, with the cryptocurrency soaring to another record high just a few percent away from $10,000 after gaining more than a fifth in value over the past three days alone.
In macro, the big mover was the euro, which hit a fresh two-month high of 1.955 before paring gains and trading flat on the day, with a Merkel ally saying on Monday that the “grand coalition” talks may not begin until next year, potentially prolonging the uncertainty in Europe’s largest economy.
“There is optimism about the formation of a grand coalition in Germany, and economic surprise indices for the bloc are at an all-time high,” said Antoine Bouvet, rates strategist at Mizuho. “That means there could be more investment in Europe, driving the currency higher, and the corollary to that is for market expectations for ECB policy has to be more dovish.”
The dollar failed to sustain an early advance even as Treasuries dropped. The U.S. currency was initially supported by improved prospects that the U.S. tax bill will be passed this year, alongside profit taking following the Bloomberg Dollar Spot Index’s worst week in more than two months. Republican lawmakers in the U.S. Senate plan to hold a make-or-break floor vote on their bill as soon as Nov. 30. Yet, last week’s pattern that saw demand for the euro soon after the London open unfolded once more, as the common currency rose to 1.1957, its strongest level since Sept. 22. According to Bloomberg, a mix of names, including real money and leveraged accounts, added fresh upside exposure in both the euro spot and options markets. Demand for vanilla calls in tenors between 18 months and two years was seen in OTC trades, traders in Europe said. The chances that German Chancellor Angela Merkel ultimately pulls off a renewed coalition with the Social Democrats supports the front-end of the common currency’s volatility skew. At the same time, traders seem less worried over the risks surrounding Italian elections due by May next year, pushing six-month risk reversals to their most euro-bullish sentiment since 2009.
Asset moves aside, after a long weekend, investors are gearing up for a busy week, with Trump scheduled to address Senate Republicans at their weekly luncheon Tuesday on taxes ahead of a potential vote on tax reform set of November 30. Federal Reserve Chair Janet Yellen testifies before the congressional Joint Economic Committee in Washington, and the confirmation hearing for her nominated successor, Jerome Powell, begins. Adding to the mix are data on U.S. GDP, prices and jobs.
In rates, the yield on 10Y TSY gained less than one basis point to 2.35%; 10Y Bund yield fell one basis point to 0.35% while Britain’s 10-year yield dipped less than one basis point to 1.247%, the lowest in almost three weeks. Japan’s 10-year yield climbed one basis point to 0.043 percent, the highest in more than a week.
In commodities, West Texas Intermediate crude declined 0.8 percent to $58.48 a barrel. Gold increased 0.4 percent to $1,293.95 an ounce, the highest in six weeks. Copper fell 1% to $3.16 a pound.Elsewhere, nickel led a slump in industrial metals, with copper declining for the first time in seven sessions.
Economic data includes new-home sales and Dallas Fed manufacturing; on the Fed speaking circuit, we have two former Goldmanites: outgoing NY Fed President Bill Dudley, and Minneapolis Fed President Neel Kashkari.
Bulletin overnight summary from RanSquawk
- Commodity-linked currencies were mildly pressured as WTI crude pulled back from USD 59/bbl.
- EU equities pare initial losses in what has been a relatively quiet morning.
- Looking ahead, highlights include US New Home Sales
Market Snapshot
- S&P 500 futures up 0.07% to 2,602.75
- STOXX Europe 600 up 0.2% to 387.43
- MSCI Asia down 0.4% to 172.33
- MSCI Asia ex Japan down 0.7% to 564.57
- Nikkei down 0.2% to 22,495.99
- Topix down 0.2% to 1,776.73
- Hang Seng Index down 0.6% to 29,686.19
- Shanghai Composite down 0.9% to 3,322.23
- Sensex up 0.07% to 33,703.49
- Australia S&P/ASX 200 up 0.1% to 5,988.77
- Kospi down 1.4% to 2,507.81
- German 10Y yield rose 0.7 bps to 0.367%
- Euro down 0.05% to $1.1927
- Brent Futures down 0.2% to $63.76/bbl
- Italian 10Y yield rose 2.8 bps to 1.546%
- Spanish 10Y yield fell 2.0 bps to 1.466%
- Gold spot up 0.3% to $1,291.93
- U.S. Dollar Index down 0.06% to 92.73
Top Overnight Headlines
- Tax bill update: Republican leaders in the Senate plan a make- or-break floor vote on the tax bill as soon as Nov. 30
- Russia’s deputy foreign minister said North Korea’s pause in provocations indicates a step toward denuclearization of the Korean peninsula
- The China and Eastern Europe summit takes place in Budapest, Hungarian Prime Minister Viktor Orban hosts Chinese Premier Li Keqiang
- Senate plans tax vote amid Trump sales pitch: Tax Debate Update
- Germany’s standoff eases as wrangling shifts to coalition terms
- Black Friday online spending was record $5.03 billion: Adobe Systems
- Bitcoin closing in on $10,000 as cryptocurrency mania intensifies
- BOJ’s Suzuki: Slight YCC changes possible when inflation nears 2%
- Russia-OPEC said to agree framework to extend output cuts to end-2018
- Meredith Agrees to Buy Time Inc. With Koch Brothers Backing
- Senate Plans Tax Vote Amid Trump Sales Pitch: Tax Debate Update
- Roark Capital Is Said to Sweeten Buffalo Wild Wings Takeover Bid
- Bitcoin Guns for $10,000 as Cryptocurrency Mania Defies Skeptics
- Macy’s Says Fully Resolved Capacity-Related System Issues
- Cyber Monday Caps Strong E-Commerce Holiday Sales Growth
- Ryan Dismisses Deficit Concerns to Chase Political Win on Taxes
- Next Act in CFPB Drama Comes When Dueling Bosses Show Up to Lead
- French Anti-Fraud Office May Fine Fiat Up to EU9.62B: Monde
- iPhone X 4Q Production Improves, Momentum to Continue: KGI
In Asian markets, stocks took a turn for the worse and failed to sustain the early momentum from last week’s Black Friday optimism in US, where the S&P 500 and Nasdaq posted fresh record levels. ASX 200 (+0.1%) was choppy after the 6,000 level provided resistance and Nikkei 225 (-0.3%) gave up opening gains and then some, as Japanese sentiment soured amid flows into JPY. Chinese markets were among the laggards in the region, with Hang Seng (-0.6%) and Shanghai Comp. (-0.9%) negative after a net-neutral PBoC liquidity operation in the backdrop of the recent bond market jitters, while Industrial Profits also slightly cooled. Finally, 10yr JGBs were lacklustre with prices below 151.00 and demand suppressed after a tepid BoJ Rinban announcement for only JPY 550bln in the belly to short-end. Chinese Industrial Profits (Oct) Y/Y 25.1% (Prev. 27.7%). PBoC injected CNY 70bln via 7-day reverse repos, CNY 60bln via 14-day reverse repos and CNY 10bln via 63-day reverse repos, for a total zero net daily liquidity injection. PBoC set CNY mid-point at 6.5874 (Prev. 6.5810). BoJ Board Member Suzuki said he is closely observing the side effects of monetary policy and that NIRP has a significantly large impact on earnings at financial institutions. Suzuki added he doesn’t not see a need for additional measures and commented that powerful easing must be maintained to reach target at early date, but that the BoJ could fine-tune policy prior to reaching the price goal.
Top Asian Nerws
- China’s Top Uber-for-Trucks Apps Are Said to Agree on a Merger
- Credit Suisse Alumni Start Asia Credit Fund to Fill Lending Gap
- World’s Priciest Housing Market Seen Defying Doomsayers Into ’18
- China Shares Resume Decline as Year’s Top Performers Take a Hit
- ICBC, JD.com’s Finance Arm Announce Launch of Digital Bank
In Europe, price action was relatively contained with EU indices paring initial declines. In terms of stock specifics, Julius baer is the biggest faller in Europe, down as much as 5% after news that the CEO is to resign with immediate effect, subsequently fueling worries that client assets could also depart. In rates trading, the 163.06 resistance level in Bunds held in, and in fact 163.00 continues to prove pretty durable as noted previously. Indeed, as risk appetite picks up in general the 10 year German bond is now back in negative territory and testing the downside with a bit more conviction. From a high of 163.05 a fresh low at 162.77 just traded and volumes continue to pick up at 110k+. Aside from outright selling, it looks like option related flows are going through alongside some early position rolls from the front month Dec17 contract into Mar18. Recall, last Friday’s low was 162.67 and this is naturally now nearest support. Conversely, semi-core and periphery Eurozone debt is outperforming above water, especially Italian BTPs that continue to rally in wake of the Tesoro pulling this week’s term issuance (ie more competition for supply with the ECB). Note, 10 year futures have been 50 ticks ahead, with the yield down to 1.78% and spread to Germany in to 141bp. In the UK, Gilts also selling off and now near the bottom end of a 125.18-47 Liffe range vs last Friday’s 125.32 close.
Top European News
- Allianz Offers $2.2 Billion to Buy Remainder of Euler Hermes
- What the Central Banks Are Saying About Cryptocurrencies
- Germany Edges Closer to New Government as Merkel Lays Down Terms
- Julius Baer CEO Quits in Surprise Departure, Joins Rival
- Clock Ticks as Ireland’s Varadkar Scrambles to Avoid Election
- Santander Consumer Bank May Sell EU250m Covered Bond Tomorrow
In FX, the Euro was stable, paring early gains after no sign of any German or wider Eurozone political angst, as the single currency carves out fresh gains vs the Usd to trade above 1.1950. 1.2000 may present something of a psychological hurdle, but in truth there is nothing on the charts in terms of resistance until 1.2033 before the pair takes aim at the 2017 peak at 1.2092 (set on September 8). On the options front, only a small expiry at 1.1950 (270 mn) may not be enough to deter bulls. Eur/Gbp not quite as perky below 0.9000, with strong technical resistance at 0.9033 also keeping a lid on the cross. The yen was another beneficiary of Dollar weakness, and risk-off trade in Asia, as the pair retreats towards recent lows just ahead of the 111.00 handle, currently around 111.25 within a 111.10-70 range. The OZ dollar was back above 0.7600 (just) vs the Greenback after a brief set-back overnight on latest Chinese asset declines.
In commodities, WTI and Brent crude futures off slightly amid a rise in US oil rig counts, marking the first monthly rig count since July, as producers are attracted by rising crude prices. However, the downside has been capped given the rising prospect that OPEC and Non-OPEC members will agree output pact for 2018. Saudi Arabia and Russia reportedly agreed that extension of output cuts should be announced at the November 30th meeting, according to reports citing sources on Friday. There were also separate comments from the UAE Energy Minister who is said to be optimistic OPEC is to extend the output cut deal. Kazakhstan says that it is ready to discuss extending the OPEC/Non-OPEC production deal.
Looking at today's events, it is a fairly quiet start to the week with mostly second tier data releases including October new home sales and the November Dallas Fed manufacturing activity index in the US. The BoE’s Ramsden is scheduled to speak in the evening, followed later by the Fed’s Kashkari.
US event calendar
- 10am: New Home Sales, est. 625,000, prior 667,000; MoM, est. -6.3%, prior 18.9%
- 10:30am: Dallas Fed Manf. Activity, est. 24, prior 27.6
- 5:30pm: Minnesota Fed President Kashkari Participates in Forum
- 7pm: Fed’s Dudley Speaks on U.S. Economy: 10 Years After Crisis
DB's Jim Reid concludes the overnight wrap
Welcome to the last week of November with December starting on Friday. Can the S&P 500 hold on to complete its 13th successive positive total return month? November is currently running at just under +1.5%. If so, it'll be the first time ever in the c.90 years we have monthly returns data that we've seen such a run. We've also never seen every month in the year experience a positive total return. Whether November might create the first of these new records might depend on where we go on the expected Senate vote on tax reform later this week.
A reminder that the Republican leadership can afford to lose no more than two votes with Politico reporting over the weekend that as many as six Republican Senators are still withholding their support. If it eventually passes this week then differences with the House bill will then need to be reconciled before final legislation can be passed to President Trump. For now, Republican lawmakers are still committed to finalising the bill by Christmas as Senator Scott noted “I hope we can get it done by Christmas…if not, we’ll be here through Christmas, looking at the end of the year”.
Elsewhere this week, Fed Chair nominee Jerome Powell’s confirmation hearing takes place tomorrow. Our US economists expect this to go smoothly and will be followed by full Senate approval in the coming weeks. We also have current Fed Chair Yellen’s testimony before the Joint Economic Committee on Wednesday. Again our US economists don’t expect this to be much of game changer but she may feel less restrained in conveying her own opinions in light of this being her last appearance before Congress.
In terms of data the main focus this week will be the various inflation readings across the globe. In Europe we have the November CPI report scheduled for Thursday where the consensus expect a rise in both the headline (to +1.6% yoy from +1.4%) and the core (to +1.0% yoy from +0.9%). In the US on the same day we’ll also receive the personal income and spending reports, and PCE core and deflator readings for October. Japan’s CPI report is also out on Thursday. Other things to note this week include the second revision to Q3 GDP (+3.2% qoq annualized expected) in the US on Wednesday which our colleagues notecould see some upside risk given recent revisions to underlying data. Also worth highlighting are Thursday’s PMIs in China, the final European manufacturing PMIs on Friday and the US ISM manufacturing report on the same day.
There are also lots of central bank speakers this week and those at the Fed might be carefully watched given the concerns expressed in the last FOMC minutes (released just before the Thanksgiving break) about soft inflation. The full day by day week ahead is at the end but remember our new "Next Week, This Week..." document published on Friday which includes a cut out and keep table of upcoming events.
This morning in Asia, markets are trading lower with the Nikkei (-0.38%), Hang Seng (-0.56%), Kospi (-1.32%) and Chinese bourses down 0.7%-1.3% as we type. Elsewhere, China’s industrial profit for October has slowed mom to a still decent growth of 25.1% yoy (vs. 27.7% previous). China will continue to be in focus after the wobbles last week and the increasing chatter of a growth slowdown. Turning to the US holiday season shopping tally, early feedback suggests it has been strong for the online sector. Adobe analytics (which measures transactions at the largest 100 web retailers) noted Black Friday and Thanksgiving online sales in the US rose 17.9% yoy to US$7.9bn. Elsewhere, marketing firm Criteo noted 40% of Black Friday’s online purchases were made on mobile phones, up from 29% last year. Conversely, Reuters noted anecdotal feedback suggests sales at traditional brick-and-mortar retailers may have been more muted. We shall find out more with the National Retail Federation scheduled to publish its estimate of sales on Tuesday.
Moving to Brexit talks, the Scottish Conservative Party leader Ms Davidson has warned time is running out as “if we don’t make it through in the next two weeks, to move to that next phase (on trade and transitional deal)….(then) it’s a setback”. The Sunday Times reported that the UK will improved its financial settlement offer to £40bln (c€45bn), but the exact figures will not be made public, while the FT has noted that PM May will present an improved offer on 4th December. We wait and see if these initiatives kick start the negotiations. It seems the Irish border has moved to being the number 1 stumbling block for now.
Now briefly recapping market performance back on Friday. US equities (S&P +0.21%; Nasdaq +0.32%) strengthened on thin volumes after trading resumed for half a day post Thanksgiving. The S&P rose to a fresh all time high of 2,602 with modest gains in the tech and materials sector partly offset by telco and financial stocks. European markets were mixed but little changed. The DAX rose 0.39% partly on signs of increased support from the SPD to help Ms Merkel to form a new coalition government. Across the region, the Stoxx 600 and FTSE both dipped c0.1% while the CAC rose 0.20%. The VIX fell 2% to 9.67.
Government bond markets weakened slightly with core bond yields flattish to 2bp higher (Gilts 10y flat; Bunds +1.3bp; UST +2.3bp), while peripherals also rose 2-3bp. Turning to currencies, the US dollar index fell 0.47% while Sterling and Euro gained 0.21% and 0.69% respectively – the latter is back near its two month high. In commodities, WTI oil rose 1.6% to a fresh two year high following Bloomberg reporting that Russia and Saudi Arabia have reached a framework on potentially extending production cuts at the OPEC meeting on Thursday.
Away from markets, S&P has cut South Africa’s local currency debt one notch lower to junk status (BB+/Stable) citing its expectations for further deterioration in the country’s economic outlook and public finances. Moody’s still has its South Africa’s rating at investment grade (Baa3), but has put them on negative watch. The Rand fell c2% against the Greenback on Friday but has recovered c0.6% this morning.
The latest data from the European Banking Authority showed European banks have pared their exposure to Britain since the Brexit vote. Banks based in the EU bloc have cut their total assets tied to the UK by -16.3% yoy (-€356bn) to €1.59trn as at June 2017, with most the decline driven by a drop in derivatives related exposures.
In Germany, the latest Emnid survey show 52% of Germans believe Ms Merkel’s CDU/CSU and SPD should form a coalition government, but 39% oppose a grand coalition. On an individual party basis, support for CDU/CSU and SPD were little changed, up 2ppt and 1ppt from last week.
Wwe wrap up with other key data releases from Friday. In the US, the flash November Markit PMIs were slightly lower than expectations. The services PMI (54.7 vs. 55.3 expected) and manufacturing PMI (53.8 vs. 55 expected) were both softer. Hence, the composite PMI fell 0.6pt to 54.6 (vs. 55.2 previous) – now back to July levels. In Germany, the November confidence indicators were solid. The IFO business climate trended higher (117.5 vs 116.7 expected) and IFO expectations were well above expectations at 111 (vs 108.8 expected) - the highest since November 2010. Elsewhere, the UK’s October housing finance approvals were very slightly lower than expected at £40.5bn (vs. £40.65bn), while Italy’s lumpy industrials orders fell sharply in September but were still up 4.5% yoy.
Looking at today's events, it is a fairly quiet start to the week with mostly second tier data releases including October new home sales and the November Dallas Fed manufacturing activity index in the US. The BoE’s Ramsden is scheduled to speak in the evening, followed later by the Fed’s Kashkari.